Vishal Makkar, Head of Retirement Consulting at Buck in the UK comments: Funding levels for schemes have started to increase again in August, reaching an aggregate surplus of over £313bn. The funding ratio now sits at 125.1% with both assets and liabilities down to £1,565bn and £1252.2bn respectively.
“With the Bank of England signalling further interest rate hikes and inflation projected to reach 13% this year, there are still causes for concern for trustees in the coming months. As they look to shelter investments from the uncertain economic climate, trustees and sponsors look to inflation-proof assets to safeguard their pension schemes and, ultimately, members’ pensions from increased volatility.
“As the newly appointed Government indicates that it is likely to announce wider budget plans in the coming weeks, trustees and sponsors may be forced to reassess their position and consider necessary measures to ensure schemes are ready for a bumpy winter.”
Sion Cole, Head of UK Fiduciary Business at BlackRock, said: Over August the PPF 7800 funding levels had a sizeable increase from 118.2% to 125.1% . This is reflective of the record rise in bond yields and falling liability values. Markets are responding to the US Fed Chair’s Jackson Hole speech, where he reasserted the Fed’s commitment to bringing inflation down. So, while we see monetary policymakers ultimately accepting a higher rate of inflation in the short to medium terms, we are positioned across all asset classes for a continuation of the current monetary environment.”
“In the UK, the Bank of England has been candid about their assessment that raising interest rates enough to bring inflation down to the 2% target, will ultimately harm the economy. More broadly, we think the UK is dealing with an underlying inflation issue driven not only by the shock of energy prices, but also a reduction in production capacity owing to low levels of labour supply. We are also beginning to see pressures on company earnings, which in turn has led to increasing numbers of corporate insolvencies, which denotes the strong need for contingency planning. Compared to the PPF 7800 index, not every scheme saw positive improvements last month - given these are also contingent on each scheme’s asset allocation and risk positioning. Furthermore, we’re neutral on European government bonds and have a modest overweight to UK gilts with a preference for short-dated bonds due to markets pricing in an overly hawkish rate path.”
“The substantial monthly gains and volatile economic environment continue to highlight the value of risk management and thoughtful positioning, with meeting liabilities and funding goals remaining key considerations. There is a continued lack of consensus from fund managers on where base rates will end up, and this illustrates why scheme managers must take a long-term view, and demonstrate the importance of diversification into multiple asset classes, including alternatives and illiquid securities.”
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