UK rate cut hits pensions and savers

The Bank of England Monetary Policy Committee’s decision to cut the base rate to 0.25% and boost quantitative easing by £60 billion will increase pension liabilities and hit savers, experts have warned.

Consultant Mercer said that the pension liabilities for the UK’s 350 largest companies have increased to £870 billion on August 4th following the rate cut, up from £856 billion at the end of July. It added that despite a rise in asset values, pension deficits increased by £10 billion. Mercer senior partner, Ali Tayyebi, commented: “This sudden increase reminds us that it is the outlook for the future long-term secure investment returns which drives pension scheme deficits – much more than the short term performance of assets.”

Despite the rise in pension liabilities and deficts, Royal London director of policy, Steve Webb, said that policy makers and others should remember that running a pension fund is a long-term business. “Pension fund liabilities are huge when looked at as a single lump sum, but a large part of those liabilities will not fall due as a payment for decades. Policy makers should not respond to these fluctuations with knee-jerk responses such as watering down protection for existing pensioners or forcing firms to contribute unrealistic amounts.” Webb added that pension funds need realistic contributions, but sponsors’ contributions should not undermine the long-term future of their businesses.

The Bank of England’s rate cut and QE boost is intended to help the economy cope with uncertainty created by the vote to exit the European Union, but former pensions minister, Ros Altmann, said those moves would adversely affect savers and pensioners. Altmann commented: “I believe the damaging side-effects of low interest rates have been underestimated. Not only are significant sections of the population being hit near-term, the consequences for the medium and longer term are also negative.”

Altmann called for the government to help savers by issuing special savers bonds, which were issued for over 65s in 2015, for all age groups. “A new issue of such bonds would reward savers for setting money aside. This is vital if we are to sustain a savings culture in this country,” Altmann said. She added that the use of very low interest rates to stimulate economic activity is now becoming counter-productive, as it is raising house prices, making savings less attractive and reducing pensioner incomes, which in turn reduces spending.