Pension plan administrators have been asked to consider how a high interest rate environment could impact the ability of sponsoring employers to fund defined benefit (DB) plans and “lock in” earnings recently, following the Bank of England’s latest interest rate hike.
The Bank of England confirmed another interest rate hike today (22 September), from 1.75% to 2.25%, marking the highest rate since 2008.
According to XPS, the increase pushed UK pension schemes into surplus, based on a long-term target of gilts +0.5%, as higher interest rates lead to improved funding positions for schemes. of retirement.
“A rise of at least 0.5% was already anticipated by investment markets, with an increase of around 2.7% in long-term government bond yields since December 2021, reducing plan liabilities pension plans of £750 billion, or almost 35%,” Charlotte Jones, senior consultant at XPS Pensions Group, explained.
“The energy cap is expected to cause prices to rise less rapidly than previously feared, but with the future far from certain, pension plan administrators should seriously consider taking steps to lock in some of these gains. by reducing the levels of risk in their investment strategies or by securing members. ‘benefits from an insurance company’.
However, LCP clarified that while rising long-term rates are generally good news for plan funding levels, it will impact companies differently depending on their debt structure and exposure to fluctuations in rates. interest rate.
In light of this, he warned that any negative impact on the commitment support available to the scheme could have “significant” consequences on an employer’s ability to provide financial support to their scheme.
In addition to this, LCP explained that any required changes in the security provided to lenders could also impact the recovery from a pension scheme’s insolvency.
LCP has therefore encouraged trustees to understand their sponsor’s financial situation and structure, particularly in light of the Pensions Scheme Act 2021, as schemes could be subject to civil or financial penalties if they fail to meet not meet the regulator’s expectations that trustees have full visibility into changes to pension plan security.
“In this high interest rate environment, directors really need to understand the finances of the sponsoring employer,” added LCP Partner Fran Bailey. “Commitment is the key to this.
“Processes must be in place to ensure that any changes to a sponsor’s funding profile are communicated in a timely manner and that sufficient information is shared to allow the impact of these to be assessed on the commitment. This will help them protect both the program and themselves.”