Four investment questions trustees and sponsors of defined benefit schemes should ask themselves
The first years of this decade have proved particularly disruptive, as pandemic, war and high inflation pave the way for turbulence to come. As 2023 progresses, the world faces a set of risks that feel both eerily familiar and wholly new. Those like high inflation and geopolitical conflict appeared to have been solved over the past few decades. They are now being amplified by newer risks, like unsustainable levels of debt and environmental crisis.
At Mercer, we do not expect a deep global recession in 2023 and our central view is that we think annual inflation rates will fall, while remaining firmly above the 2% targeted by developed world central banks. However, with the geopolitical and financial backdrop of the unwinding of loose monetary policy, there remains significant scope for tail risk and market volatility on both the upside and downside.
Among UK defined benefit pension fund trustees, there’s a prevailing sense of uncertainty. To add to the panoply of risks, 2022’s huge sell-off in gilts following the year’s “mini-Budget” undermined long-held assumptions about the safety of gilts. As trustees reassess their strategic frameworks for the years ahead, there are four key things we believe you should think about in 2023.
1. What are the lessons from past recessions?
2. What are Biodiversity’s growing risks and opportunities?
3. Has your strategy and journey changed?
4. Is your governance fit for a crisis?
Finally, a lesson from the last few years is that trustees must be organised to act swiftly in case unthinkable events happen. Who would have predicted the COVID-19 pandemic, Russian invasion of Ukraine or the degree of gilt market volatility? What would you do if there was another “black swan” event like a new military conflict, a more dangerous COVID-19 outbreak or a fresh inflation spike? Equally, there could be a “blue bird” event – or outbreak of good news – such as a peaceful resolution to the Ukraine crisis. Trustees need to prepare their governance for a less predictable world, by making it more nimble and efficient. That comes from greater operational efficiency, which can be achieved in a number of ways. There remains a need to prepare portfolios through stress testing.
The landscape is very different from what it was even 12 months ago. Change has been rapid and unpredictable, leaving some defined benefit schemes in a significantly different situation. If you would like an independent assessment of your current investment arrangements and governance structure, we would be happy to help.
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