Pension savers are set face “more pain” in the wake of today’s Bank of England interest rate cut, with defined benefit deficits likely to soar and annuity rates plummet, according to pension and savings industry figures.
The Bank of England has today cut the base interest rate by half (0.25%) from 0.5% to 0.25% as the Bank’s Governor, Mark Carney, unveiled measures aimed at preventing a recession following the Brexit vote. As well as cutting interest rates for the first time since 2009, Carney also boosted Quantitative Easing (QE) by £60bn.
Nigel Green, chief executive at deVere said that the Bank of England has delivered yet “another painful bloody nose” to pensioners and savers.
AJ Bell senior analyst Tom Selby says the move could have far-reaching consequences for UK savers and for those with pensions that are based in the UK.
“The fallout from the BHS disaster has thrust the UK’s defined benefit pensions crisis back into the spotlight, and today’s rate cut piles further pain onto scheme sponsors” said Selby. “A lower base rate will place further downward pressure on gilt yields, which have already plummeted in the wake of the Brexit vote.”
“Gilt yields are used by actuaries to value DB liabilities, so a further drop in yields will push up already sky-high scheme deficits. On the flip side, if today’s monetary stimulus does the trick and boosts the UK economy, then the value of the assets DB schemes hold to pay out pensions may well rise,” he said.
“This really is a toxic combination for millions of people who rely on pensions and savings,” said Green. “With interest rates now at their lowest since 1694, gilt yields will fall further. These yields are already incredibly low and by falling even more, pension deficits will increase further.
Green added that it is “extremely concerning” because there is, he says, already a mammoth £935bn black hole in defined benefit pension schemes.
“The scale of these deficits casts doubt on the survival of many company pension schemes and in order to survive they will need to make drastic changes to the terms of employees’ pension schemes, ” he said. “The misery is especially acute for those retiring now who are to buy an annuity. The income from an annuity is linked to gilt rates, so annuity rates are also at record lows.”
‘Insult to injury’
The implications for pension savers that might have been planning to buy an annuity could “add insult to injury” for pension savers already reeling from the Brexit vote,” said AJ Bell’s Selby.
“Insurers use government gilt yields to price annuities, so a cut in the base rate puts further downward pressure on UK gilt yields and, in turn, annuity prices,” said Selby.
“The picture is challenging for drawdown investors too, with the search for yield set to become even harder. And with a recent report from McKinsey warning equity returns are likely to be significantly lower over the next 20 years, it’s more important than ever savers are realistic about the returns they’ll get from the stock market,” he added.
British expat retirees
Green also criticised the Bank of England’s policy of ultra-low interest rates and large-scale money printing as something particularly worrying for the millions of British expat retirees.
“Not only do they face the same serious challenges of pensioners and savers in the UK, they also have to deal with the impact of a falling pound. The drop negatively hits their fixed income, meaning that life becomes more expensive in their countries of residence.”
“The Bank of England’s announcement is another hammer blow for pensioners and savers. I would urge people to review their financial strategies sooner rather than later to see what can be done to mitigate the devastating impact the policies could have on their hard-earned nest eggs.”