The Big Picture THE BIG PICTURE: GOVERNMENT SET FOR BORROWING BONANZA
70% 60% 50% 40% 30% 20% 10% 0%
-10% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Equities
Bonds Insurance policies
Other investments of which: Cash and deposits Property Hedge Funds Annuities Miscellaneous Source: Pension Protection Fund
Will Sajid Javid’s borrowing plans lift pension portfolios? Catherine Lafferty takes a look.
The UK could be in-line for a government spending spree if, as he has signalled, the Chancellor of the Exchequer, Sajid Javid, announces extra borrowing of £22bn in March’s Budget. Ordinarily such a move would be expected to influence defined benefit (DB) pensions, which have seen investments in bonds soar to 63% in 2019 from 28% in 2006 as, in theory, further government borrowing should send the gilt yield higher. Yet despite a bond rally yields are at record lows. In 2019, the Pension Protection Fund noted that lower gilt yields pushed liability values up more than asset values though this was counteracted by increasing asset prices prompted by a rise in the equity markets, which helped to blunt the effect of yield movements.
Stuart Trow, credit strategist at the European Bank of Recon- struction and Development, said a boom in government bor- rowing should help DB schemes as it would raise the discount rate and tackle deficits as well as giving equities a lift. But he cautioned that risk-free rates globally are currently fall- ing quickly so DB schemes may not benefit from the move as would normally have been expected. “December’s election triggered considerable outperformance in the UK, despite the fiscal implications of a strong Johnson government,” Trow said.
“The bottom line is that fiscal easing can either be a sugar rush: tax cuts for the rich, or it can be genuine investment in the economy, which is what is actually required. Either way though, such is the pressure on yields globally, that it is unlikely to do too much damage to the gilt market or raise DB discount rates,” he added.
Issue 90 | February 2020 | portfolio institutional | 11
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