Rising interest rates could wipe further £100bn from DB long-term liabilities

A further £100bn could be removed from the long-term liabilities of UK defined benefit (DB) pension schemes if longer-term gilt yields were to increase in line with The Bank of England’s recent base rate change, analysis from XPS Pensions Group has found.

The provider suggested this would be “welcome news” for DB schemes that were not fully hedged, and whose funding positions may improve off the back of the bank's decision to raise interest rates from 0.5 per cent to 0.75 per cent, depending on the investment market response.

In addition to this, it noted that a rise in gilt yields alongside the prospect of stable long-term inflation typically spells "good news for pension schemes".

According to the research, the estimated £100bn fall in liabilities would be in addition to around £380bn already removed from DB pension liabilities as a result of the 0.65 per cent increase in base rates since 16 December 2021.

Indeed, XPS Pensions Group senior consultant, Charlotte Jones, noted that gilt yields have been tracking base rates and rising steadily since December 2021 to reach highs that have not been seen since early 2019.

“In liability terms, this should be good news; rising gilt yields generally mean that the funding positions of schemes which are not fully hedged will improve," she continued.

“However, in the current environment a stable or improved funding position is not guaranteed - with the conflict in Ukraine and inflation concerns continuing, the market remains volatile, keeping trustees and their advisors on their toes.”

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