BlackRock Head of UK Strategic Clients, Andy Tunningley, says that Father Christmas gave Trustees an early Christmas present in November as pension funding improved. The PPF 7800 Index aggregate funding ratio improved from 84.1% to 88.1% in November, marking the third consecutive monthly improvement, as rising gilt yields caused liabilities to fall more than assets. Unfortunately, a pension fund is for life, not just for Christmas - the gains of recent months only bring funding levels only slightly above where they were at the start of the year. 2016 has been another lost year for many pension funds.
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“Government bond yields across the globe jumped higher during November following the surprise election of Donald Trump as the President of the United States. The result added fuel to the fire for some nascent trends in markets, in particular trends towards steeper government yield curves and reflation. UK yields were further helped higher by Chancellor Hammond’s first Autumn Statement, with the modestly relaxed fiscal purse strings leading to greater gilt issuance in the near term. Trustees would do well to look beyond the headlines, however - real yields, which are far more relevant to pension funds than nominal yields given the inflation-linked nature of many pension promises, are still below their pre-Brexit levels. We believe that the extra borrowing announced by the Chancellor will have little impact on the huge supply-demand imbalance in the long dated gilt market that acts to anchor yields to low levels. Pension funds cannot rely on rising yields to escape their funding holes- most pension funds should hedge more interest rate and inflation risk than they currently do.
“Economic forecasts from the Office for Budget Responsibility suggest post-Brexit Britain will experience lower growth than was previously forecast. Though near term UK data has held up well, we think this uncertain, likely low-growth future, could restrict the ability of some UK pension fund sponsors to support schemes that run into difficulties. Though no silver bullets exist, alternative income sources can help. In particular, private market real assets can offer attractive cash flow streams and diversified risk exposures for long term investors. Pension funds should take advantage of their ability to hold illiquid assets that many other investors cannot. In the Autumn Statement several new UK infrastructure projects were announced.
Though the projects will be government funded, the chancellor hinted at greater private sector involvement in funding future projects – which should be welcomed by the pensions community.”
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