“Although expected, the Bank of England’s decision today is painful for pension schemes who had been lobbying for a re-think on Quantitative Easing and urging for no further rate cut.
“With the latest survey of British business activity showing the sharpest fall in at least 20 years, markets had largely factored it in to prices. However, we have now seen long-term interest rates fall markedly in the last few weeks, with 10 year Government bond yields now well below 1%. This has caused pension scheme deficits to soar from already record highs to levels which for some could be catastrophic.
“Trustees who have been reluctant to reduce or remove exposure to interest rate risk in their pension scheme, through Liability Driven Investment or other means, are faced with the dilemma of whether to act now that prices have moved even further against them. The risky alternative is to stay in the investment casino and hope that markets are wrong and interest rates rise soon.
“Pension schemes with actuarial valuations in 2016 will have to have some difficult negotiations with the sponsor as bigger pension deficits will inevitably lead to calls for a hike in employer contributions.”
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