The improvement seen over January represents a reversal of December’s deterioration and highlights the impact of market volatility on pension schemes.
With the demand for government debt expected to fall significantly the increase in bond yields seen over January could continue.
Mercer’s monthly analysis of FTSE 350 pension schemes highlights the impact of significant bond yields increases during January 2024. These increases are not as large or as fast as seen in the mini-budget of September 2022, but with the demand for government debt from pension schemes expected to fall in 2024, this could be the tip of the iceberg.
Mercer’s analysis shows an increase in the aggregate funding level across company accounts since the end of December 2023, reaching 111% at the end of January 2024, a reversal of the deterioration seen over December 2023.
Adam Lane, Head of Corporate Investment Consulting at Mercer said, “Pension scheme funding positions are tied to the market and the volatility we’ve seen over the last few months really brings this into focus. Markets are pricing in falls in interest rates during 2024, but this should not be seen as the expected outcome. Our analysis suggests £300bn of pension assets could potentially be transferred to insurers in the coming years requiring significant sales of government bonds which, in the absence of any new buyers, is likely to put major upward pressure on yields and UK finances. It would seem volatility is here to stay for pension schemes.”
The UK’s Debt Management Office is aware of this problem and is expected to announce a reduction in the issuance of government bonds alongside the spring budget.
Mr Lane continued, “With the improvement we’ve seen in schemes’ funding positions since 2021, many schemes have taken action to lock in these stronger positions by de-risking their investment portfolios. Many schemes who have not passed their liabilities to an insurer have been making larger allocations to credit instruments and hedging funding positions against market movements. However, while many schemes will now be running lower levels of risk, residual risks will have become more pronounced as a result. For example, we anticipate those who have increased allocations to credit-instruments will now be bearing a larger amount of credit risk. We expect that this may come into sharper focus through the remainder of 2024.”
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