Interest Rate Cuts Could Push Defined Benefit Pensions Deficit To £1trn (Final Salary Pensions)

IThe UK’s defined benefit (DB) pension deficit could grow by hundreds of billions of pounds if the Bank of England (BoE) opts to cut interest rates in response to Brexit, Hymans Robertson has warned (Final Salary Pensions).

The actuarial consultancy firm estimated post-Brexit that the DB deficit stood at £900bn. Its head of corporate consulting, John Hackett, told Financial Adviser that a 25 basis point to cut to interest rates, assuming it flowed on to bond yields, could push the deficit above £1trn.

He said: “If bond yeilds went down by 0.25 per cent, UK pension liabilities would rise by 5 per cet, or £100 bn.”

BOE governor Mark Carney has said he was ready to pump £250 bn into the economy and would “consider any additional policy responses” to Britain’s decision to leave the EU.

Mark Dowsey, a senior consultant at Wills Towers Watson, said there may be a silver lining for DB schemes paying into the Pension Protection Fund (PPF) levy.

Currently, if a scheme falls into the PPF, new pensioners receive only 90 per cent of what they were promised.

(FTadviser, 2016)