Partner and Actuary, Stuart Price and Senior Investment Consultant and Actuary, Kara Newcombe headlined the free hour-long virtual session which saw Kara focus on how the global financial markets reacted to the Russian invasion of Ukraine and views as to what could happen in the coming months with the ongoing conflict, soaring inflation, and continuing Covid-19 infections. The surge in commodity prices, supply chain disruption and the increase in inflation and gilt yields were also discussed. Stuart covered the increase in gilt yields and the positive impact this is having on defined benefit (DB) pension schemes, and highlighted the advantages of companies implementing salary sacrifice schemes following the rise in National Insurance contributions.
Speaking about the impact of financial markets on UK pensions over the 12 months to 30 April, Stuart said: “Government gilt yields and corporate bond yields are steadily increasing and in the long term, which we are interested in for determining pensions, this looks set to continue. For DB scheme employers, this is very good news as funding levels should improve along with pension obligations on company balance sheets and there’s the possibility of a reduction of employer contributions in the future too.
“For defined contribution (DC) schemes, as pensions are generally a long-term investment, the volatile global markets shouldn’t have too much impact on those in their 20s, 30s, 40s or even 50s, as we often see peaks and troughs and there is time for markets to recover. The current situation could even be a good time to put more money into your DC pension as there may be investment opportunities to take advantage of. The time for concern is when nearing retirement, but for many in this situation there are mechanisms in place to protect them against falls in investment markets.
“With government and corporate bond yields increasing, annuity rates are improving so we could see more people selecting the annuity route at retirement to provide them with an income from their DC pension going forward.
“The key to everything, is employers communicating what is going on to their employees. They need to keep communications simple and provide reassurance and signpost helpful places to get more information. One thing I would say, especially with the recent National Insurance increase, if not already done so, employers should seriously consider a salary sacrifice arrangement for employee pension contributions which means employees and employers make savings on the amount of national insurance that they pay.”
Speaking about current world events and the repercussions of these, Kara said: “The events in Ukraine have had a dramatic impact with far reaching economic consequences and the situation is currently showing no signs of improvement.
“Inflation reached 7% in March and is set to hit 10% by end of this year which has seen the Bank of England (BoE) tighten its monetary policy and shift its focus from supporting growth to controlling inflation. Subsequently, it has begun a new gradual program of quantitative tightening where it will no longer reinvest the proceeds of government bonds when they mature. The BoE will only start selling its remaining gilts when the base rate rises further, depending on economic conditions at the time. Markets are expecting the BoE to be more aggressive with rate rises and there are suggestions of a possible interest rate increase to at least 2% by the end of the year.
“There are some positive points to report with nationwide Covid restrictions lifted and the economy fully opening up which should provide further support to consumer spending and economic growth. The employment rate has also shown signs of recovery.
Concerns over the reliability of Russian energy supplies will put further pressure on European governments to transition away from imported fossil fuels and towards domestically-generated renewables over the longer-term.
“Looking ahead, we remain positive on developed equities, as company balance sheets and earnings remain strong and this asset class will be the most sensitive to any form of long-term economic recovery. We also see opportunities in emerging market equities, however, they have tremendous exposure to the ongoing war in Ukraine. The long-term outlook is difficult to assess given the unprecedented situation, so unfortunately, for now, it is a case of watch and wait.”
|
