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Our response to today’s Spring Budget

6th March 2024

Today, 6th March, the Chancellor delivered the Spring Budget. Commenting on the latest economic forecasts and the considerations for companies with defined benefit pension schemes and trustees, Shweta Singh, our Chief Economist, and Nick Gibson, Managing Director, comment.

On the macro-economic landscape, Shweta Singh, Chief Economist, Cardano said:

Today’s budget announcement emphasises the continued constrained position of the UK economy. The Chancellor would have wished to have been a little more generous but fiscal flexibility was not on his side. The cut in national insurance rates; child benefit reform; the freezing of fuel and excise duties; and the public sector productivity plan will dominate the headlines, however, they don’t meaningfully move the needle on what remains a slow path of recovery for the UK economy.

The Office for Budget Responsibility’s (OBR) updated forecasts, which reflects a relatively sanguine view on growth for this year and an optimistic outlook for next year: the OBR has upgraded their growth expectations and now expects +0.8% real growth in 2024 and +1.9% in 2025, these upgrades being +0.1 pct pts and +0.5 pct pts higher than their November 2023 estimates respectively. We see downside risks to the OBR’s growth outlook, which are also more optimistic than the Bank of England’s forecasts.

This was never going to be the pre-election giveaway that Hunt (or, more accurately, his backbench colleagues) would have wanted. The Chancellor was facing a reduced fiscal headroom of £12bn heading into the Spring budget in comparison to Autumn estimates of £13bn. The front-loaded package of measures, including tax cuts raises borrowing by an average of £8bn a year, further reducing the fiscal space to £8.9bn, meaningfully lower than the average of £26bn that Chancellors have set aside against their fiscal rules since 2010. However, the budget was in line with analyst and market expectations and was delivered without risking the kind of market turmoil that accompanied his predecessor’s attempt to shake up the UK fiscal landscape. Gilt markets and the value of sterling in foreign exchange markets have reacted in a broadly neutral way. Calm markets will be comforting to UK households, businesses, and investors in UK assets alike, wanting some much needed economic stability.

On the challenges facing trustees and companies with UK defined benefit pension schemes, Nick Gibson, Managing Director, Cardano Advisory said:

Today’s budget announcement underlines the macroeconomic challenges many businesses continue to face. While growth forecasts have been upgraded, recovery is still expected to be slow and will also vary greatly by sector. This, coupled with the current interest rate environment, will put increasing pressure on upcoming refinancings and business capital allocation.

For trustees of UK defined benefit (DB) pension schemes, this macroeconomic backdrop increases the importance of closely monitoring developments in the corporate sponsor. We are increasingly seeing trustee boards plan for scenarios where the scheme strategy could be impacted by corporate activity, including for well-funded schemes that have a clear plan to their ultimate end-game.

For companies with UK DB schemes as key stakeholders in the business, it is more important than ever to plan ahead for how major corporate developments, including M&A transactions or refinancings, will impact the scheme. Such advanced planning will help with decision-making by management over allocation of the “marginal pound” in the business, whilst also ensuring that the scheme strategy remains on course, as companies increasingly look to de-risk their balance sheet by reducing or removing their pensions risk.