“September marked another tough month for UK Pension Schemes, with equity market losses, falling yields and rising inflation expectation levels all contributing to falling funding levels. The PPF 7800 Index decreased over the month to 91.4%, down 1.2% since August.
“Hopes of a full recovery that drove market gains over the summer were severely hampered by a second wave of COVID-19 cases and less fiscal support from governments. Equity markets stalled on the back of signs of the much feared second wave, putting a stop to the steady rebound we have witnessed since the March lows. This served as a timely reminder that the pandemic and as a result, volatility, still has some way to run. In the UK, a stagnation of Brexit negotiations further weighed down on investors, with the FTSE 100 falling 1.5% over September. The prospect of no deal is also pushing down bond yields, with 20-year gilt yields at 0.8% by the end of Q3, 0.5% lower than at the start of the year, driving pension scheme liabilities up.
“The possibility of a second wave, no sight of a viable vaccine, a US election and Brexit negotiations are just four factors which could cause further volatility and risk to schemes as we head into the end of the year. In the face of such uncertainty, and the potential for binary outcomes to significantly impact markets, trustees should be thinking about what they can be doing to best protect themselves from tail risks in Q4. This uncertainty has undoubtedly contributed to the increased interest in Fiduciary Management across UK pension schemes. Trustees are seeing the benefit of moving swiftly to take advantage of these abnormal market conditions, preserving and even improving funding levels for schemes. The new September data shows PPF funding levels down 6.6% over the year – many schemes with fiduciary arrangements in place will be back to where they started the year, or even ahead.”
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