Interest rate rise could wipe £100bn from DB schemes’ long-term liabilities

The Bank of England’s decision to raise base rates from 0.25 per cent to 0.5 per cent could remove £100bn from the long-term liabilities of defined benefit (DB) pension schemes in the UK, according to XPS Pensions.

XPS Pensions’ DB:UK tracker estimated the reduction in liabilities could occur if longer-term gilt yields were to increase in line with base rates.

The estimated movement in liabilities was based on gilt yield movement alone and no allowance was made for changes to inflation or the market value of assets.

XPS Pensions noted that this does not allow for any offsetting reduction in value to hedged assets.

It stated that the potential reduction would be “welcome news” to DB schemes that are not fully hedged, as their funding positions should improve off the back of the Bank of England’s announcement, and that a rise in gilt yields coupled with the prospect of stable inflation usually mean "good news" for pension schemes.

“Rising inflation has been at the forefront of people’s minds since the supply-side concerns in 2021, and it is no surprise that the Bank of England is committing to a further increase in interest rates in an attempt to combat it,” said XPS Pensions Group senior investment consultant, Felix Currell.

“The key will be whether the right balance can be struck; will recent market growth be sustained with manageable inflation, or will investors lose confidence in a tightening monetary policy environment?”

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