The Bank of England's prediction of a deep recession, and grim news in the US labour market, looked to have cooled the bounce-back in equity markets before a late surge, while new analysis suggests further pain for credit markets if the pandemic worsens, and actuaries call on the Pensions Regulator to do more. Read our round-up of pensions and finance news about the coronavirus outbreak.
Bank of England warns of recession
The UK is suffering a "very sharp reduction in activity" due to forced closure of businesses in reaction to the Covid-19 outbreak and could see lasting damage to the economy, according to the Bank of England. The bank's scheduled meeting maintained the base rate at 0.1 per cent, having already slashed its key policy measure and announced a fresh £200bn of quantitative easing earlier in March. Gilt markets were largely unmoved by the announcement. Ahmer Tirmizi, investment manager at Seven InvestmentManagement, said there is still the possibility for rates to go even lower, stressing that "we are not living in normal times". The ability of monetary policy to combat a workforce stuck inside has been questioned recently, but Mr Tirmzi said: “It shouldn’t be forgotten that the BoE has a huge, mostly hidden role as the grease in the wheels of the market machine. Interest rates are the bank’s tool to help ordinary people – but with the government taking on that burden, the BoE is actually more focused on making sure that financial markets function."
Equity rally continues
UK stock markets have ended the day in positive territory again, despite data pointing to a massive downturn in economic output. The S&P 500 index was up almost 4 per cent on Thursday evening as Congress was close to signing an economic rescue package, despite a record-breaking 3m Americans newly claiming unemployment benefits. The FTSE 100 closed up by 2.24 per cent while the FTSE 250 was up 3.78 per cent. Analysts said the positive sentiment was a reaction to policymakers' preparedness to roll out substantial measures to tackle the virus – in the UK, chancellor Rishi Sunak unveiled a bailout plan for the self-employed.
Credit markets 'not out of woods'
Widening spreads in credit markets are tracing a similar pattern to that seen in the 2008 global financial crisis, according to analysis by MSCI. While that peak widening – around 400 basis points – is yet to be seen during this crisis, a stress-test of this scenario forecasts a further 8 per cent drop for US investment grade, while high-yield indices could drop a further 19 per cent. "Based on our scenario, credit investors may not be out of the woods yet if the coronavirus pandemic worsens," the report's authors wrote.
Uncertainty hits infrastructure markets
The UK government has announced successive commitments to increase spending on infrastructure, but the Covid-19 pandemic could still have drastic consequences for investors in this illiquid asset class, according to a report by Aviva Investors. The analysis stressed that it was too early to draw conclusions about the shape of recession, but said some sectors are already feeling the heat: "An immediate impact is being felt at airports, where the dramatic decline in passenger numbers is leading to financial stress on major airlines. While government support could be implemented, especially for national airlines, airport owners are having to manage the current loss in activity and are already cutting costs." Aviva also said the crisis will test the debt structures used to finance infrastructure projects, and cautioned: "Given the delicate nature, lenders need to act reasonably and work with borrowers to ride through the current situation."
Actuaries ask TPR for more
Mercer has called for the Pensions Regulator to further clarify its position on the deferral or cancellation of employer contributions into defined benefit plans. The regulator announced late last week that it viewed requests to change payment plans as "understandable" given the sever economic disruption being experienced, but the Big Three firm said more needs to be done. Charles Cowling, a partner at the company, outlined several options for the watchdog:
TPR could indicate that missing one month’s contribution would be viewed as immaterial and would not have to be reported to it, provided steps are being taken to ensure compliance with a revised schedule from the following month.
TPR could announce that for those companies experiencing cash flow difficulties, tPR considers it reasonable for trustees to agree immediately to amend schedules of contributions to allow a deferral of all deficit recovery contributions due in the next six months, noting that the scheme actuary would in any case have to certify the amendment, provided this would not endanger the continuation of payments to pension scheme beneficiaries.
TPR could confirm that in the circumstances of Covid-19, tPR will not intervene if, for example, trustees choose to spread the deficit recovery contributions that would ordinarily be payable over the next six months for a period of up to three years (ie they would be recouped within three and a half years).
TPR could provide confirmation that it will not intervene where trustees believe it is appropriate to agree to such limited amendments to the schedule of contributions without seeking independent covenant advice (unless tPR has reasons to do so that are unrelated to the current Covid-19 crisis).
