Inflation expectations in the UK have resulted in increases in long-term interest rates as markets price in future expected base rate increases by the Bank of England. These long-term interest rates are a key component of the valuation of defined benefit pensions. These interest rate expectations have increased significantly in recent months – in particular the forward rates (10 year) which are a key component to annuity pricing.
Pension performance values
We use our proprietary model for a hypothetical deferred defined benefit pension – the performance is shown in the chart below relative to a starting value of 31/03/2017.
Personal pension plan - Benchmark index performance
We use the FTSE Private Investor Income Index (PII) and the FTSE All Share Index (weighted 50:50 with PII) to represent the personal pension plan.
Relative performance – ratio of pension to benchmark index
A loss position generated at the series of dates shown, as a result of a transfer, is when the value noted below is greater than 100.