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In the worst quarter since 2011, equity markets fell notably in both October and December. The falls stemmed from a range of global issues, not least ongoing concerns around international trade between US and emerging market countries, in particular China, and the rising US interest rate environment putting pressure on sources of economic growth. |
The surprise is not so much that the falls have occurred, but rather that they didn’t occur earlier. These underlying issues are not new. So the falls in the fourth quarter only took back two prior quarters of returns. Despite some sensationalist press headline during December in relation to what were actually fairly modest fluctuations, the Sterling exchange rate to the Euro and the Dollar ended the quarter much where it started. Over quarter four a typical pension scheme will have suffered a fall in funding level of 4.7%. This is the result of falls in asset values and a rise in liabilities. Published UK inflation statistics have been coming down over the year but longer term inflation expectations have been more stable, buoyed by potential inflationary pressures such as Brexit related currency depreciation. Key considerations for trustees:
The CMA’s final report and what it means for your scheme
On 12 December 2018 the CMA published its final report following an investigation in to the extent that competition was working within the investment consulting (IC) and fiduciary management (FM) markets. It was found that were adverse effects on competition in both markets and the CMA ser out a package of 8 remedies. Remedy 1 and 7 require action by trustees, make sure you know what actions your scheme needs to take.
Making the most of illiquidity
Given the long term investment horizon of defined benefit (DB) pension schemes, illiquid assets can play an important role. However, the majority of pension schemes are often missing out on the benefits that illiquid assets can offer due to excessive caution over ‘locking up capital’ for an extended period of time. An understanding of the range of options and how this can align with a scheme’s requirements presents opportunity for pension schemes to tailor to their individual needs, and in doing so increase return, reduce risk, or a combination of the two.
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