Any Impact for Defined Benefit Pensions Schemes following Interest Rate Rise?

02 August 2018

Today’s 0.25% increase in the Bank of England Base Rate was widely expected following the Monetary Policy Committee’s (MPC) previous comments and vote. Wages have been increasing and the recent decision to break the cap on public sector pay rises will add further upwards pressure. Reading between the lines, concerns around productivity growth point to the need to manage inflation carefully despite low levels of growth.

Market pricing suggests further rate rises, at around 0.25% per year over the next three years. This is consistent with the MPC’s June comments that “any future increases in the Bank Rate are likely to be at a gradual pace and to a limited extent”.We largely agree with this expectation, particularly over the short to medium term, although believe markets are pricing rates too low for the long term.

For defined benefit pension schemes, we do not expect today’s increase to have a significant impact on longer term rates (gilt yields). However, this rate rise will help to support the value of Sterling which has been under pressure in the light of increased Brexit uncertainty. The FTSE 100, which is highly sensitive to the value of Sterling due to its constituents’ overseas earnings, has been moving in the opposite direction to Sterling and therefore this rate increase may temper any upward movement in the short term.