People used to say that fixed income was the boring piece of the jigsaw, but it is now one of its more challenging parts. Alan Pickering, BESTrustees


something must hinder access to capital and then there is an earn- ings or cash-flow shock. If you get those three things you have a crisis. Without all three, however, you don’t.


My point is that fiscal and monetary policies are working. Real rates being low or negative for corporate borrowers has largely erased the issue of access to capital. Risk in credit has declined as real rates have declined and the volatility of real rates has declined. That’s why it was a concern last year when the Fed started tightening. Without question, the advance of cov-lite would lead you to think that credit risk is higher. The underwriting standards, as it hap- pens in every credit cycle, have deteriorated and so there will be a day of reckoning, but that’s been accompanied by policy which truly reduces default risk. We shouldn’t forget that. I’m not sure credit risk has moved meaningfully higher, which is probably why spreads remain so low. The market knows that although there’s a lot of debt out there, default rates are low. That’s probably because of the policy backstop. Pickering: As a trustee, it’s important to differentiate between my defined benefit clients and my defined contribution clients. In the context of a defined benefit scheme, I am helping the share- holder meet the promises that their predecessors made. That is a business-to-business relationship and the extra 0.01% of a large amount of money might be a premium worth paying for extra risk.


In the defined contribution world, I am looking after the members and the profit and loss go straight to the bottom line. It is impor- tant that we explain to policymakers that a defined contribution pension scheme is a pension scheme, not a savings vehicle and therefore it can be seen as a long-term relationship between the customer, the trust and those using the money before the mem- bers needed it.


I get worried when people talk about having early access to pen- sion schemes. I am trying to invest DC money over 20, 30, 40, 50 years. They don’t need daily liquidity. DC members shouldn’t be day traders. They should be cash-flow positive, particularly in the UK as some form of auto enrolment is going to be with us for quite a while. We can be patient investors, but we don’t need to be cutting edge investors since for most ordinary people the pain of losing money dwarfs the pleasure of making money.


If we can find ways of avoiding this catalyst of 60 or 65 years old, which means nothing in the lifecycle of a DC member. We ought to find ways and develop products that look after them from 18 to 98 and avoid artificial catalysts for changing from one form of investment to another. Derry Pickford: I am slightly sceptical about this idea of the illiquid- ity premium being purely a premium for illiquidity. In fact, there isn’t a huge amount of disguised risk here.


March 2020 portfolio institutional roundtable: Fixed income 13


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