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Speakers at Punter Southall’s Annual Pension Conference discuss the changes impacting the pensions industry
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Downward pressure on Gilt yields presents a number of challenges for schemes, says Danny Vassiliades
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The Pensions Regulator Chief Executive, Lesley Titcomb, calls for increased training to equip trustees for the 21st Century
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Paul Johnson, Director, Institute of Fiscal Studies urged Government to address risk sharing
Presenting his Investment Outlook, Mr Vassiliades highlighted how macro-economic factors, such as low price inflation, and consistent demand for index-linked Gilts, are placing downward pressure on yields. As a result, schemes cannot rely on quickly increasing yields to reduce their funding deficits.
Speaking at the conference, Mr. Vassiliades said: “The markets are currently showing us that there is no expectation of Gilt yields rising above three per cent a year. With no shortage of future demand for gilts, and price inflation remaining low, the belief that fast rising yields will reduce deficits looks a low possibility.”
He added: “Pension schemes also need to consider their approach to interest rate risk. This is currently sitting in portfolios unrewarded. With any unrewarded risk, a default assumption that 100 per cent of that risk should be hedged needs to be adopted.
Then, by degrees, schemes can reduce the amount of hedging they want relative to where they think the market will be.”
Recent research carried out by Punter Southall found that the number of schemes hedging interest rate risk as a proportion of the UK market is still relatively low and it is likely that less than 50% of UK Defined Benefit pension scheme liabilities are currently hedged.
The proportion is far less for many small and medium sized schemes.
Guest Speakers
Lesley Titcomb, Chief Executive of The Pensions Regulator, also gave an address to the conference in which she called for effective risk management processes and the need to train trustees for the 21st Century. “Risk taking is an essential part of a schemes’ ability to meet its needs. Schemes need to focus on funding, risk management and covenant. The new DB Code of Practice has made a real difference,” she said.
She continued: “We will spend the next few months looking at what additional support we can give trustees in areas such as training to enhance their skills and how they can improve outcomes for savers.”
The keynote speech was delivered by Paul Johnson, Director at The Institute for Fiscal Studies. In a wide-ranging speech, Mr. Johnson discussed generational trends for pensioners, including the increasing wealth of modern retirees and the move towards DC pension provision. “Risk sharing between the State, employers and individuals is the big issue government needs to address,” he concluded.
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