With the turmoil in the investment markets, Matt Richards, senior director of business development at Standard Life, part of the Phoenix Group, explains the impact this is having on the ability of schemes to continue their risk reduction activities and on the rates offered by insurers.
“Last week was the week in which the investment strategies of defined benefit schemes became the focus of the national conversation and led to the intervention of the Bank of England to support the UK gilt market While the events of the past few days have highlighted strains on DB schemes, the overall picture regarding their funded position and ability to reduce risk is more nuanced and, in many cases, more positive than might be seen. headlines suggest.
“For schemes looking to reduce their risk, the rise in gilt yields this week has lowered insurance prices, but this has been accompanied by a decline in the value of their LDI funds. The extent of the impact of these opposing trends on the affordability of plans to undertake buy-in activities will depend on the degree of matching between the assets that insurers use to underpin their ratings and the plans’ assets. Plans are often under-covered relative to insurers’ pricing portfolios, which means that this rise in returns will be beneficial. However, once yields start moving in the other direction, it will have the opposite effect.
“Over the past few days, plans have been forced to sell assets to meet cash margin requirements, the liquidation of gilts and credit would exacerbate any mismatch between insurer prices and plan assets. continue to rise, that’s not a problem, but Schemes will want to rebalance exposures where possible and hopefully before rates start to fall, or act to ensure they’ve benefited short-term market movements.
“The surge in gilt sales, and consequently the rapid decline in the price of gilts, is largely due to these margin calls within Scheme LDI portfolios. This shock to the gilt market is what has driven the BoE to restart its gilt buying program to stabilize the market as supply exceeds demand, minimizing the fall in gilt prices and the impact on Scheme funding positions.