Over February, pension plan funding levels rose by 0.9% as government bond yields moved higher resulting in a fall in liabilities. While risk assets continued to bounce back following last quarter’s sharp declines, gains in equity markets were offset by gilt yield rises and spread widening. With this increase, the PPF funding level for the average pension scheme is once more close to surplus following December’s sudden fall back into the red.
Rhetoric from central banks around the world continued to be dovish, with US investors in particular reassured by the Fed’s indication that they would not be hiking rates any time soon. This combined with positive noises coming out of the US/China trade talks drove US equities around 7% higher over the month. Closer to home, despite ongoing uncertainty around the outcome of the Brexit negotiations, the FTSE 100 rose back above 7,000 on 1 February and remained above that level throughout the month.
As funding levels continue to improve, and with more schemes than ever adopting liability hedging strategies to protect against sudden yield falls, trustees’ thoughts are increasing turning towards “end-game” planning: what is our target; by when do we want to reach it; what do we do when we get there?
For many schemes the target may be self-sufficiency on a prudent basis, with a pensioner buy-in then on the cards followed by a full buy-out in time. However we are seeing increased interest in DIY buy-ins as trustees realise the opportunity cost of hedging longevity risk, especially when life expectancy is declining as the latest mortality projections have shown. Furthermore, doing several buy-ins on the road to a full buy-out may seem attractive at the time, but are those schemes transferring a relatively small risk at the expense of capital efficiency? While the market continues to debate whether so-called cashflow driven investment strategies are the way forward, we have had many discussions with our clients on the merits of cashflow matching alongside liability hedging and longevity risk management strategies. Some have concluded that adopting an insurer-like investment strategy is preferable to paying a buy-in insurer to do the same job.
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