As Team Europe celebrated winning the Ryder Cup in September, so pension schemes also had a successful month with funding levels rising to their highest level for over a year. The PPF 7800 Index hit 97.7% at the end of September, up from 96.1% at the end of August and from 90.6% this time last year, as gilt yields rose across the curve, reducing liabilities. Continued positive equity markets also helped to keep asset levels, and therefore funding levels high. However, we are still only 0.8% above where funding levels were in January so schemes should not get complacent.
With September marking 10 years since the collapse of Lehman Brothers and the start of the Global Financial Crisis, attention has naturally turned to how schemes have fared and whether they are more prepared were there to be another shock to the system. According to the Purple Book, most schemes have de-risked significantly over this period, with the average scheme having less than a third of their assets in equities compared with over 50% in 2008. Furthermore, the rise in the adoption of LDI (nearly £1 billion of liabilities were hedged at the end of 2017) is evidence that schemes have become more wary of the possibility of large market events which could disrupt portfolios and have built more resilience in as a result. The days of schemes waiting for yield rises to get them out of trouble are long gone. However, trustees remain their own worst enemies as demand for government and corporate bonds continues to far exceed supply, keeping yields and credit spreads at very low levels with little chance of these rising significantly.
With traditional assets feeling the squeeze, schemes should be looking elsewhere to gain access to the characteristics they are seeking and private markets are one such area. Despite much talk about these alternative assets being the new mainstream, asset allocation between 2008 and 2017 shows that little has changed, with allocations to property down slightly and investments in “other” asset classes only up 0.4% to 4.1%. We believe now is the right time for pension schemes to be investing in alternative asset classes to help them to manage the ever-harder balancing act between risk management, cash-flow generation and return and to take advantage of exposures they cannot access in public market equivalents. Indeed, whereas in previous years investors have been wary of investing in infrastructure debt due to narrow spreads, with spreads widening over recent months perhaps now is the time for schemes to invest in an asset class which undeniably meets their needs, ticking the boxes for both long-term, stable cashflows and yields in excess of investment grade credit.
Above all, what is more apparent this year as markets have become more volatile, is the need for trustees to take responsibility for the resilience of their schemes and have a holistic strategy in place. As Team USA found out in Paris, a collection of best in class individuals doesn’t necessarily lead to success; trustees as team captains need to ensure their “players” function as a single coherent whole to reach their goals.
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