PLSA calls on UK pensions regulator as Gilt yields drop post-BoE

The UK Pensions Regulator should exercise its powers “to take a proportionate and flexible approach” to scheme funding, the UK workplace pensions association said in the wake of the Bank of England’s easing action plan, which sent defined benefit (DB) deficits to fresh record highs.

The central bank today cut interest rates for the first time in more than seven years, to 0.25%, and launched further quantitative easing.

This includes purchasing up to £10bn (€11.9) of UK corporate bonds over the next 18 months and re-starting purchases of Gilts, of £60bn over the next six months.

It also announced a new funding scheme for banks, the “Term Funding Scheme”.

The rate cut had been fully priced in but not the asset purchases.

The Bank of England’s announcement sent Gilt yields tumbling to fresh record lows, and UK DB pension scheme deficits soaring to record highs.

According to consultancy Hymans Robertson, DB liabilities increased by £70bn to £2.4trn in the wake of the Bank of England revealing its action plan, with the pension schemes’ aggregate deficit standing at £945bn.

Sterling fell, while equity markets have risen.

The UK’s Pensions and Lifetime Savings Association (PLSA) said the rate cut and further quantitative easing would put pension schemes under greater pressure. 

Commenting on the rate cut, Graham Vidler, director of external affairs at the PLSA, said the association recognised the need to protect the UK economy but that “strong consideration needs to be given to the negative impact this will have on the 6,000 private defined benefit pension schemes helping some 11m savers”.

He acknowledged that some of the Bank of England’s quantitative easing programme targeted corporate bonds, but he said the impact on Gilt yields would still be an additional burden for many pension schemes.

The Pensions Regulator (TPR) needs to adapt its approach accordingly, according to the PLSA.

“Given the current economic conditions, we are calling on the Pensions Regulator to use its existing powers to take a proportionate and flexible approach to scheme funding in these uncertain times,” said Vidler.

“It should give particular consideration to schemes going through a valuation cycle at the moment.”

Others also pointed to the negative effect on pension schemes’ funding, with implications for scheme sponsors in addition to the regulator.  

Meanwhile, according to Toby Nangle, head of multi-asset allocation for the EMEA at Columbia Threadneedle Investments, some members of the Bank of England’s Monetary Policy Committee (MPC) had indicated that “they would be keeping in mind the impact of any move by the Bank of England on pensions, insurance and banks”.

He said that while the Term Funding Scheme appears to be designed to mitigate the impact of the rate cut on commercial banks, the fact that the MPC “assessed the impact on pension funds of further yield declines as being relatively limited looks courageous”.

He added: “Their assessment that the overall size of contributions to defined benefit pension schemes have been stable over 20 years despite fluctuations in the size of their deficits deserves further scrutiny.”