Markets are friendly. Collect 200bp. Do not go directly to the PPF.
There is some good news for pension schemes as investment markets have performed well in recent months:
- Equities higher: MSCI +20% from start of rally in November
- Gilt yields higher: 30 year is 3.41%, up 44bp from December low
- Real yield positive in longer-end: 30 year currently +0.10% having reached -0.22%
- Credit spreads lower: GBP corporate bond spreads have reversed upward momentum
- Volatility lower: CBOE VIX reaches 15, lowest level since 2008
- Alternatives higher: Hedge Fund Index is 4% above low in December
Equity index and Gilt yields higher....
Real Gilt yields off their lows....
GBP corporate bond spreads off recent highs....
Equity volatility suggests 'Don't Panic'....
Hedge fund performance rebounds ....
All these factors should bring some relief as funding levels look set to improve. It seems Father Christmas did receive my 2012 Wish List
, bringing #pensions an opportunity for DB schemes to de-risk at better levels this year!
Finger on the trigger?
Even better news (for some).
Schemes with an appropriate risk management and governance framework are using this opportunity to de-risk rather than reading about improved funding levels in the following month’s PPF 7800 report.
Of course, this strategy is not suitable or available to all. What is required? Empowering trustees with the ability to ACT – Agility, Control, Transparency
The opportunity to de-risk is dependent on which triggers are chosen. They can be based on movements in asset prices or funding ratios, for example. At Redington, we prefer the holistic approach in setting appropriate triggers:
- Required return
: If investment return required to meet an ‘Endgame’ recovery plan is lower than return expected on those investments. For cricketers, think of it as run rate required to win match dropping lower than current run rate, allowing a more defensive approach to reduce risk of losing the game.
- Funding ratio: Funding level improvements may result from higher discount rates / contributions / asset returns. Holistic approach takes all of these into account and determines action based on funding ratio reaching pre-agreed levels.
Has the storm passed, or is this just a calm?
The flow of cash from government bonds to equities may quickly reverse should further economic wobbles occur. Greece’s funding problems have been relieved but they still require growth to avoid further bailouts. Portugal’s economy is not out of the woods
. Spain has warned it will miss its deficit target
. Relations between Iran and Israel continue to deteriorate
, threatening world oil prices and inflation.
Agility, Control and Transparency are necessary to navigate the current markets. Alternatively, we could all ask Father Christmas for a crystal ball!
[Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice. Click here for full disclaimer]