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Pension funds must prepare for interest rate surprises

Pitmans Trustees says pension schemes will need to move quickly to develop more robust strategies and decision processes for the interest rate surprises expected in the near future.

Colin Richardson, client director, says: “Following the speech given by Mark Carney last month speculation has continued to escalate as to the timing of interest rate rises and their path over the next few years.  Some of this speculation has not always been helpful - varying signals, economic data and external risks make these kinds of predictions treacherous. Nonetheless, after this long period of unchanged extraordinary low rates it is vital for schemes to be prepared for the changes to come. 

“Interest rate rises present both huge opportunities and massive risks for schemes. With material rises pre-anticipated within markets, positioning in relation to variances from consensus market expectations is important in the short term. Varying impact for investment terms from short term base rate rises means schemes need to be aware of exposure to investment term or "duration" risk.  Existing investment de-risking strategies may become more active depending on base rate impacts on longer term yields and asset allocation triggers will lead to more investment switches than hitherto. Schemes need to be satisfied that the de-risking strategy is right for them. The period of rising rates could also lead to de-risking opportunities on the asset and liability side and makes it a time to plan the potential actions on both.

“It is clear that schemes need to be carefully considering their positioning and how robust it is in relation to all of these potential change in view of where their unique risks lie.  Within all this, however, we need to remember the context that, with the exception of those unfortunately over-borrowed, interest rate rises will be good news: a small tentative step towards economic normality and a sign the economy is considered strong enough to withstand the change.”

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