Market moves: Consultancy Mercer has hit out at media reports that suggested the solvency of defined benefit pension schemes came under threat this week, while LGPS Central points out investment opportunities, and Hymans Robertson issues guidance on liability-driven investments and collateral needs.
No ‘reason for concerns’ over DB health
Mercer issued a statement on September 29 in response to media reports that had suggested solvency issues for DB schemes, which were alleged to have been forecast by schemes and regulators as gilt yields spiked and collateral calls followed, prompting schemes to sell more gilts. The Bank of England intervened on September 27 with a 13-day gilt purchase programme aimed at stabilising prices. But Mercer UK chief actuary Charles Cowling said that “it is inaccurate and imbalanced” for the solvency of DB schemes to have been presented as under threat. “The large majority of pension schemes have seen their solvency position improve this week,” he said. “At this time, we believe there should be no reason for concerns over pension funds’ solvency as a result of recent market movements.”
A good time to hedge non-sterling assets?
Despite the current market turmoil, there are investment opportunities, according to LGPS Central chief investment officer Gordon Ross, who said the recent weakness in sterling offers a good opportunity to hedge non-sterling overseas assets. He noted that the “mini” Budget almost guarantees an increase in interest rates, with rates likely to sit above those of other major economies. “There will be opportunities in the next few months to place any short-term liquidity monies at higher rates potentially into 2024,” he said. As the relative UK interest rate differential — especially to US interest rates — narrows, with UK short rates eventually potentially higher than those in the US, the value of sterling should rise against the dollar and recoup some of its value, Ross continued. “In anticipation of this, it is a good time to hedge non-sterling assets into sterling to protect relative, unrealised foreign currency profits accrued from non-GBP market exposure,” he said. Given this year’s equity market falls since the start of 2022, those with equity protection strategies should review their hedges, he added, with it possibly being the moment to either realise the protection “gained” or reset their trigger level.
Trustees should ‘keep their foot to the floor’ on collateral
Hymans Robertson chief investment officer David Walker has urged trustees to stay alive to their schemes’ collateral needs. “We anticipate there will be continued pressure on bond, credit and other liquid markets as schemes continue to liquidate assets to meet collateral calls and deleverage their LDI solutions,” he predicted. “The most common forms of collateral may continue to see acute, technically driven selling pressure in the coming days and weeks.” The BoE’s intervention has provided some respite, Walker continued, but stressed “the need for trustees to use this time to continue to keep their foot to the floor with regards to ensuring collateral sufficiency, while also balancing resulting investment risk and return needs”.
