Budget 2022 impact on DB pension schemes – ‘likely to further reduce deficits’ – Jon Forsyth, LCP

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High levels of government borrowing announced in the Autumn ‘mini Budget’ are likely to drive up long-term interest rates and reduce deficits in DB pension schemes according to LCP partner, Jon Forsyth.

In the last week, the interest rate on 20 year UK gilts stood at around 3.5% and had risen to just over 3.8% before the Chancellor stood up.  Market reaction to the statement has led to a further increase with rates now at around 4.0%.  Coming on top of earlier rises in long-term interest rates these increases will reinforce the trend of more schemes being in surplus and more schemes being in a position to consider buying out some or all of their liabilities.

Scheme funding is also affected by expected future inflation over the long-term which has risen slightly in recent weeks.  However, where pension increases are not fully protected against inflation because of caps, schemes can sometimes benefit from higher inflation if they are heavily invested in inflation linked assets such as index-linked gilts.  The exact impact will vary from scheme to scheme and will also depend on their hedging strategy.

The Chancellor also reversed a planned increase in Corporation Tax rates.   This means that companies will get less tax relief on the contributions they make into pension schemes than expected, and this could affect the timing of contributions into DB pensions.

Commenting, Jon Forsyth said: “The vast majority of DB schemes will find themselves in a better funding position this year than last, and today’s announcements are likely to reinforce that trend.  If long-term interest rates continue to rise, deficits will tend to fall, and for some schemes this could bring forward the potential to buy out or buy in some of their liabilities.  The impact of other Budget measures such as the scrapping of the Corporation Tax increase will have a less clear cut impact, as firms will get less relief than expected on pension contributions.  But overall today’s statement is likely to lead to an improvement in DB scheme funding”.