Editorial: These days, nothing is certain. But the difficulties defined benefit schemes face in setting their investment and funding strategy over the next year really take the biscuit.
To take a positive spin first, the upside to 2020’s March madness is that there are finally opportunities to capture attractive yields in fixed income markets, now the mainstay of most DB strategies.
Our roundtable, which you can read on page 34, explores the sub-asset classes experts think are attractive, and asks whether trustee governance structures are nimble enough to take advantage.
But yields do not simply balloon for no reason. For all the policy support offered to companies battling coronavirus and the financial crisis it inspired, it would be naive to suggest credit markets will not experience defaults over the coming months.
The challenge, then, to borrow the rather elegant industry term, is to discern the fallen angels from the falling knives. Of course, this requires manager skill, something not necessarily easy to come by.
The active vs passive debate has raged for years, and very little new can be said about active managers’ ability to perform on average. In fixed income markets, even the more sceptical commentators recognise the value to be had in avoiding the worst credits.
But our cover feature this month looks into a somewhat underreported aspect of the debate, and one that causes trustees a further headache – can their consultants’ manager research teams actually identify the select few managers that beat the benchmark consistently?
A mounting body of evidence casts doubt on this claim. In fairness, the consultants’ job is a tricky one – the smaller the pool of outperforming managers, the less chance they will have of directing their clients towards one without excessively bloating the fund.
Instead, a key takeaway from this piece by Benjamin Mercer is that we could still do with greater transparency in the pensions industry. As one academic has identified, most other financial services are expected to present their data openly and in comparable ways – why shouldn’t consultancies?
A final frustration, as if trustees need it, is the worry that their sophisticated strategic asset allocations (which are acknowledged as the key driver of returns and an area in which consultants drive immense value) could fall foul of the new regulatory regime for DB.
The Pensions Regulator does not plan to issue a second consultation on its new funding strategy until spring next year, but responses from the pensions industry highlight it as a concern, even if a distant one.
As recounted in our story on page 12, the argument is at something of an impasse. Actuaries warn that measuring even bespoke arrangements by reference to the prudence of the proposed fast-track funding assessment could stifle the creativity needed to overcome the crisis.
By contrast, the regulator may well feel that doing so is the only way to ensure that less engaged employers do not simply carry on as before, explaining away excessive risks by reference to a covenant that – as we have learned – could disappear tomorrow.
The result is unhelpful for well-meaning trustees however, who may wonder if the time they have spent implementing cash flow-driven investment strategies and dynamic discount rates set some way above the fast-track standard will be wasted.
In the lengthy interim the regulator has afford itself before its next consultation, it would do well to embark on a communications exercise to explain its thinking on bespoke arrangements.
