The pension risk transfer market has been negatively impacted by COVID-19. Total pension buyout sales totaled $2.3 billion in the second quarter of 2020, a decrease of 46% compared to the second quarter of last year and the lowest quarterly total since Q1 2018.
Derivatives are a tool, nothing more, nothing less. Just like any tool, if used inappropriately, they can cause more harm than good. Derivatives, such as options on equity indices or futures on interest rates, properly used can be very useful tools for investors. They are used to manage risk and to provide greater certainty around the path of future investment returns.
We remain in the Downturn phase of the market cycle, but recognize that policy support continues to be the dominant factor for asset prices and warrants a moderate allocation to high quality risk assets.
The September equity market sell off, combined with historically low interest rates, will mean lower funding levels than at the start of the year for many plans. Looking forward, funding volatility will likely continue through the remainder of the year with the markets vulnerable to both virus related developments and fallout from the US election.
Many frozen pension plan sponsors have established “glidepaths” to manage the allocation of assets between growth assets (typically equity) and hedging assets (typically fixed income). These glidepaths are designed to systematically reduce the growth assets and increase the hedging assets as a plan’s funded status improves.
With valuations across most major asset classes very expensive, we believe we are still in the Downturn phase of the cycle. Although headline economic growth numbers are likely to improve in the near term, we believe consensus expectations for a full economic recovery may still be optimistic
The equity market recovery underway since the end of March plows ahead, despite a backdrop of virus related economic uncertainty. Overseas markets remain below pre-COVID levels, but US stocks, heavy in a small number of large technology firms, have now surpassed their previous highs.
Economic expectations are modestly positive over the medium term, credit conditions are improving, but valuations are expensive. Our view remains that we are in the Downturn phase, but we recognize that there is meaningful support for risk assets.
Equity markets posted strong returns for the month of July, continuing their recovery despite troubles with reopening and increases in virus cases in parts of the US. For some equity markets, they ended July where they began 2020.
Markets have largely shrugged off news of renewed virus outbreaks in much of the US and the continuation of large, seemingly uncontrolled outbreaks in many significant emerging market countries such as Brazil, India and Mexico. In the US, markets seem to be in a “heads I win, tails you lose” frame of mind with respect to renewed outbreaks…