Hertfordshire County Council Pension Fund Employing Bodies Meeting Pension Schemes and the Financial Crisis

1
Hertfordshire County Council Pension Fund
Employing Bodies MeetingPension Schemes and the
Financial Crisis

• 20 March 2009

Nick Sykes
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Hertfordshire County Council Pension Fund

• Pension schemes and the financial crisis
• What has happened
• Where are we now
• Implications for pension schemes
• What happens next
• Conclusion

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Pension schemes and financial crisisWhat has
happened

• Calm before the storm

4
Pension schemes and financial crisisWhat has
happened

• Phase 1 Credit crunch
• US housing market correction
• Increasing defaults on mortgages
• Falls in mortgage-linked securities
• Concerns about banks solvency
• Wholesale money markets seizure

5
Pension schemes and financial crisis What has
happened

• Phase 2 Systemic Crisis
• Lehmans collapse
• Counterparty risks/losses
• Massive deleveraging
• Losses on toxic assets revealed
• Investors run for cover
• Banks bailed out

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Pension schemes and financial crisisWhat has
happened

• Phase 3 Economic crisis
• Collapse of confidence in financial system
• Withdrawal of credit
• Collapse in asset values
• Consumer/corporate confidence disappears
• Real economies drop sharply
• Unemployment rising
• Further fall in confidence

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Pension schemes and financial crisisWhere are we
now

• Economic activity falling rapidly
• Corporate profits/dividends hit
• Massive monetary/fiscal stimulus
• Inflation falling sharply
• Recession or depression?

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Pension schemes and financial crisisWhere are we
now

• Equities down 40 in last year and c50 from
  their peak in 2000
• Property weakest year on record, no recovery in
  sight
• Other alternative assets hit by investor risk
  aversion
• Government bonds the only safe haven asset
• Higher volatility and higher correlation of
  growth assets

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Pension schemes and financial crisisWhere are we
now

• Gilt yields at 50 year lows
• Equity yields well above gilt yields (implies no
  future growth)
• Other growth assets at very depressed prices
• What outlook is being priced into the markets?

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Implications for pension schemes

• Pension schemes are very long term investors
• Can withstand market volatility and illiquidity
• Are net investors into lowly priced markets
• Can take advantage of longer term opportunities
  e.g. corporate bonds currently

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Implications for pension schemes

• Pension schemes have been hit by
• Falling equity markets
• Falling property markets
• Weakness in alternative assets
• Active investment managers
• struggles
• Falling gilt yields
• Funding levels have experienced a material
  deterioration
• Implications for employer contributions post 2010
  actuarial valuation

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What happens next?

• Scenario 1
• Deep recession, but recovery triggered by massive
  stimulus measures and assisted by more robust
  growth in developing world
• Economic growth in place by 2010
• Investment markets anticipate this, plenty of
  scope for recovery
• Scenario 2
• Deep recession, loss of confidence, difficulty of
  getting economies going again despite massive
  stimulus
• Extended period of weak growth, risk of falling
  prices (deflation) further delaying consumer
  spending and undermining confidence
• Investment markets pricing some of this in, but
  would fall further

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What happens next?

• Depends on actions by the authorities
• Effect of quantitative easing and other stimulus
  measures
• Global not UK problem
• Importance of consumer confidence
• US likely to show first signs of recovery

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What happens next?

• Economic outlook is more uncertain than at any
  time in the last 30 years
• Will the stimulus work?
• Will deflation gain a hold, or will inflation
  reappear?
• Markets hate uncertainty more than bad news
• Return to benign growth and moderate inflation
  combination of 1992-2007 seems extremely unlikely

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Conclusions Reasons to be cheerful

• Economic news is unremittingly bad, but this is
  priced into markets
• Authorities have the commitment to turn economies
  around and get them growing again
• Inflationary pressures have fallen right back for
  now (which helps pension scheme liabilities)
• Pension schemes as long term investors may
  capture some attractive opportunities

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