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Alistair Russell-Smith, Partner, Hymans Robertson comments on the impact on DB pensions schemes of the BoE decision to hold interest rates, and the subsequent fall in UK long-dated government bonds yields. |
“Falling gilt yields as a result of the Bank of England latest interest rate decision, in conjunction with the dip in equity markets have had a knock-on effect on UK DB schemes, with funding levels dropping by 3% on average. Gilt yields have tumbled to new lows for 2018, falling 0.2% in recent weeks while there has, at the same time, been a 4% decline in equity markets. Our own analysis of the UK’s FTSE 350 DB pensions shows deficits have risen £15bn in the last 2 weeks, now reaching £90bn. “Our research continues to show that deficit levels remain largely manageable for 90% of the FTSE 350, accounting for less than 10% of their market cap. In fact, 85% of companies would be able to pay off their deficit completely with six months of earnings.
“The impact of this recent volatility, particularly on schemes with low hedging levels, shows the benefit of taking a more measured approach to investment risk, even if this means having a longer deficit recovery period. This type of ‘lower risk for longer’ strategy will usually result in a better chance of the scheme paying its members’ pensions while also avoiding placing the sponsoring employer into financial difficulty. We must remember that DB pension promises typically extend for the best part of a century and that trustees don’t need to rush towards the exit only to risk tripping over the employer’s own shoelaces.” |
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