Tue, 16 Dec 2014 13:10:42 GMT
Friends Provident was one of the first pension schemes to undertake a large scale LDI hedge years ago.
Over the last 11 years real yields have fallen by 276 basis points, an average of 25 basis points every year.
30 year nominal gilt rates have fallen while 30 year inflation break-evens have risen.
Equities and index-linked gilts have provided similar excess returns.
30 year USD swaps and EUR swaps have also fallen substantially over the last 11 years.
Friends Provident was one of the first UK pension schemes to undertake a large scale LDI he ...
Fri, 12 Dec 2014 11:32:34 GMT
Are Rates Low?
Above all else, the mark-to-market value of long-term liabilities is determined by long-term interest rates. The relentless fall in interest rates over the last few years has hit pension funds hard. However, many argue that such valuations are misleading because interest rates are artificially low, and will rise back up soon.
To say interest rates are low, compared to history, seems eminently fair. Using data on US 10yr rates from Professor Robert Shiller, current rates are just above the 10th percentile; so for nearly 90% of the last 144 years US 10y rates were high ...
Thu, 11 Dec 2014 11:00:00 GMT
GBP real swap rates are around minus one percent.
Most of this fall has been due to falling nominal rates rather than falling inflation expectations with similar moves in USD and Euros.
While the Federal Reserve has ended QE the Bank of Japan has increased QE and the ECB may be about to start.
Concerns about inflation in the UK undershooting the Bank of England’s 2% target.
GBP Swap Real Rates Fall to Record Lows
Real GBP swap rates have fallen substantially year to date with even the long end part of the curve now close to minus one percen ...
Mon, 08 Dec 2014 11:46:07 GMT
Charles Dickens’ novel “A Christmas Carol” is a widely celebrated festive tale that details the transformation of the famous Christmas humbug Ebenezer Scrooge. In the book Ebenezer is a “wrenching, grasping, scraping, clutching, covetous, old sinner!" whose business is loaning money and ruthlessly chasing repayments.
What Dickens neglected to portray was that Mr. Scrooge’s money lending business also had the daunting commitment of a Defined Benefit Pension Fund.
In this blog I uncover the previously untold supple ...
Thu, 04 Dec 2014 15:56:29 GMT
The Government’s pension reform programme since 2010 gained a powerful boost in last year’s Budget with the announcement that people saving in DC schemes would, from next year, no longer have to purchase an annuity when they retire. At a stroke, the retirement landscape in DC changed dramatically and we are still digesting the implications. We have subsequently gained a little more clarity concerning the guidance that people will be able to access before they make any final decisions, but there is still a heated debate underway about the impact of these changes.
The tr ...
Thu, 13 Nov 2014 20:13:12 GMT
Alice: I’m not a serpent, I tell you! I’m a -- I’m a --
Pidgeon: Well! what are you? I can see you’re trying to invent something!
Alice: I -- I’m a little girl
Pidgeon: A likely story indeed! I’ve seen a good many little girls in my time, but never one with such a neck as that! No, no! You’re a serpent; and there’s no use denying it. I suppose you’ll be telling me next that you never tasted an egg!
Alice: I have tasted eggs, certainly, but little girls eat eggs quite as much as serpents do, you know.
Pidgeon: I don’t ...
Tue, 11 Nov 2014 18:52:46 GMT
When I woke up this morning and read through the latest breaking news, I was delighted to see that the long awaited Shanghai-Hong Kong exchange connect program will formally debut on 17th November 2014. Although the intention of the regulator to take such a key step towards greater financial liberalisation in the world’s second largest economy was announced six months ago, the actual effective date has been delayed and was never certain partly due to the pro-democracy protests in Hong Kong.
In this article I explain what has happened, why it matters and what the implications ar ...
Thu, 06 Nov 2014 14:18:34 GMT
In the same week that the Federal Reserve ended Quantitative Easing (QE) the Bank of Japan increased QE
The Japanese Government Pension Investment Fund moves away from bonds and towards equities
The pension fund has a clear objective for the change in asset allocation
The new asset allocation is relying on equity risk premia and FX carry to generate returns
This may work in the inflationary environment that the fund expects but may not if deflation continues
Using leverage would enable a more balanced allocation between performance in inflati ...
Wed, 29 Oct 2014 15:00:51 GMT
One of the core responsibilities of a pensions investment consultant is to educate trustees about the unique risks that liability-targeting investors face, and to keep them informed about changes in the economic and regulatory environment. When done effectively this allows both trustees and consultants to see the fund’s current position from the same perspective, and acts as the foundation for subsequent decisions.
The process of educating trustees is an example of what I believe to be the key issue in pensions: communication between trustees and their consultants. Eve ...
Fri, 10 Oct 2014 11:39:10 GMT
Many asset classes have experienced high (by historical standards) returns in recent years at comparatively low levels of volatility. Some equity indices for example have recently made new all-time highs. However plenty of risks remain. Investors and pension funds need to generate returns from their assets, but worry about what a big fall in their value could do to their position.
Given this backdrop, it’s no surprise that strategies and approaches that look to control risk by curbing exposures at the most risky times are gaining popularity. One approach that we’ve bee ...