The calm before the storm? COVID-19 update

by Simon Cohen   •  
Blog

It had all started to look so good in the investment markets.  Having fallen significantly, most markets had rallied strongly with equities in the US actually up for the year, having been 20-25% lower (during March).  In fact, the NASDAQ briefly hit an all-time high.  Long-dated gilt yields also rose slightly, hitting the heady heights of 0.8% at one point, still very low but not at the levels of 0.3% achieved in March, when market turmoil was at its greatest.

 

This all seemed a bit strange to me and many economists.  We are about to enter potentially the biggest recession that we have ever suffered, yet some markets are at all-time highs.  In fact, the day that it was announced that the UK had contracted by a massive 20%, the FTSE rose by over 1%.  The markets seemed to be pricing in a “V” shaped recovery, and I, like many others, am not convinced.

 

After a sharp fall on 11 June, the NASDAQ is now back at an all-time high.  UK long-term gilt yields remain very volatile and are currently sitting at around 0.7%.

 

What does all this mean for pension schemes?

 

During the market turmoil, many pension schemes had seen their funding levels hit by the “double whammy” of falling growth markets and falling interest rates (leading to higher liabilities).  Their funding levels had on average fallen by about 5-10%. 

 

With the market recovery, they will have seen funding levels improve.  They are still unlikely to be back to where they were.  For two reasons, firstly if a funding level falls by 10%, the level needs to rise by at least 11% to get back to where it was.  Also, albeit markets had rallied, many markets were not back to the levels where they used to be. 

 

What should pension schemes be doing?  

 

My view is that pension schemes should be taking the opportunity to de-risk their investment strategies if they can afford to do so, whilst the markets are still  positive.  They should try to do this quickly.  However, in implementing this they need to be careful.  They should spread their trades across a few tranches as market volatility has picked up a little and they wouldn’t want to trade on the “wrong day”.  This means there is a fine balancing act between getting the trades implemented quickly, but also avoiding dealing on the wrong day by spreading the trades.  Even if pension schemes are not in a position to de-risk, I think trustees should be keeping a close eye on the markets and be ready for a stormier time in future.

Further reading

Is your DB scheme an asset rather than a liability?

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by Alistair Russell-Smith   •  

2024 Charity Defined Benefit Pensions Benchmarking Report

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by Alistair Russell-Smith   •  

Spring Budget 2024 – What does it mean for pensions?

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by Angela Burns   •  

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