“I enjoy working with PSGS and we have a very positive relationship. I was new to pensions and found them very helpful.”
“Their pragmatic approach helps with quick and easy decision making. Another approach might have made things more difficult.”
“Many organisations and people provide the services that clients need. In my opinion, the differentiator is in the way those services are provided and to that extent, Kathy embodies the qualities that I have come to value from PSITL. Kathy is organised but not fussy; diligent but not dogmatic; persistent without being pushy and compliant in a pragmatic way. Whilst she takes ownership and drives issues forward, Kathy is a team player who uses her and her colleagues experience to provide services to her trustee client whilst working closely with those like me representing the sponsoring employer. She works collaboratively with advisers but constructively challenges the scope of services, fees and service standards whenever necessary and makes sure that member needs are always taken into account. I enjoy working with her and trust that she will deliver what is required by the trustee and the members they represent in a manner satisfactory to the sponsoring employer. ”
“I wanted to look at the effectiveness of our trustee board, so Gillian, our PSGS scheme secretary, provided their trustee self-assessment tool to help me gather thoughts and opinions from others on the board. The tool was extremely easy to use and asked all the right questions to help me collect the information I needed as Trustee Chair. It is a great example of the way PSGS shares knowledge with their clients and makes dealing with key governance issues easy. As well as enabling me to meet one of the Regulator’s 21st century trusteeship requirements, using the tool has flagged trustee training needs and ways we could improve trustee meetings further. ”
“They have helped us save much more and created a cohesive plan to de-risk whilst building an integrated pension team.”
“In any major corporate transaction, time is of the essence. PSGS' pragmatic commercial approach helped us manage the pensions aspects of our group re-structure to ensure a positive outcome for all parties. ”
In a world where few of the old rules seem to apply, surely it’s strange to be using previous experience to estimate certainty about the future? This is what stochastic modelling does and many pension schemes use it as a basis for decision making.
Even the conventional approach that bonds are the best diversifier for equity risk is now open to question. The simultaneous fall in both stock and bond values in recent simultaneous falls may well not be the aberration that traditionalists think. After all, since the financial crisis, both stocks and bonds have performed very strongly – why wouldn’t the reverse be true if we really are seeing inflation making a return in the current high employment environment (in the UK and US at least)?
Another question: is liability driven investment (LDI) even the ‘must have’ instrument it has been if rates were to rise faster than expected to combat inflationary pressures?
With all these uncertainties (don’t even mention Brexit), surely the best planning pension trustees can do is stress test their scheme’s resilience to a range of scenarios.
How about this one…
Let’s say you are a trustee of a £1bn pension scheme. You have the following diverse range of assets that together provide a low value at risk (VAR), so you feel reasonably resilient:
Now, picture an unexpected 1% upward move in interest rates (prompted, say, by an inflation spike). With a 33% allocation to 20 year duration LDI leveraged 3 times, the pension trustees receive a collateral call of £133 million (£666m borrowed x 1% x 20).
To meet this, the pension scheme (alongside many others) needs to liquidate assets. You can’t readily sell corporate bonds because, post the global financial crisis, the banks no longer make markets in them. So, you liquidate the DGF instead and join other pension funds in selling equities that are your most liquid assets.
The high yield and investment grade bonds see spreads widen just as equity prices are sliding. The real asset portfolio funds are also under selling pressure, so trade at a discount to net asset value for those who are able to sell. So you sell gilts and reduce your hedge. Perhaps the capital loss you take on these in a rising yield market will be more than offset by the reduction in your liabilities, but that’s a gamble and it won’t help stem the unrealised losses elsewhere (the highly geared floating rate private credit portfolio certainly isn’t a tail wind in this market either).
Granted, most pension schemes will have planned for the collateral calls, but many schemes won’t have performed cross portfolio stress tests to understand what a scenario like this might bring. It also means they won’t have plans in place to avoid being a forced seller in a stressed market.
You think this scenario is unrealistic? How unrealistic?
Perhaps you need a stochastic model to tell you.