The negative market reaction to last week’s ‘mini’ budget is impacting both DB and DC pension schemes.
One of the biggest impact has come from the surge in gilt yields, which is likely to have a positive impact on the funding levels of many DB schemes.
XPS Pensions chief investment officer Simeon Willis says: “The unprecedented surge in gilt yields this morning on top of those seen on Friday will have improved UK pension scheme funding levels by a greater quantum than a whole year’s deficit removal contributions.
“Market conditions are changing at pace and the factors that influence them stretch far beyond the pensions industry.”
He adds: “We are starting to see liability driven investment (LDI) managers flag new emergency collateral calls, a trend that is likely to continue in the coming days. Agility is key, and schemes should be braced as we move to a new market environment. Without fail, schemes using LDI should review their plans and assess whether further action is required to maintain a diverse portfolio, be ready for any further LDI collateral calls and maintain – or even increase – hedging to lock in these improvements.”
Rising gilt yields could also lead to higher annuity rates. AJ Bell head of retirement policy Tom Selby says: “As gilt yields increase, annuity rates will likely continue to rise, meaning for those who choose to secure an income with a portion of their pot will be able to get a bigger bang for their buck.
“Rising gilt yields could also be good news for DB schemes, which should see the accounting value of their liabilities fall. This is because DB schemes tend to invest in gilts to pay members’ pensions, so if the yield is higher the amount they need to invest to pay those pensions falls. The overall impact on deficits will depend on what happens to a scheme’s assets as well, of course, but these should be well diversified and so to an extent protected from any ructions in the UK.”
Meanwhile fund valuations in the DC sector have been hit by more stock market volatility, amid fears of higher interest rates and inflation, with the FTSE sliding below 7,000 at one point.
Pensions experts said that this should not unduly worry younger savers due to the longer-term nature of these investments, but said ongoing market volatility could prove difficult for older savers, particularly those who are drawing down income from their pension scheme.
Selby says that the one of the main impact for pension fund will be inflation, which is likely to be worsened by the sharp decline in the value of sterling in the wake of this mini budget. He adds: “A weaker pound means it costs more for UK companies to buy things from abroad, and it costs less for foreign companies to buy things from the UK.
“As the UK is a net importer, the big danger is that inflation will be imported as a result of the sterling crash at a time when prices are already surging.”