The Rugby World Cup kicked off in September and there are some (tenuous) parallels pension schemes can draw from this. After the shock results of the previous month, most schemes will have breathed a small sigh of relief in September.
They will have cheered as the PPF 7800 index finished the month at 92.2%, 0.7% higher than August lows. Signs of progress in the trade wars in the first part of September created early momentum and a slew of good economic data drove the rolling maul of equity growth forward. September also saw a modest increase in bond yields effectively moving the try line of full funding ever so slightly closer as liabilities decreased.
Looking back over the quarter as a whole however, that white line is as far away as ever. Global bond yields were driven lower by monetary policy easing, with most major central banks getting in on the act to help stimulate growth. The US Federal Reserve cut rates by 0.25% in July and a further 0.25% at their meeting in September. The European Central Bank announced its biggest package of rate cuts and economic stimulus in three years as it cut policy rate further into negative territory and revived its bond buying program for an unlimited period. China continues to inject fiscal stimulus through government spending to support growth. Bond markets are heavily pricing in continued monetary and fiscal easing, which leads to lower bond yields both now and in the future. This isn’t a good sign for pension schemes hoping that rising rates will help them get back on level terms. As always, we caution schemes against such a binary approach and advocate a good degree of interest rate hedging - this year a scheme with a duration of 20 years will have seen its liability value increase by c15%; LDI will have helped defend territory.
In other news, September was the last chance for UK schemes to update their Statement of Investment Principles to reflect how they take account of financially material considerations, including Environmental, Social and Governance matters, as well as the extent that non-financial matters are taken in to account ahead of the 1st October deadline. Trustees may find it relatively easy to incorporate ESG preferences into equity allocations and on the alternatives side through allocations to renewable power and other sustainable investments. However they may be questioning how they can do this in their fixed income portfolios. With the advent of green bonds and environmentally aware money market funds, schemes can now integrate ESG into their bond and LDI strategies.
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