Pension scheme funding remains “favourable” despite today’s decision by the Bank of England to keep interest rates on hold.
There has been some speculation that the Bank’s Monetary Policy Committee’s decision might cut rates to stimulate growth, given poorer economic data in October. But with inflation remaining at twice the 2 per cent target it opted for a safety first approach, ahead of this month’s Budget.
XPS Group chief investment officer Simeon Willis says the MPC’s decision was broadly in line with expectations, so “the impact on pension schemes is negligible”.
He adds: “Longer term interest rates, which are what matters most to pension schemes, have demonstrated dislocation from short term rates, trading at much higher yields for the last six months.
“Even in light of the recent falls in yields over October, reflecting more favourable inflation figures, longer term yields are still higher than might reasonably be considered best expectations of future short term interest rates.
“This reflects the DMO’s challenge of issuing gilts in the current environment. Pension scheme appetite is largely satiated with existing gilt holdings and there is additional supply in the form of ongoing quantitative tightening, on top of regular issuance to finance the cash-strapped government.”
Canada Life UK retirement income director Nick Flynn says: “Just a few weeks ago, a pre-Budget base rate reduction by the Bank of England seemed unlikely. However, weaker-than-expected economic data in October, combined with expectations of a future downward trajectory for inflation, made it a real possibility.
“Ultimately, MPC decided to hold the base rate steady. However, the 5-4 vote among MPC members suggests a change could be on the near-term horizon. Attention will now turn to the final MPC meeting of the year, which will help set the tone for market expectations in early 2026.
“Those considering an annuity can still take advantage of the current competitive rate environment. With the certainty of a guaranteed income for life, annuities continue to be an attractive option for retirees looking to secure their financial future and support their loved ones, especially as the outlook for pensions and tax rules continues to evolve.”
Standard Life retirement savings director Mike Ambery says some had expected the Bank to cuts rates to help stimulate growth, but the decision to keep rates on hold reflects ongoing concerns around inflation.
“The move highlights the delicate balancing act policymakers face – maintaining support for the economy without reigniting price pressures,” he adds.
Schroders senior economist George Brown says: ”A cautious approach remains appropriate given the risk that high inflation becomes entrenched, due to sticky wage growth and subdued productivity.
“However, this may change if reports the Chancellor intends to double her fiscal headroom to £20 billion are true. Alongside mooted tax cuts on household energy bills, if these measures materialise, they could create scope for the Bank to cut multiple times next year.”
