Interest rate cuts could push DB deficit to £1trn

Interest rate cuts could push DB deficit to £1trn

The 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.

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

He said: “If the Bank of England initiated action that led to bond yields going down by 0.25 per cent, then that would cause UK pension liabilities to increase by 5 per cent, or £100bn.”

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

Minutes from this month’s Monetary Policy Committee meeting gave a strong hint that interest rates – currently at a record low 0.5 per cent – would be cut at its August meeting.

Immediately after the referedum vote, the swaps market put the chances of a rate cut in July at 50 per cent, and at 80 per cent by the end of the year. There was also a 15 per cent chance Britain would follow Japan and the eurozone into negative interest rate territory.

Mark Dowsey, a senior consultant at Willis 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. But speaking before the referendum, Mr Dowsey said the EU could rule against such a significant cut to retirement benefits.