From:                                   Richard Lloyd-Bithell <richard.lloyd-bithell@email.cipfa.org.uk>

Sent:                                    29 May 2020 17:02

To:                                        Pitt, Joanne

Subject:                                Pensions Network Newsletter &amp; Economic Update

 

 

 

Pensions Network
Newsletter & Economic Update

29 May 2020

 

Events & Webinar

CIPFA And Insight Investment - Investment and Asset Backed Securities Webinar 18th June - CIPFA in partnership with Insight Investment are delivering a webinar to provide a first class presentation on Investment options, specifically detailing Asset Backed Security options to give you an understanding of the dynamics of these structures and the regulatory environment.

Our next Live Economic Update will be in July

Key Areas will be covered with a live Q&A on, Key Data and Trends. The Economic impact on the global and UK economy and the Impact on Portfolios

Programme caveat

All events are subject to change. Where new topics emerge that are considered as either more important or urgent than those within the existing programme, the CIPFA CPN will attempt to add them to the programme as outlined above. However there may be occasions when a new programme has to replace an existing programme already highlighted at short notice.

Pensions Home

Advisor Update

Welcome to the May Pensions Newsletter

Firstly – I hope this finds you well and best wishes in these challenging times ahead and thank you for joining our webinars over the last month in these very busy times.

These are challenging times for Pension Funds, we have seen some of the UK’s biggest funds stockpiling cash as we continue to grapple with the future uncertainties of Covid-19 and the impact. The extra allocations to cash investments are a sign of the time that a need of maintaining liquidity has gained greater focus in the management of portfolios. Whilst none of us know which direction the market is going, it is certain that risks are abundant.

Palestine Solidarity Campaign Ltd vs Secretary of State for Communities and Local Government

In a landmark verdict, the court ruled in favour of the Palestine Solidarity Campaign (PSC) in a legal case which has set a significant precedent for local decision making for Local Government Pension Funds. The ruling has significant implications on the level of intervention allowed by Central Government on how LGPS’s invest their funds.

https://www.supremecourt.uk/cases/uksc-2018-0133.html

Update from GOV.UK – Proposed merger of the Northumberland and Tyne and Wear pension funds

Northumberland County Council and South Tyneside Council are both administering authorities of the Local Government Pension Scheme, in relation to the Northumberland Pension Fund and the Tyne and Wear Pension Fund respectively.

Both funds have worked closely together in recent years, and have now applied to the Secretary of State to merge in order to make further efficiencies savings.

The government has issued its response to the consultation. It confirms that the government has decided to proceed with the merger of the 2 pension funds.

https://www.gov.uk/government/consultations/proposed-merger-of-the-northumberland-and-tyne-and-wear-pension-funds?utm_source=9246e1ce-5e91-4659-8df8-58d992dc2e2c&utm_medium=email&utm_campaign=govuk-notifications&utm_content=immediate

At the Pensions Network we strive to give you the best information and we hope you will join us at our next online webinar, free to all Pensions Network Subscribers,

CIPFA And Insight Investment - Investment and Asset Backed Securities Webinar 18th June

We will cover a brief introduction into the creation of asset backed securities and the fundamental dynamics of these structures

Delve into the remote credit risk that global securitisations have shown through both the global financial crisis and also the more recent global growth wobbles; US subprime and CDO markets were the acute problem and have since all but disappeared from the market place (<1% of total market)>

Covering developments in underwriting standards have been improved dramatically; structures are far less levered and ironically the very punitive European regulatory regimes provide asset backed securities with almost unparalleled spread opportunity for equivalent credit risk.

Best wishes,

Richard Lloyd-Bithell

CIPFA Pensions and Treasury Management Advisor

 

May Economic Update -

 

April was dominated by coronavirus, as the entire country went into lockdown and the UK economy came to a standstill. There has been a terrible death toll, both in hospitals and now emerging also in care homes and people’s own homes. Worryingly, we are not yet at the end, only at the beginning of the end at best, and that is before one considers other future risks such as second waves and the timeline and success of any vaccine.

