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Ongoing conflicts have influenced the geopolitical landscape in 2023 and with no immediate signs of resolution, are likely to do so again in 2024, as governments and policymakers worldwide respond to persistent risks, against a backdrop of elections across the globe.
The majority of these investments are of importance to the local economy (and in aggregate to the national economy). However, in 2023, we made an investment of international significance, deploying £100 million of funding in three major UK Port Groups – Associated British Ports, Peel Ports and Forth Ports – covering port sites from Southampton, Liverpool and all the way to Dundee.
At the same time fiscal and monetary policy is constrained by excessive borrowing, higher interest rates, and high tax burdens.
These are all issues that trustees of defined benefits (DB) pension schemes will have to consider as they manage their assets and liabilities. However, the threat isn’t over yet as a shift towards nationalism by major countries could have lasting effects on global inflation expectations, pressuring central banks to maintain higher interest rates. Whatever the circumstance, a scenario with prolonged higher rates could significantly impact pension schemes.
The bulk annuity market had a record year in 2023 despite the geopolitical and economic headwinds. It witnessed increased activity, driven by higher gilt yields allowing schemes to capitalise on improved funding levels, making buyouts an attractive option for trustees seeking to secure member benefits amid uncertainty.
What we have seen is that even in periods of heightened economic volatility, well-prepared schemes, particularly those already in discussions with insurers, can leverage market movements in stressed scenarios to secure insurance at optimal affordability.
This process has been helped because over the past decade trustees in large part have been continually reengineering their schemes’ profiles as they progress their de-risking journey. The PPF’s Purple Book has DB schemes in aggregate surplus to buyout for the first time ever, meaning many now even closer to buyout, leading to consultant projections of an extremely busy market in 2024.
Finally, buying out a defined benefit scheme can provide corporate sponsors with the flexibility to respond swiftly should they need, to the demanding geopolitical situation. We expect more deals to be based on this rational.
From a trustee perspective in 2023, the central bank focus on curbing inflation and bringing stability, will have been welcome as it creates more certainty in matching assets and liabilities.
