The much higher interest rates we have seen in the past few months are clearly bad news for borrowers, especially for younger people trying to buy their first home.

And higher long-term interest rates, pushing down the value of bonds, have hit the value of defined contribution (DC) pension pots, even though equities are up.

However, it’s not all bad news, particularly not for older Britons. For those with a DC pension who have retired, or nearing retirement, higher bond interest rates are very good, because they have reduced the cost of buying an annuity — a guaranteed pension for life, which can be inflation linked.

The annuity which can now be bought with a DC pension pot has increased by a half in the past 18 months.

For the first time in a long time, annuities look “good value” versus keeping your DC savings and drawing down each month, but with no guaranteed amount and no guarantee you won’t run out of money.

Meanwhile, people in company defined benefit pension (DB) schemes can also rest easier. Higher long-term interest rates have also transformed out of all recognition the health of DB schemes, which pay a guaranteed inflation-linked pension for life, based on salary and the number of years worked. For the first time in over 20 years, finance directors are not losing sleep over pensions.

The monthly figures for the UK’s 5,100 private sector DB schemes from the Pension Protection Fund, the lifeboat set up by the government to pay compensation when a scheme goes bust, show this transformation.

These figures compare the value of assets needed to pay all promised pensions at the PPF level — liabilities — with the assets held by schemes. From December 2021 to June 2023 the surplus of assets over liabilities increased from £130bn, around £1.8tn assets and £1.7tn liabilities, to £440bn, around £1.4tn assets and £1tn liabilities. Only 500 schemes are still in deficit, with a total deficit of just £2.3bn.

Much higher long-term bond yields, driven partly by worldwide increases and partly by the UK’s homegrown “mini” Budget debacle, have slashed PPF liabilities by a third. Assets fell by just a quarter, mainly bonds held to match pension liabilities, leaving average funding levels at a record 145 per cent.

Read more @ft