Posts Tagged ‘Review’

Brendan McLean

2019 reflections

The year began negatively with many commentators predicting poor returns. This was mainly because 2018 was a particularly poor year for assets. Deutsche Bank said 93% of assets were down in 2018 – worse than during the Great Depression – and December 2018 was the lowest performing month since the 2008 financial crisis for global equities. In Q4 2018, Brent crude oil fell by 35% due to rising crude inventories and increased production, in addition to fears that global growth may be slowing.

The main causes of the large declines in 2018 were: US central bank increasing interest rates, a slowdown in Eurozone business confidence, tightening global liquidity due to the withdrawal of quantitative easing, and weaker Chinese growth.  There were also rising geopolitical concerns including Brexit, Italian politics, US political gridlock, and the ongoing trade conflict between the US and China.

Key features from 2019 were the liquidity issues affecting Neil Woodford’s flagship fund, the Woodford Equity Income Fund, H2O Asset Management and the M&G property fund. As investors continue to hunt in riskier, illiquid parts of the investment universe (due to the decreasing yields available), I would not be surprised if similar events occurred this year.

Environmental, social and governance issues (ESG) became more important in 2019 as trustees faced new requirements to document the way in which they take account of ESG issues in their Statement of Investment Principles (SIPs). This resulted in a frantic push from asset managers to make their funds meet the relevant standards. Suddenly every fund became an ESG focused fund, which going forward is likely to result in a degree of ‘greenwashing’. There will be additional ESG requirements in place from October 2020 so trustees should prepare to spend more time on this area.

2020 predictions

2020 has certainly begun differently to 2019, mainly because 2019 was a fantastic year for assets. It would have been hard to lose money with equities and bonds both going up. Global equities increased by 22% – even a 60:40 equity bond fund would have increased by 20%. Commentators have been claiming that 2020 will be a good year, but I wonder how influenced they are by the joy of 2019.

Nevertheless, there are reasons to be optimistic about 2020. Due to the large Conservative majority in the House of Commons, progress on Brexit will hopefully be made and years of uncertainly should come to an end. There has also been progress on the US/China trade war. In the USA strong real wage growth, low debt levels and rising house prices means the US consumer, the key driver of the economy, is more likely to keep spending, which could prolong the economic cycle and be supportive for assets.

However, bonds and some equity markets do appear expensive by historical standards. There is a high level of global debt and the increased tension between the USA and Iran could very quickly escalate. This means that asset values are susceptible to any type of global shock.

To reduce the effects of such a shock, investors should aim to be highly diversified, allocating not only to the traditional asset classes of bonds and equities, but also alternative asset classes such as infrastructure, commodities, emerging market debt, structured finance, and currency.

Matt Masters

As we say goodbye to the 2010s and welcome the 2020s, we look back at some of the big themes that emerged in Defined Benefit (DB) pensions over the past decade.

Low interest rate environment

Much has been written about low interest rates, might they be here to stay and whether or not the UK is in the grip of a Japan-like environment? Regardless of the answers to these questions, it has certainly made the cost of securing pension income much more expensive, resulting in, amongst other things, significantly increased liabilities for final salary pension schemes.

This has led to an increasingly polarised position for DB schemes, with those who hedged interest rate risk early on now sitting relatively pretty, and those who did not now finding themselves continuing to stare at deficits, despite record contributions and one of the longest equity market bull runs in history.

While the low interest rate environment has led to a corresponding re-rating of asset prices, driving some of the unprecedented returns seen over the decade, perhaps more importantly it means lower expected returns looking forward. Consequently, pension schemes are having to keep their investment strategies under review, with many choosing to look at more esoteric investment classes and the merits of a fiduciary approach. 

A decade of returns

It was the decade of the equity bull market, with the US S&P 500 index up 28.9% in 2019, its best for some years, contributing to a 190% gain over the decade. This was led by stocks such as Netflix (up over 4,000%) and Apple (up over 850%).

Closer to home it was a decade of mixed performance. While the Total Return on the FTSE 100 was 104% (equating to an annualised return of around 7.4%), JD Sports, who weren’t even in the FTSE 100 index at the start of the decade, ended the period as the top performer, with £1,000 invested in January 2010 worth £33,700 at the end of December 2019.

By contrast, Tesco, with its accounting scandal, numerous profit warnings, and with the challenge from the German discounters, was the worst-performing FTSE 100 share over the decade, giving a negative total return of 21.6%. More generally, the banks and energy stocks largely seemed to have a tough time in the 2010s.

The rise of member options and de-risking

The number of DB schemes moving inexorably closer to the “end game” has increased substantially, with many putting in place strategies designed to move them into a position to fully secure all benefits as soon as reasonably possible.

While this may remain many years away for some, a focus on member options has come to the fore. Along with the now regulated incentive exercises, this can perhaps most clearly be seen by the change in options available at retirement. Beside the traditional retirement options of “pension; or tax-free cash sum and lower pension” are further choices, commonly a transfer value or partial transfer value, or an option to exchange pension increases for additional pension.

In addition, the buy-out market has continued to grow rapidly, with the second five years of the decade seeing some five times the level of activity from the first five years, with transactions peaking in 2019 at around £35bn. And, while the headlines suggest a focus on multi-billion pound deals, there remains competitive pricing for those smaller schemes who are genuinely ready to transact.

Pension freedoms

A look back over the past ten years wouldn’t be complete without mention of pension freedoms. The popularity of the member options mentioned above was turbocharged by George Osborne’s shock Budget announcement of 2014. Gone was the requirement to take an annuity with your Defined Contribution (DC) pot, replaced with the “freedom and choice” to do what you want with it, whether to buy the much talked about Lamborghini or not. 

With this change came a substantial increase in transfer value quotation requests, particularly from DB members over the age of 55 curious to explore their options. Indeed, this activity has led to a substantial increases in the amount transferred from DB schemes, to an annual amount in excess of £20bn. While seen as a win-win-win (a win for members, who are able to take greater control over their retirement planning; a win for pension schemes trustees, who see a consequent improvement in the funding position for their remaining members; and a win for pension scheme sponsors, who see a reduction in their buy-out liability), DB pension transfers could represent another “mis-selling scandal”, if not conducted properly.

Conclusion

While pensions are reassuringly long-term in nature, the rate of change in legislation and market developments can often seem to stand in stark contrast. The coming decade promises continued evolution and change, not least with a new Pensions Bill expected imminently, a “stronger, tougher regulator”, GMP equalisation to grapple with, the potential alignment of RPI with CPI, the possible rise of commercial consolidators and the implications of Brexit to come!

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