Low interest rates have been around for a long time. In the late ‘90s you had base rates at the heady heights of 7.5% (Does anyone remember paying eye watering 9.5% + mortgages?). Then came the steady decline which became a steep plummet from 5% in September 2008 to 0.5% in March 2009. Since then we have had an unbroken period of stability with no ups or downs over the last seven and a bit years. But is that all going to change?
As the fallout from Brexit continues to ripple through the economy, we have Mark Carney making lots of noise about a reduction in interest rates to an all time low. OK, the Bank of England’s Monetary Policy Committee (MPC) voted at their July meeting to leave interest rates at 0.5% (8:1 majority). However, if you read the minutes of the meeting this is perhaps due to there not being enough evidence to support a reduction – yet. Here’s an interesting comment from Paragraph 24 “Few hard data covering the post referendum period had yet been released and very little survey evidence was available so far.” So, as the hard data becomes available the case for an interest rate cut may become more convincing for the remaining 8 (I am assuming that for the 1, Gertjan Vlieghe, the case will be more convincing).
But as that famed wit and raconteur Jimmy Cricket would say, “And there’s more.” If reports are to believed we are now facing the very real possibility of the UK joining the growing club of major states with negative base interest rates.
The group that would truly be negatively impacted are savers, and in particular, pensioners. To give credence to the reports of negative interest rates being a real option Ros Altmann, until recently a member of the Government, so perhaps a little more in the know (assuming the Treasury was speaking to her), reacted to the news that NatWest had warned corporate customers that they may have to charge interest on accounts in credit, should the Bank of England dip the interest rate into the sub-zero waters. Should that happen, many will anxiously wait to see if those charges seep across to personal savings accounts too. If that levee were to break, the former Pensions Minister said “The danger is many people will just think, “I’m going to put the money under the mattress.””
A big bank with its hundreds of financial advisors metaphorically stuffing the duvet is one thing, but I don’t think that even the former minister is actually recommending this course of action to Mr Bloggs Snr on the Clapham omnibus. Should pensioners take such action, there have to be real security fears for their savings, as well as their own health and safety. Beyond the obvious risks associated with keeping large amounts of cash being under beds, there is also the real possibility that these concerned pensioners may be more susceptible to pension/investment scams, offering a safe haven with fantastic (aka. positive) returns on their savings, just like they used to have. If negative interest rates come our way, the industry needs be even more alive to the risks posed by scammers.
But what about Trustees? In terms of pension schemes themselves, negative interest rates won’t be a surprise – they have been feeling the pain of low long term interest rates on their funding levels for a number of years. with the market environment having an affect on gilts and gilt yields. Trustees have seen the increasing impact of low interest rates on their funding results year on year. Their pain will continue, but it’d hardly be a game-changer in the current environment. That does not mean trustees should just shrug their shoulders and chalk it up to one more bit of funding bad news. Following the Brexit result my colleague Brian Spence wrote a blog calling for trustees to reappraise what the changing economic landscape means for their schemes. This is reiterated by the Pension Regulator in their recent Guidance Statement. In it the Regulator states that it considers it too early to fully understand Brexit’s implications, and that any impact will be scheme and sponsor specific. Three bullet points for trustees to consider are:
- Trustees should take an integrated approach to risk management (considering funding, investment and covenant together rather than in isolation).
- The Regulator expects Trustees and Sponsors to work openly and collaboratively.
- Trustees should consider scenario planning to assess the impact of uncertain economic outcomes.
The Regulator also urges trustees to consider exposure to interest rates and inflation risks, concentrations of investment, currency exposures and liquidity.
Change and volatility are likely to be ever present guests at the pensions banquet for the next couple of years, at least. Unlike Banquo’s ghost these particular guests should be visible to all and doing nothing is not really an option.