Saturday, 6 August 2016

Interest Rates fall. What should Pension Funds do? NOTHING !!!

The unprecedented low levels of interest rates have had only one significant effect on private sector DB pensions. That is on liabilities. Government (BOE) interest rates determine Gilt Yields which in term determine the discount rate used in liability calculations.

The Discount Rate is an assumption. Liabilities extend forward for decades (30/40 years) and nobody can forecast what level of interest rate will apply. It is reasonable to assume that at some point rates will revert to traditional norms. That is to say significantly higher than at present. So using current rates substantially overstates a fund's liabilities.

The prudent Fund Manager will not panic and certainly not seek sponsor support to boost assets to match liabilities which by any rational analysis are significantly overstated. Better to run for a time with a negative funding ratio than to send good money chasing after bad.