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Risk reduction a ‘key driver’ of increased gilts investments

Written by Talya Misiri
17/03/17

Risk reduction is a “key driver” of increased gilts investments by pensions funds, Barnett Waddingham partner Rod Goodyer has noted.

Discussing the ONS’s recent investment report for Q4 2016, Goodyer, said; “The increasing maturity of pension schemes and a growing need to reduce risk are the key drivers of the switch into gilts. Most pension funds are funded on the assumption of de-risking into high quality fixed income assets as their cash outflow needs grow and gilts are the simplest way to achieve this.

Confirming the ONS’s suggestion that the increased uptake of gilts was to avoid potential volatility, Goodyer added: “Purchasing long-dated gilts also reduces funding volatility for most schemes. We saw some schemes increasing their levels of gilt exposure ahead of the EU referendum last year to protect themselves against adverse outcomes.

“The strong performance of equities in recent years may also have facilitated some of the switches with schemes looking to crystallise some of the gains made, particularly on unhedged overseas exposures.

Furthermore Goodyer observed that “Another trend is pension fund sponsors and trustees growing increasingly tired of waiting for gilts to become cheaper and instead adopting a phased approach to de-risking.”

In addition, Wedlake Bell pensions team partner Clive Weber was largely in agreement that investments in gilts is sensible in the current climate. "The ONS report that UK pension funds put £32bn into gilts in 2016 is sobering. Have scheme trustees made the right call?” he asked.

“As it happens, the equity markets have by and large confounded the pessimists and have risen strongly. Quite why locking into gilts to match liabilities and eliminating the prospect for investment out performance is sensible as a medium to long term strategy is very difficult to understand. All the more so given the long term nature of most scheme liabilities.

“Continued focus on employers' ability to support large pension scheme deficits – including TPR's naturally prudential approach – has encouraged many schemes to revert more to gilts in recent years. Perhaps worries that the long bull run in equities since the 2009 recession may be drawing to a close has also weighed on the minds of some trustees and their advisers. If so, time will tell whether the call is premature."

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