Andy Tunningley, Head of UK Strategic Clients at BlackRock, comments on the latest PPF 7800 Index figures: As temperatures continue to stay high across the country, so do pension scheme liabilities, with stubbornly low gilt yields showing few signs of rising significantly and providing schemes with relief from the heat. PPF funding levels rose 0.5% to 94.9% over June as assets and liabilities both fell over the month. Looking back over the first half of the year, funding levels are up around 1% driven by an increase in asset values. Whilst these are small overall gains, schemes should make the most of the sunny outlook while it lasts - while equity markets remained buoyant in June, escalating geopolitical tensions and uncertainty over the viability of the latest Brexit proposal could cause unexpected downpours in the shape of equity market volatility which may remove funding level gains over the last year.
As the Bank of England yet again kept base rates on hold, as expected, there was little movement in the yield curve over the month. However, with the usually dovish Haldane going against the majority in voting for a rise for the first time since joining the MPC four years ago, the potential for a rate rise at the next meeting has increased. This will result in a funding cost increase for those schemes with floating rate derivatives. On that topic, the European Investment Bank released a SONIA-based bond during June, and we expect this trend to continue as LIBOR is phased out over the next three years. Regardless of the underlying cash rate used, financing costs are set to increase and trustees should ensure they have prepared adequately for the change in season by giving thought to using their spare collateral to earn additional return, such as through absolute return bond funds or securitised assets.
June saw China open its traditionally domestic owner only A-Share equity markets to foreign investors through inclusion in the MSCI EM Index. Many pro-growth schemes - particularly those with a strong sponsor covenant and long time horizon - are looking at exploiting this new source of potential return, despite the volatility that we saw in China this month. In such an immature and opaque market with a wealth of “big data” it’s important to be able to cut through the noise, whether through “boots on the ground” investors or with the aid of analytics and more quantitative approaches. When China is the world’s second largest economy with the second largest and most liquid stock market, how can schemes continue to run more than half their equity portfolios in the UK and US combined while emerging markets typically make up less than 5%?
Boris Mikhailov, Investment Strategist, Global Investment Solutions at Aviva Investors comments on the latest figures: "Over the month there was a marginal improvement in the reported PPF figures today, the aggregate funding position of pension schemes increased to c.95%. This compares to 89% funding position a year ago and 78% as at the of June 2016. Over longer periods, however, if you rewind back to 2011, the funding levels reached dizzy highs of well over 100% funded.
“Although schemes are adopting de-risking strategies to take advantage of improvements in funding positions, more could be done to increase certainty of meeting pension promises.
“According to the 2018 Mercer European Asset Allocation Survey, only 34% of UK pension schemes have formal de-risking triggers in place. The remaining pension schemes have an informal approach. This means that opportunities to ‘bank’ unexpected improvements in funding positions by taking the risk off the table could be missed.
“With volatility across financial markets only likely to increase this year, pension schemes need to brace themselves for an even choppier ride. Without a clear game-plan, most schemes will be none the wiser if markets start moving against them.
“For those looking at the ways to achieve more consistent returns while protecting against severe drawdowns, there is now a range of investment products and techniques at their disposal. These include traditional LDI techniques as well as more innovative Cashflow Driven Investing (CDI) strategies that utilise public and higher-yielding private debt assets.
“Using these could provide much greater certainty of delivering the return and matching liability cashflows when compared to a ‘traditional’ approach of investing in the growth and matching assets that most schemes still adopt. We would urge pension schemes to consider how these strategies and techniques could be utilised to help them meet their outcomes.”
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