PensionBee CEO, Romi Savova commented: “Chancellor Jeremy Hunt’s fiscal statement hopes to deliver confidence and stability for public markets, which is important for all types of pensions. Scrapping the reduction of the basic rate of tax will retain the simplicity of pension taxation and tax relief: for every £100 contributed to a pension, most savers can continue to receive an additional £25 in their pensions through tax relief indefinitely. However, for many, including pensioners, it will be disappointing to see a core measure, designed to support savers during the cost of living crisis, has been pulled back.”
Adam Gillespie, Investment Partner, XPS Pensions Group, said: The latest mini-budget U-turn by the UK Government hopefully ends the recent misadventure in sterling bond markets. But the events of the last three weeks have cast a long shadow over the pensions industry.
Initial market reaction to the latest announcement seems favourable overall, although it needs to be taken in context of the intra-day movements on Friday. Whilst the pensions industry hopes this is an end to the large daily surges and market pull backs, the experience of the last three weeks will have had a detrimental impact on schemes in two ways:
• With the marked rise and fall of yields, any lost hedging could have led to a cost for affected schemes. Based on a round trip rise and fall in yields of 0.5%, every 10% reduction in hedging at the peak would result in a typical pension scheme’s funding level falling by 1%. Some schemes would have had their hedging reduced by more than 40%, meaning a 4% hit to their funding level based on the up and down movements witnessed over two trading days.
• Hedging is now more capital intensive. Since schemes typically first decide their return requirements before then considering how much they can hedge, the inescapable conclusion is that we are going to witness lower hedging levels across the industry. This means schemes and companies being more exposed to uncertainty around funding pension deficits in the future than we’ve previously seen.
It is important to position these movements against a backdrop of a 20% improvement in the very long-term funding of an average scheme, since the start of the year.
Commenting on the Chancellor’s emergency statement, Chris Arcari, Head of Capital Market, Hymans Robertson, says: “Today’s update from the Chancellor should, to some extent, improve the market’s view as to credibility of the government's fiscal plans, but political instability is not a favourable backdrop and gilt market volatility may remain high. We have seen 30 year yields down over 40Bps and sterling up close to 1% versus dollar, although given the ever-changing market conditions we are cautious about the longer term comfort today’s statement will bring. The rolling back of unfunded tax cuts to stimulate an economy with already high inflation may take a degree of pressure off the Bank of England, but inflation at a headline and core level remain at extremely elevated levels, and labour markets are tight. Indeed, a scaling back of the energy support package may mean headline inflation rises more than recent forecasts suggest. As a result we still expect a series of large interest rate rises from the Bank of England in November and December, though this is at least fully priced in to the front of the gilt market already.
“As we have previously said yields have risen, following global moves, to reflect fundamental developments in the wake of the pandemic and Russia’s invasion of Ukraine, but they have also faced upwards pressure from strong technical headwinds. The Chancellor’s announcements this morning should reduce some of this pressure, however, the near-term technical picture is not a positive one: even in its reduced form, the UK’s energy support package will require a large increase in gilt issuance; the BoE are set to begin active gilt sales at the end of October; and, the de-leveraging of UK defined benefit (DB) pension scheme’s interest-rate and inflation hedging programmes will weigh on gilt demand – even if yields stop rising, or fall, schemes are still in the process of de-leveraging as they, and their LDI managers, adopt more prudent targets.”
Susannah Streeter, senior investment and markets analyst Hargreaves Lansdown: ‘’With the government in special measures, no part of the Truss administration’s plans are immune from being ripped down and thrown out in the quest for stability.
As the UK government has dramatically climbed down, the pound has been wracked with a fresh bout of volatility falling back from above $1.13. But crucially government borrowing costs have crept further down, with 10-year gilt yields dipping below 4%.
The Prime Minister’s authority is now so diminished that even her centrepiece strategy to alleviate the cost-of-living crisis is being sharply curtailed with the freezing of household energy bills coming to an end in April. What was meant to be two years of support has been slashed to just six months. The cost to the government was potentially open ended given the volatility in energy prices, and that with unfunded tax cuts piled on top amid escalating inflation, was what spooked the markets.
A bonfire of her tax plans is ablaze with only the reversal of the National Insurance rise and the stamp duty cut surviving the flames.
There will no longer be a cut to dividend tax rates, the cut in the basic rate of income tax has been postponed indefinitely and there will be no changes to the way self-employed people are currently taxed. The freeze on alcohol duty rates will be scrapped and the tax-free shopping scheme for tourists will also be axed. These measures will help make up a £32 billion pound black hole in the government’s finances. A new fiscal broom is sweeping away the mess of the old mini budget into but it’s also looks increasingly likely that it will also eventually wipe out the brief Prime Ministerial career of Liz Truss.’’
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