Sion Cole, Head of UK Fiduciary Business at BlackRock, said: “June saw funding levels improve by 1.2%. This followed on from a rise in May primarily due to the rise in gilt yields and underhedged scheme positions, the PPF 7800 index’s increase over the recent period has mainly been driven by the continued rise in bond yields offset by falls in global equity markets. Not every scheme will have seen funding level gains over this period, as this is largely dependent on the asset allocation and risk tolerance of the scheme.”
“We are continuing to see the fallout from global events on economic conditions and financial markets, and we expect volatility as central bankers raise rates to attempt to contain inflation. We remain positioned for higher levels of inflation in the short and mid-term across all asset classes, as we see policymakers ultimately living with inflation. In the near-term, we see a risk of growth stalling but remain optimistic over the long-term.”
“Liquidity has been a concern for many defined benefit schemes, as rates have continued to rise, meaning LDI portfolios need recapitalising. However, through a dynamic approach to portfolio positioning and careful rebalancing, schemes are currently robust enough to navigate rate rises, especially given the improvement to long-term yields.
“The first half of 2022 has shown that risk management remains the central component to meeting liabilities and funding goals. The combination of macroeconomic factors has highlighted the importance of scheme managers taking a long-term view into their investment philosophy, but also the significance of diversification across asset classes. Our view remains that schemes should consider all options when it comes to diversifying, including alternatives as a means to add value and further mitigate risk.”
Vishal Makkar, Head of Retirement Consulting at Buck in the UK comments: “Funding levels for schemes continued to improve during June, reaching an aggregate surplus of over £267.9bn. Driven by higher gilt yields, the funding ratio now sits at 120.1% with both assets and liabilities down to £1,598.7 bn and £1,330.8bn respectively.
“The Monetary Policy Committee voted to raise the base rate to 1.25% in mid-June and alongside rising longer term gilt yields this may continue to prove beneficial for some schemes’ funding positions. However, this should be treated with caution as continued inflation and turmoil at the top of government will impact a range of scheme sponsors, while also upending the investment landscape.
“With the cost-of-living crisis and inflation set to rise further, both scheme sponsors and trustees need to keep a close eye on the shifting and uncertain economic climate and evaluate how well their current investment strategy addresses these risk dynamics in an efficient way.”
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