Keep calm and monitor your covenant

The fact the bank only managed to spend £1.12bn on Tuesday for gilts with maturities exceeding 15 years has been put down to long-term investors – mainly pension funds – not wanting to part with their matching assets, even at prices well above market rates.

But it is clear that long-term investors need long-term assets, and if they sell the ones they own now, they will have to buy others – at a higher price.

The issues created for pension funds by the £70bn quantitative easing programme and resulting low gilt yields has even led former pensions minister Ros Altmann to call for an inquiry into the effect this measure is having on company pension funds.

She said the new round of QE and latest interest rate cut would push more schemes over the edge, but the government is unfazed, saying a strong economy and employers are best for schemes, the Financial Times reports.

Employer strength is one of the focal points for trustees after the Brexit vote. Our article on the gilt yield conundrum shows experts agree that covenant assessment helps schemes to determine whether to hedge against interest rate risk now – or whether to ride it out.

Others point to unusual measures schemes are taking: alternatives to gilts for calculating liabilities are being discussed by some schemes, a trustee revealed.

Yet others suggest investing in more exotic or illiquid assets to help bring funding levels up to scratch.

Going cap in hand to the sponsor, hedging at record low interest rates, moving assets up the risk curve – none of these are actions any trustee would look forward to taking.

But times are hard for DB schemes, and choice, it seems, is becoming a luxury for trustees they might not be able to afford.

Sandra Wolf is editor at Pensions Expert. You can follow her on Twitter @SandraCWK and the team @pensions_expert.