PensionsMar 12 2020

Rate cut means 'time for advisers to demonstrate their value'

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Rate cut means 'time for advisers to demonstrate their value'

Mr Selby said: “Given UK DB schemes were in deficit to the tune of almost £125bn at the end of February, a rate cut is arguably the last thing company sponsors need right now. 

“If deficits do rise then difficult decisions will need to be made at corporate level about the balance between paying dividends and increasing contributions to fund these yawning pensions black holes.”

Steve Webb, partner at LCP, said this could cause more schemes to enter deficit as businesses may not have the funds to plug their pension schemes during this time of uncertainty.

Mr Webb said: ‘If long-term interest rates drop it will be bad news for company pension funds if their future liabilities are discounted at a lower rate. 

“This will put more pressure on firms to top up their company pension schemes at a time when the economic slowdown is likely to put pressure on their finances.  

“This increases the risk that pension scheme members could find their company goes out of business at a time when the scheme is in deficit and potentially puts more pressure on the Pension Protection Fund."

However it is not all bad news as low interest rates can be good for equities which could see pension savers' investments boosted.

Mr Selby said: “Generally lower interest rates are good for equities and therefore pension savers who are invested in equities. Whether or not this action boosts people’s investments or simply acts to stem coronavirus sell-off remains to be seen, however.”

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