The Bank of England’s (BoE) reduction of the base rate from 4.5 per cent to 4.25 per cent is expected to be "welcomed" by most pension schemes due to strong funding positions.

XPS Group chief investment officer, Simeon Willis, said that traditionally, lower interest rates are seen as negative for pension schemes, because they increase the value of liabilities, but with most schemes now well-funded and highly hedged, many are less concerned with falling yields.

“In fact, persistently high long-term yields have created friction, creating operational challenges which constrains the ability to maintain exposures to illiquid growth assets,” he continued.

“What schemes want now is stability, combined with sustained growth to support the long-term value of their credit and other risk assets, maintaining funding levels. Economic growth sits at the heart of this desirable scenario.”

Several industry experts acknowledged that the cuts to the base rate “come as little surprise”, given the increasing volatility in the global economic landscape.

Willis noted that long-term inflation expectations fell following President Trump's tariff announcements, possibly reflecting expectations of lower-cost imports being diverted to the UK instead of the US.

In addition to this, he pointed out that March's inflation also came in lower than forecast, though it remains above the BoE target.

"These factors have set the scene for a gradual easing of interest rates, supporting a UK economy increasingly focused on finding new sources of growth," he added.

Quilter investment strategist, Lindsay James, highlighted the fact that seven members of the BoE’s Monetary Policy Committee (MPC) voted to lower rates in a sign of strong agreement around the threat to growth imposed on the UK economy by US President Donald Trump’s tariffs.

The MPC report showed that two members wanted to go further and bring rates down to 4 per cent, which James said suggested more “drastic action” is being considered as economic growth is forecasted to have stalled.

However, AJ Bell head of investment analysis, Laith Khalaf, suggested that its “best not to bet the house” on interest rates being cut to the expected 3.5 per cent by the end of this year.

“That’s what the market currently expects, and based on the Bank’s forecasts would serve to bring inflation back to 2 per cent in the medium term. But with such a high degree of uncertainty around the forecasts, it would be unwise to ink three more rate cuts in this year.”

Standard Life managing director for retail direct, Dean Butler, stated that the cut is a “more complex picture” for savers, as cash savers may find returns begin to erode in real terms, particularly if inflation remains above the BoE’s 2 per cent target.

He added: “For those able to take a longer-term approach, saving into a pension offers the benefits of investing as well as significant tax efficiency.”

However, Insignis executive chairman and co-founder, Giles Hutson, said that relying “too heavily” on equity markets or leaving cash unmanaged could expose portfolios to unnecessary risk. 

“Today’s news reinforces the importance of diversification, not only across asset classes, but within cash holdings themselves,” he said.

“Spreading cash across multiple institutions can help improve yields while mitigating risk. Making cash work harder is no longer optional - it’s a fundamental part of maintaining portfolio resilience.” 

Barnett Waddingham chief investment officer, Matt Tickle, explained that the UK-US trade deal, whilst a “positive step” for the UK economy, there remains heightened uncertainty compared to 2024. 

“Tariffs remain higher, and more uncertain than previously, whilst the bigger impact on the UK is still likely to come from global tariffs which remain hugely elevated,” he added.

---