Consultants sounded an optimistic note on Tuesday, urging clients to rebalance equity portfolios ahead of a bounceback and explore high-yield credit opportunities. Meanwhile, the fifth anniversary of freedom and choice proves the policy’s enduring popularity.
Time to buy high-yield bonds?
Dislocation in credit markets and retail investors scrambling for the exit make a credible case for pension schemes to pick up healthy returns, according to consultancy giant Mercer. Huge redemptions in mutual funds and exchange traded funds have widened bid-offer spreads amid reduced liquidity, while credit spreads themselves have widened at a pace outstripping the 2008 global financial crisis. Investment grade and high-yield credit now offer spreads of 330 basis points and 1,000bp respectively, up from 90bp and 400bp at the beginning of the year. While Mercer expects defaults to increase markedly and is wary of the effects of ratings downgrades in investment grade, it believes fiscal and monetary stimulus should provide enough support to businesses to maintain healthy returns in high yield, even if mark-to-market values fall further in the coming weeks.
Keep rebalancing, says Aon
Trustees scared away from rebalancing their portfolios due to recent market volatility risk missing out on a future recovery, a new paper form Aon has warned. Equity markets have tumbled spectacularly in recent weeks, leaving pension schemes nursing heavy losses and significantly underweight their target allocations. “If the appropriate equity allocation for an institution is 50 per cent, for example, then the institution should have 50 per cent in equities, not 43 per cent or 57 per cent,” the paper argued. Analysis undertaken by the company has shown that missing the best week of market recovery alone can have a significant drag on performance.
Further deterioration in funding levels likely
XPS Pensions has poured cold water on hopes that defined benefit schemes will enjoy a quick return to previous funding levels, with a further fall of 5 per cent likely, even after the 8.4 per cent aggregate haircut already experienced. In its central case, the majority of damage is done by falling equities and tightening interest rates, while in its worst projection of a global depression, yields would rise to reflect the growing probability of corporate and sovereign default. The consultancy holds an unfavourable or neutral view on all asset classes except cash. “The best case is that pension schemes broadly recover the losses seen over the past quarter, but we think this is pretty unlikely in so short a time period,” said Ben Gold, head of investment. “Our central case is for a further deterioration in funding levels from here of 5 per cent. But we think there is a chance that things will get a lot worse than this, with funding levels falling by a further 25 per cent or more.”
Pension freedoms ever popular
Research to mark the fifth anniversary of freedom and choice in pensions shows consumers are still keen on withdrawing tax-free lump sums from their pots. A third of people surveyed by Prospect Pensions said they wanted to take a one-off payment. Of those, 70 per cent planned to take the full 25 per cent permitted, and 55 per cent planned to take their cash as soon as they reached 55. However, the company also found that the vast majority of people have at least one pot that does not offer flexible access.
