Another month of tumbling gilt yields and increasing equity volatility saw UK pension scheme funding levels fall even further in August.
The PPF 7800 Index ended the month down 3.5% at 91.5%, increasing deficits by £72.2bn. Funding levels now stand 6.5% lower than where they started the year, and in fact, now lower than they were throughout the whole of 2018. The main driver of the falls was a sharp decline in gilt yields, which fell 30bps across the curve. While schemes with liability hedging and credit strategies in place will have been protected, equity volatility increased dramatically so assets fell over the month. This was largely driven by geopolitics with Trump suggesting new tariffs on Chinese imports. In the UK Brexit volatility continued with the prospect of a no-deal Brexit and/or a general election becoming more likely. As a result, UK and global equity markets were down 2-3% over the month.
Whether a scheme is in surplus or deficit will largely have decided how schemes have fared in August. Generally speaking better funded schemes have more hedging and are taking less investment risk so will have coped better with the market turbulence in August. Conversely, their underfunded counterparts who need to chase returns will have been hit hardest. But by carefully and dynamically tilting their portfolios they could have protected themselves on the downside and captured upside opportunities such as the mid-month rally. This is the essence of a delegated approach which may be a (non-CMA review) reason why there has been so much search activity this year.
With little resolution in sight to the geopolitical challenges which have impacted markets and therefore pension schemes so far in 2019, we expect more and more schemes to consider fiduciary management. This is because dynamic, flexible investment strategies underpinned by high levels of liability hedging seem most appropriate in the current climate. Whilst the PPF 7800 index has fallen since December, a fiduciary approach could have resulted in a funding level gain over the same period.
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