Alongside this, there has been significant economic fallout. Scheduled flights for the UK are down 93% year on year. Public transit usage is down almost 80%. The UK has seen early business indicators tumble, notably the IHS Markit/CIPS UK PMI indices, which showed the steepest contraction in business activity since records began, and at a pace far greater than in the last financial crisis. The implication is that GDP will decline by up to 5% on an annualised basis in Q1 and even more in Q2. In other words, we are now in recession territory.

Equity and bond markets fell dramatically but have also rallied since, making back some of their losses. However, this reflects the significant stimulus from government and the Bank of England to cushion the effects of the above, and not the underlying real economic impact. Over half of all businesses by early April were reporting turnover lower than their normal range, according to the Office for National Statistics. 40% reported cutting jobs and over 28% said they were reducing working hours. This has likely worsened over April, with many businesses at a standstill. Despite government support, more than 1.8 million claims were filed for universal credit since the start of March. As these take several weeks to process, these have not shown up in unemployment numbers or those seeking out of work benefits as yet. When they do, it is entirely feasible that we are looking at a return to numbers last seen in the early 1990s, a period that still haunts part of the UK.

A shock like this does not imply a rapid recovery, but rather one that may take us well into next year and perhaps longer. What does that mean for returns and portfolios?

Consumer price inflation dropped to 1.5% in March, driven by sharp falls in petrol prices and clothing sales. The real rate (the yield once adjusted for inflation) has marginally improved, but is still strongly negative at -1.4%. The outlook also is poor with the implied forward real curve predicting a fall to below -2.5% over the next five years. The base rate is anchored to 0.1% and may even go negative if the UK adopts European tactics. That means any improvement would flow only from rapidly falling inflation, which here implies more pain for the economy.

For treasury portfolios, this is a bleak picture for the immediate future. The above shows a significant drag on returns, negative in real terms for typical portfolios, and the weakness in the economy increases the risk of credit downgrades and defaults. Relying on ratings alone with not be sufficient, and treasuries should look to conduct external independent reviews to identify gaps, where risks may lie and understand their resilience to future shocks.

Alongside, income generation will be more important than ever as councils face more pressure on services and lose valuable income streams such as planning and leisure facilities in the current lockdown. But resilience and risks will also need to be carefully ascertained, managed and monitored going forward. Here, commercial property shows increasing risk from our latest weekly Covid analysis (available on request to CIPFA local authority members at no cost), though pockets of opportunity remain. Renewables and SME lending also offer potential opportunities for those willing to undertake the due diligence.

Looking ahead, the April data will give us a better sense of the depth of the shock. Numbers are likely to worsen, but there may also be more clarity on the way forward when we next reconvene and we can begin to consider the longer picture with more confidence.

Dr Bob Swarup

Camdor Global Advisors

swarup@camdorglobaladvisors.com

Camdor Global Advisors is a specialist investment and risk advisory firm focused on providing insightful analysis, prudent advice and pragmatic solutions for today’s complex environment to its local authority clients. For more information, please click here .

 

Network and CIPFA News

Borrowing hits record high in April –

Public sector borrowing hit a record £62.1bn in April 2020, during the first full month of Covid-19 lockdown measures, according to the Office for National Statistics.

https://www.publicfinance.co.uk/news/2020/05/borrowing-hits-record-high-april

LGPS funds urged to protect pensions of staff returning to fight coronavirus –

https://www.lgcplus.com/finance/lgps-funds-urged-to-protect-pensions-of-staff-returning-to-fight-coronavirus-23-03-2020/

 

Pensions Network Advisor

Richard Lloyd-Bithell
Pensions Network Advisor
+44 (0)7748 396985
richard.lloyd-bithell@cipfa.org

 

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