Key points:

• Both 10 and 20 year gilts have hit all-time lows
• This has led to the liabilities of UK defined benefit schemes rising by £70bn¹ to £2.4 trillion¹
• To put this in context, UK GDP currently stands at £1.8trn¹
• This pushes the aggregate UK DB deficit up to £945bn¹ – the worst it has ever been

Hymans Robertson, the leading pensions, benefits and risk consultancy, has shown that the combined liabilities of UK Defined Benefit (DB) pension schemes have risen by £70bn¹ as a direct consequence of the Bank of England’s decision to cut interest rates to 0.25% and introduce a new £60bn programme of QE. 

Commenting on today’s interest rate decision by the Bank of England, Patrick Bloomfield, Partner at Hymans Robertson said:

“Markets had already reacted to the announcement with yields going lower and yesterday total DB deficits stood at £885billion¹. However, the QE package announced by the MPC hadn’t been entirely priced in to markets. That’s why today we’ve seen record lows in gilt yields leading to pension liabilities increasing by £70bn¹ to £2.4 trillion¹, reaching record highs. The UK DB deficit now stands at a new record high of £945bn¹.

“Pension schemes are being hit hard by recent events, but we need to remember that the impact will not be felt equally by all. Headlines have been dominated by cases where scheme liabilities are putting companies at risk of insolvency and the security of members’ benefits at risk. However, there are schemes with robust funding plans that don’t take more risk than they need to who will be able to weather this. The gap between pension schemes which hedged their risks and those that haven’t is starker than ever before.”

“These inflationary measures signal more pain to come for pension schemes.  Above target inflation will flow through to higher pension indexation, putting yet more pressure on scheme finances and cashflow.  Again, those who’ve planned ahead will weather the storm, but those who haven’t could become forced sellers of assets at just the wrong point in the economic cycle.”

Commenting on what those running DB schemes should do, said he added:

“Schemes need to remember that pensions are long-term and should avoid over-reacting to short term capital market volatility. The past months’ events highlight the need for schemes to become more resilient to risk. Specifically, they need to ensure they don’t take more risk than they need to. They also need to place much closer attention to assessing the financial ability of their sponsoring company to support the scheme now and in the future.

“Today’s announcement will undoubtedly add more fuel to the fire on the debate around the sustainability of DB pension schemes. There are a range of options on the table that could come under consideration. In this, we need to remember that for schemes in distress, a healthy balance needs to be sought to keep sponsoring businesses viable on an ongoing basis to avoid members falling into the PPF and taking a significant haircut to their benefits. We expect to see much more debate on this over the coming weeks.”

¹Figures are an estimate of the aggregate cost of all UK private sector defined benefit schemes being secured with an insurance company; frequently referred to as a solvency or buy-out cost.