Belief in the recovery has made equites and bonds expensive, schemes should go off-piste in search of returns

Pension funds have not had much to cheer about recently.

Their liabilities rose sharply in January, reflecting lower gilt yields as markets remained sceptical that the Bank of England would raise its benchmark rate anytime soon.

Mark Carney, the Bank’s governor, sought to reinforce this impression in February by announcing a new framework for forward guidance - after he realised that the trigger for a rate rise under the first framework was dangerously close to being met.

Are there any reasons to be cheerful?

The value of pension fund assets has also taken a hit. The FTSE All-Share fell sharply in late January and early February, though it has recovered some of its lost ground. Emerging markets stocks, which were supposed to give pension fund portfolios va-va-voom by exposing them to the high output and personal consumption growth of local economies, have been troubled by fears over political and currency stability. Are there any reasons to be cheerful at all?

Many economists no longer take forward guidance very seriously

The good news for pension funds is that many economists no longer take forward guidance very seriously. They know that ultimately, if the UK economy begins to power ahead - prompting fears of inflation - the Bank of England will have to raise rates, regardless of whatever stupefyingly complex guidance on the issue it has set out in the past.

The UK economy is not yet powering ahead, but it has at least picked itself off the ground and dusted itself off. Britain’s economy is growing faster than those of most of its industrialised peers. As a result, a growing number of economists forecast a rate rise this year. Whenever it comes, it will reduce pension fund deficits and raise the value of their UK assets.

In the case of emerging markets, what was once cause for gloom is now cause for celebration. For a long time after the 2008 financial crisis, weak demand in the US and euro zone economies acted as a brake on economic growth in emerging economies.

Both the US and the eurozone have achieved a measure of political peace that has restored business confidence

Now, however, both the US and the eurozone have achieved a measure of political peace that has restored business confidence and allowed a return to output growth. This will benefit emerging economies and, in the longer term, emerging market stocks.

The problem for pension funds, however, is not that no-one believes in the continuing economic recovery at home and abroad. It is that too many people believe in it.

Now might be the time, therefore, to go off-piste by investing in private equity

As a result, most stocks and bonds no longer look very cheap. Now might be the time, therefore, to go off-piste by investing in private equity, which still looks good value. Their money will be tied up for several years, but private equity will gain from accelerating economic growth.

Those pension funds which can afford to take a longer-term view should have the courage to do so.  

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