The health of UK pension schemes as well as the population was put under significant strain following the outbreak of Coronavirus during February. As the COVID-19 epidemic spread across the globe, impacting supply chains, travel and corporate and domestic spending, its effects were felt in investment markets. Following a subdued response to news of the initial outbreak in January, February hit markets hard.
Equities were down nearly 10%. 20 year UK gilt yields fell 0.09% while credit spreads rose by a similar amount. This means government bonds (and UK pension liabilities) increased a further 2%, while credit stayed flat over the month. UK pension scheme assets therefore decreased, so funding levels, as measured by the PPF 7800 Index fell 2.7% in February (and will have fallen further at the start of March). However the variation around these figures will be significant. Those schemes running low levels of hedging and high allocations to growth assets will be suffering and could have seen their funding levels fall by as much as 5% over February. By contrast, de-risked plans would have protected themselves from the worst of the pain through their high allocations to liability-matching assets and low risk growth strategies.
But this is no time for pension investors to sell all and self-isolate. As we wrote in our bulletin, we continue to believe that long-term investors should remain level-headed and take a long-term perspective. The economy and financial systems are in much better health than in 2008. Provided there is decisive action by policy makers, we expect that the outbreak will eventually dissipate and economic activity will normalise. Events like this show the value of having an investment expert closely monitoring and managing your portfolio. Fiduciary management is growing in popularity for exactly this reason and we expect this to continue, especially as trustees look at the wide variation of outcomes.
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