Coronavirus – Cover story
of overnight repo funding into markets while the Chancellor of the Exchequer, Rishi Sunak, has made £330bn of loans availa- ble to cash-strapped businesses. But as the number of victims rises and millions of people are unable to enter their workplace, it appears inescapable that the virus will also hit the financial sector.
Despite large scale cash injections, US stock futures hit limit down levels while oil prices hit a 17-year low. What will be the scale of repercussions across markets and how will it affect pension schemes?
Effects on DB schemes
Defined benefit (DB) pension schemes will be hit by the reces- sion from at least three angles: a drop in investment returns, a spike in liabilities and risks to their sponsor’s covenant. Falling investment returns combined with potentially lower gilt yields could present a double whammy for their balance sheets. Most DB schemes have been reducing risk in their portfolios
in recent years by cutting back on their equity exposure and in- creasing investments in fixed income. The average equity allo- cation for final salary schemes has more than halved during the past 10 years, to 24% from 46.4%. Having said that, there are still schemes with a higher alloca- tion to equities, due to a relatively higher proportion of active members and higher return requirements. Examples include local government pension schemes, which tend to have higher than average allocations to equities and a relatively younger membership. Border to Coast, for example, has some £9.58bn invested in eq- uities, which is a significant majority of its pooled assets. Only a third of the pool’s members are pensioners, which leaves room for a higher risk orientation. Similarly, out of Local Pen- sions Partnership’s (LPP) £12bn of assets that are already pooled, more than half, £6.7bn, are invested in equities. Rich- ard Tomlinson, recently appointed LPP’s chief investment of- ficer, says that a long-term focus remains crucial. “We contin-
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