While low interest rates of recent years has brought welcome relief for many hard pressed mortgage holders, the impact of the very low interest rate environment has resulted in one of the most difficult periods in the history of defined benefit pensions. Whilst there have been some positive signals that this period could be coming an end, it may already too late to save defined benefit pension provision.
The low interest rates have caused pension liabilities to escalate and the uncertain equity market performance has exacerbated the funding position of company pension schemes across the country.. Unfortunately over the past five years, many companies have taken irreversible decisions to cease future accrual or to wind up schemes. These decisions have been made due to the fear that many pension risks were out of control and potentially unmanageable by companies who had weak balance sheets.
The financial environment has driven companies to reassess the impact of the pension scheme on the sponsoring employer and to encourage trustees to reduce risks by adopting liability driven investment strategies or to plan for eventual transfer of the scheme to insurance companies. For Defined Benefit schemes to survive in the private sector, the structural issues need to be addressed and the pressure needs to ease or we will be witnessing the end of good quality pensions with certain outcomes.
The interest rate position is hugely significant because if interest rates were to rise by only half of one percentage point, then the funding level could increase by up to five percentage points.
In the early months of this year the Bank of England were suggesting that rates could be expected to rise before the end of 2014 and that the global decline of interest rates was due to end. The suggestion is that quantitative easing looks simply to have brought forward a decline in real interest rates that would have occurred anyway . However, the early optimism seems to be short lived as a prominent member of the Bank of England’s interest rate setters has warned that our interest rate could be permanently lower (in the month that rates were held again by the Monetary Policy Committee at only 0.5%)
The MPC are clearly concerned about the outlook for the economy because of weaker global growth, low pay rises and political unrest across many continents. What is very clear is that there is no certainty in relation to future interest rates and we must continue to wait in hope that the conditions will be there in the near future.
It is not only the private savers who are suffering in the current conditions but potentially future generations of workers who will have no certainty in retirement.
AMNT Committee member
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