The Chancellor’s spring Budget shows that public finances are still very constrained. As confirmed by the updated Economic and Fiscal Outlook from the Office of Budget Responsibility (OBR) some fiscal flexibility has been gained – higher than expected tax receipts and lower than expected expenditures on energy subsidy schemes have both played their part.

Was it expected?

The Chancellor has been cautious in his approach to deploying this additional flexibility, recognising the challenges faced by the UK economy. As expected, changes in taxation policy have largely been avoided. Spending measures have been carefully targeted at easing conditions in the labour market and stimulating high growth business sectors. These initiatives are welcomed. Structural constraints upon labour supply, and their consequential effects upon wages and inflation, remain as a key risk to the Bank of England’s forecasts. Contrary to the OBR’s forecasts we do think that the UK falls back into recession later this year and experiences only a shallow recovery in 2024. Without a sharp fall in inflation, the ability of the Bank of England to provide monetary policy support during this downturn will be limited.

Upcoming hurdles for pension schemes

In our view, one of the biggest upcoming hurdles is the significant amounts of corporate debt sitting on the balance sheet of many businesses sponsoring UK DB pension schemes which will need refinancing in the next 12-24 months. Any refinancing will be at significantly higher interest rates than when first issued, which, together with other cost pressure, will put further pressure on cash flows. Just this week we have seen inflationary pressures show through in the latest monthly insolvency statistics which highlighted the continued upward trend of company insolvencies.

Considerations

The current dynamics are therefore a good reminder for businesses supporting DB pension schemes (sponsors) and pension trustees to properly manage their pension risk. Trustees need to have up to date information on the levels of debt held by their scheme employers, the relevant financial covenants and the maturity dates of that debt. Both sponsors and trustees alike should also factor in the timing of any refinancing, so that they can understand and prepare for the impact of any shocks and cash-flow issues that might be coming down the line.

DB pension schemes may have seen the benefit of rising gilt yields through improved funding but ultimately employer covenants are coming under more pressure and so those responsible for pension schemes need to remain vigilant and make sure their journey plans stay on course.