UK pension scheme funding levels were up over October as increasing gilt yields meant liabilities fell. The PPF 7800 Index was up 2.2% to end the month at 94.4%. Global equities rose around 2% on the back of positive economic growth and greater certainty around geopolitics. Relations between the US and China appear to be improving while there were developments - positive or negative depending on your view - on Brexit and the UK political situation leading to Sterling rising 5% against the US Dollar. With no-deal Brexit risk all but removed, UK investors were encouraged to take a more risk-on position, and long-dated government bonds sold off around 3%. While this fall offset the equity gains in their asset portfolios, its effect will have been a net positive for pension schemes who discount their liabilities using gilt yields.
As political parties in the UK set out their manifestos for the December general election, there is uncertainty over the path of gilt yields over the next few years. Will the trailed end of austerity mean the market is flooded with new gilt issuance and a rise in yields? Or will a hung Parliament spook investors and lead to a sharp rise in gilt prices as they retreat to traditional safe havens? Whatever your view, it’s unlikely to be high conviction. We have been increasing our liability hedges over 2019 and now is not the time to start cutting these back.
And on the growth assets side - what to do there? Despite the boost in October, most schemes find themselves still at funding levels of two years ago. Over that time, their assets and liabilities have both risen more than 10%. The majority of schemes still have significant deficits against their stated long term objectives. We advocate a diversified portfolio of equities, credit and alternatives to balance risk and capture upside opportunities. The key is dynamism: now isn’t the time to be setting and forgetting your investment strategy. Close management - or delegation of that management - will be critical to the success of pension schemes through the rest of this year and into next.
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