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Following the sharp rise in rates, particularly during the second half of 2022, many trustees have been able to use the first half of 2023 to prepare their scheme for the bulk annuity market. Their much improved funding positions suggest a wave of demand will propel the bulk annuity market to a record year.
As noted elsewhere in this document, gilt yields have risen to levels above those seen at the height of October’s LDI crisis. Schemes that already have, or are due to come to market, will likely benefit from current market conditions. And with headlines focussing on higher borrowing costs and increased core inflation, a significant shift away from a “higher-rate” environment is not expected in the immediate future and trustees will have a longer period to consider their improved funding position. Around two thirds in a recent survey (67%) said they expected to undertake a final insurance transaction within the next five years, while 18% said this would be at least ten years away1 . Around half (49%) said they had reviewed their investment strategy last year, while a similar percentage (46%) said they would revisit their liability hedging approach and one quarter (26%) said they had revisited their long-term strategies.
Whilst higher yields are beneficial for scheme funding positions, they do have implications for corporate sponsors. As explained in the next section, rising rates directly affect scheme sponsors, with corporates, including banks and utilities, making the news due to the shifting economic conditions. The exact depth and length of any future recession is of course unknown but the expected strain on many corporates caused by the cost of financing their debt, rising wage demands, and the impact on consumer spending of the cost of living crisis could have a material impact on some corporate covenants.
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This article is part of PIC's quarterly update series 'Compound Interest' in which we share our team’s thinking on the significant feedback loop which exists between the assets that sit within the UK’s c.£6 trillion savings system and the economy.
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