Pensions – Defined Benefit Schemes not secure black holes are growing rapidly
Sentiment – Transfer out of UK pension schemes. Prefer emerging stock markets to developed, positive on gold. Longer term outlook is to be pro-risk assets.
People are slowly beginning to realise that their ‘gold-plated’ company pensions are not secure in terms of not being able to pay out what is promised upon reaching retirement age.
Previously we have heard of black holes from the likes of BHS and Tata Steel. Now problems with BAE and BT are being highlighted in the news as having massive holes. Tesco enter the fray to with a whopping £2.6 Bn deficit, although it is pleasing to note that is has recovered from it previous level of £3.9 Bn. See the link for more details.
As a result of record low gilts (which pensions typically invest in) and perhaps an eagerness to divest the future liabilities off their books, UK pension companies are offering record transfer values. Their computers are having to inflate the size of the cake that is set to provide the yield that generates the future promised annual income from the pension draw-down.
Expats are realising that they can take control and protect themselves by transferring their pensions out into a ROPS (used to be called QROPS!) plan and enjoy solid tax free growth and giving complete freedom and control over the fund. deVere typically handles over 80% of the UK pension transfer outflow due to its highly qualified advisors and having over 80 offices globally.
August is traditionally a low activity month for capital markets or one of shocks, their impact exaggerated by thin trading liquidity. Not this August, which has seen the MSCI World index rise 0.95% in USD terms (0.94% in local currency) over the last two weeks and the Barclays Aggregate Bond index up 0.29% in USD.
Last week saw record highs for the major American stock market indices (S&P500, DJIA, and the Nasdaq Composite), the strong July labour data release undoubtedly helped drive the US market, even if the volatile record of that data this year should suggest treating it with caution. The FTSE 100 reached a 14-month high of 6,916 helped by a fall sterling that ended the week at $1.29, while Japan and continental European stock markets are all at two month highs.
If it was improved expectations for the US economy that helped lift American stock markets, elsewhere the fall in government bond yields has been the driving force, which in the case of UK gilts has been dramatic. The 30-year gilt offered a yield of 2.2% shortly before the E.U referendum on 23 June, it is now at 1.22% after a Bank of England rate cut 10 days ago, the announcement of more quantitative easing and the expectation of further monetary easing to come should the UK economy suffer a post-Brexit recession (which appears likely). The rally in UK gilt yields has in turn helped put downward pressure on other sovereign bond yields, which has then fed through into lower yields on corporate bonds.
As bond yields fall, equity dividends become relatively more attractive. Who can’t resist the 3.65% yield on the FTSE100 index, or the 2.4% on the FTSE Global ex UK index, when bank account cash interest rates are zero and the 10year gilt offers just 0.61% and the 10 year Bund -0.17%. The 10 year Treasury yield of 1.51% looks like high yield in comparison, reflecting as it does the possibility of a Fed rate hike later this year.