Consequences of the Mini Budget

On Friday 23 September 2022, the Chancellor presented a so called “mini” budget which proposed the biggest tax cuts in over 40 years and a focus on growth.  This had an immediate impact on markets which saw sharp rises in interest rates and a precipitous fall in the value of sterling.

Impact on scheme funding: There has been a significant increase in gilt yields reflecting the impact of a significant wave of new government bonds to be issued (£100bn plus), further increases to the bank base rate to address high inflation and concerns over the sustainability of the Governments handling of the economy.  This is against a backdrop of yields which have already been increasing over the year.

The impact on the funding position of your scheme will depend to what extent you have liability hedging. 

If you are fully hedged, your funding position should not be impacted significantly by the change in long term interest rates although you will likely experience further calls for capital to rebalance leverage levels which might come through at short notice. 

If your scheme is not (fully) hedged against interest rate and/or inflation movements you are likely to have seen a significant improvement in your funding position.  This could have implications for your current funding strategy and bring forward plans for de-risking.  Schemes will want to consider whether they should ‘lock-in’ any of these funding gains and whether their investment strategies remain appropriate.

Otherwise, Trustees may want to consider whether their scheme factors and transfer value basis (including any transfers that have been recently issued) remain appropriate and reflect this revised economic climate.