Following the Bank of England’s widely anticipated decision to keep interest rates at the current level of 0.5% (10 May), Stuart Price, Partner and Actuary at Cardiff-based independent financial services consultancy Quantum Advisory, explains what the implications are for UK defined benefit pension schemes as prevailing market conditions continue to be a massive challenge for all key stakeholders.
Stuart says: “Weak first quarter growth has led to The Bank of England to keep the base rate as is. A few months ago, the consensus was that there would be a rate rise with the market already pricing one in! The timing of future rate rises is also increasingly uncertain and it feels like a good time to consider the impact this is having on defined benefit pension schemes.
Low interest rates mean that the value placed on defined benefit liabilities is high, which in turn means that the deficits in many of these arrangements remain large with pressure on the sponsoring employer to fund them. This is causing many employers to close defined benefit pension schemes and replace them with defined contribution arrangements, which generally provide inferior benefits to employees.
Following the banking crisis, interest rates have been at historic lows for over ten years and we in the pension industry have been waiting patiently for them to start to increase to help improve the funding levels of defined benefit schemes and ease the pressure on employers. It appears that we will have to wait a little bit longer.
Quantum Advisory, which has five offices across the UK, including Cardiff, Amersham, Birmingham, Bristol and London, provides pension and employee benefits services to employers, scheme trustees and members.