New Year, same old story for UK pension schemes with funding levels once again falling following November’s rise. This leaves pension scheme funding levels at 98.0% at the end of 2018, down 2.9% over the month. Over December, asset values fell as the fourth quarter’s market volatility continued. Despite a brief rally at the end of the month, global stock markets were down around 10% over the month to end 2018 in negative territory, the worst year for stock market returns since 2008. Funding level losses were compounded by rising liabilities resulting from gilt yields falling at all maturities, returning them to near their start of year positions. While the PPF 7800 Index now sits 4.1% above where it started the year, in reality funding levels are likely to have fallen over the year, as the PPF dataset and assumptions were updated in November. For those schemes which haven’t experienced demographic changes like the PPF dataset, funding levels could be down as much as 5% over the year.
BlackRock’s Global Rebalancing Survey, released yesterday, suggests that 60% of corporate pension schemes intend to continue to de-risk from public market equities, with almost half of schemes expecting to increase their exposure to fixed income and a similar proportion increasing their allocation to private market assets in the shape of real assets, private debt and private equity. These investors cite the turning of the economic cycle, rising rates and trade tensions as the three most significant reason for their intended shifts. We support their intentions and believe that private markets in particular continue to offer pension schemes attractive risk-adjusted returns.
December was another reminder that UK schemes should be wary of playing the long-game of waiting for rates to rise in order to boost funding levels. With no further clarity on Brexit, we believe the Bank of England will keep base rates on hold until after the UK’s scheduled departure from the EU. Assuming a no-deal scenario is avoided, we expect markets to price in further tightening, with one rate hike in 2019 and another in 2020. In the absence of further political or economic shocks, positive or negative, it is hard to see other outcomes and these are already priced in to the yield curve. Those trustees waiting for rates to rise faster than the market will need the patience of a saint.
Our message to trustees as we start the New Year: look at your scheme holistically, build resilience into your strategy and diversify your growth assets to ensure your scheme is in good shape for what looks set to be a bumpy ride.
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