Spotlight on investment

What trustees should be asking their investment advisers and managers this quarter.

With inflationary pressures building, we set out the investment topics that should feature on trustee meeting agendas this quarter.

Asset markets

• How confident are you that central banks, especially the Bank of England, will manage to balance the need to raise interest rates to address inflation without damaging their underlying economies? Is runaway inflation or stagflation (inflation without meaningful growth) a real risk or just press speculation?
• How is our portfolio exposed to the risks, and opportunities, of rising energy prices?
• Do rising inflation and the impact of the various pension increase caps and floor within our scheme mean that we are now miss-hedged on inflation? If so, should we re-optimise the LDI portfolio as a matter of urgency?
• Rising interest rates could lead to increased leverage in our LDI portfolio / funds. What is our collateral position and plan for replenishment if needs be?
• Investment grade credit spreads are very low, ie investment grade credit is very expensive. Given that over time we are likely to move further into this asset class, how should we do this?  Should we pause until prices fall or are there areas of the credit market which are still reasonably priced?
• The UK equity market is still noticeably cheaper than the rest of the world. Is this likely to reverse over the next year?  Will the end of Covid restrictions lead to a rally?
• Are we seeing a bubble in renewable / low carbon asset prices and if so how should we factor this into our ESG plans?

Other issues

• For schemes that are well hedged on rates and inflation, given the impact of Covid, is it now time to consider longevity hedging, as this may now be one of the biggest risks to the funding level?
• Much of the ESG and climate discussion has been focused on equity holdings. Are we doing enough to incorporate the scheme’s bond holdings into our strategy and monitoring, gilts as well as credit?
• How do you see ESG practices evolving to include more of the S factor?
• Three large pension schemes have been granted a judicial review over the announced changes to RPI. If they are successful, what is the impact for this scheme?

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