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FTSE 100 schemes in black as Bank of England rate decision looms

FTSE 100 schemes in black as Bank of England rate decision looms

Mona Dohle
Wednesday 1st August 2018

FTSE 100 pension schemes have moved into surplus for the first time since 2008, ahead of a potential rate hike by the Bank of England tomorrow.

By the end of July, assets owned by defined benefit (DB) schemes of FTSE 100 companies climbed to £676bn, exceeding liabilities by £3bn, according to the latest data provided by JLT Employee Benefits.

The improvement was largely due to a sharp fall in pension scheme liabilities, from £705bn in July 2017 to £673bn 12 months later.

FTSE 350 schemes also benefited from a similar fall in liabilities, which declined to £765bn from £801bn year-on-year, matching their £765bn in assets for FTSE 350 schemes.

A key reason for the decline in liabilities is a rise in long-term gilt yields, used to calculate liability levels of DB schemes.

Charles Cowling, chief actuary at JLT Employee Benefits says: “The improvement is due to a slight increase (just under one quarter of a %) in AA bond rates (accounting disclosures use AA bonds rather than gilts to calculate liabilities) which has resulted in a 4% to 5% fall in liabilities.”

The yield on 10-year gilts increased to 1.33% from 1.21% over the past year, according to Bloomberg, a near 10% rise.

The drop in liabilities has also been beneficial for other pension schemes, as the Pension Protection Fund recently reported that its deficit had decreased from £122bn as of June last year to £85.6bn by June this year.

Cowling suggests that a potential rate hike at the next Bank of England Monetary Policy Meeting (2 August) could offer further relief for pension schemes.

“Much may depend on Thursday’s meeting of the Monetary Policy Committee at the Bank of England, with City experts and pundits alike widely predicting an interest rate rise. If Bank base rates increase to 0.75% as expected, it will only be the second time since the 2008 financial crisis that the bank has increased rates.”

“Pension schemes have been hoping to see interest rate rises for most of the last 10 years,” he adds. “The record low interest rates through this period have been a key driver in producing huge pension scheme deficits, which are only just now reaching recovery as a result of the long bull market in equities.


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