The Coronacoaster pauses, but buckle up for another ride

24-Aug-2020
  • Sion Cole

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Since we took our seats and buckled up in February, global equities have dipped, bucked and flipped in response to day-to-day updates about progress defeating the global pandemic.

By the end of June, they had delivered us, panting and queasy, pretty much exactly back to where we started. The question on everyone’s lips is: what happens next?

A House of Horrors?

Global stock markets may have stabilised, but some pension trustees face an extra treat – a trip to the House of Horrors to round off the Coronacoaster experience.

Rising inflation expectations for the longer-term have led to increased pension-scheme liabilities, as shown by the PPF 7800 index.1 This index provides the latest estimated funding position for the defined benefit pension schemes potentially eligible for entry to the Pension Protection Fund (PPF). Its latest iteration makes sobering reading.

The aggregate deficit of the 5,422 schemes in the PPF 7800 index is estimated to have increased over July to £199.5 billion from £174.8 billion at the end of June. At the end of July last year, the deficit was £62 billion.1

That’s a massive deficit increase and conceals huge variation between schemes, with some nursing far larger deficits than others. Schemes that rely heavily on UK equities face the bumpiest ride, since our stock market lags behind its peers due to Brexit uncertainty and the industrial profile of the FTSE.

Schemes that have a fiduciary manager have typically fared much better2 than those that do not, because of their agility and ability to use more sophisticated investment tools to take advantage of market discrepancies during periods of volatility.

Why it’s time to call in the experts

In times like this, experienced management shows its worth. At BlackRock, we aim to create resilient portfolios, making sure they are well positioned at regional, country and company level to take advantage of underlying themes, rather than relying on broad asset-class correlations.

We act fast, implementing decisions in line with client mandates, so that trustees don’t have to worry about waiting for investment advice and implementing a decision too late.

This perhaps explains the surge in requests for proposals (RFPs) we’ve received from potential clients interested in fiduciary management in 2020. Our RFPs are up 167 per cent on last year as Third Party Evaluators (TPEs) and trustees recognise the advantages of expert and immediate service.

We might be able to take a breather from the Coronacoaster now, with new Covid-19 cases in many places remaining thankfully low despite the easing of lockdown. But no one knows what’s around the next corner and volatility is likely to continue at least for a while.

I’d suggest that trustees soberly analyse their appetite for dealing with ups and downs when deciding whether to employ a fiduciary manager to help them ride out the coming months.

If you prefer a gentle carousel to a high-speed loop-the-loop, you might want to consider it.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed from BlackRock are as of July 2020 and may change as subsequent conditions vary.

1 PPF 78100 Index, Pensions Protection Fund, 31 July 2020

2 Funding levels for Willis Towers Watson’s delegated clients improve five times more than the UK DB industry, Willis Towers Watson, June 2020