Would you capture it or just let it slip?”
As I wrote in a recent blog, investment markets have been friendly lately, providing some pension schemes with an opportunity to de-risk at improved levels. This week has seen a turnaround in market sentiment, with scares in the Spanish and Italian government bond markets, softer US data and disappointing Chinese growth numbers sending Gilt yields and equity indices lower.
The chart above shows the movement of 30 year Gilt yields and FTSE 100 for the last month. Gilts have seen a range of 28bp from high to low while the FTSE has a range of 6.2%. Fortunately, pension schemes may have more than ‘one shot, or one opportunity’ to de-risk but it requires trustee boards to have the ability to ACT.
Why is it important to ACT?
The latest PPF 7800 figures showed an improvement in funding levels during March, helped by higher gilt yields and equities. However, the latest markets movements suggest a deterioration in funding levels for April, if the trend continues. As a rule of thumb, PPF estimate that a 7.5% rise in equities leads to a 4% rise in asset values, while a 30bp rise in gilt yields reduces liabilities by 5%. Unfortunately, we have seen both equities and yields fall this month.
Schemes with an appropriate decision-making process have been able to ‘lock-in’ some of the gains by de-risking as sentiment improved. According to a survey by Schroders, these schemes make up the minority with just 17% of those surveyed able to make immediate investment decisions. In contrast, over 50% of respondents said it takes longer than one month for trustee boards to decide.
Eminem only had one shot. If your scheme has a second shot, would you capture it or just let it slip?