The Barclays pension scheme has built up a £600m surplus thanks to sponsor contributions and investment returns. As it and other funds have benefitted from the benign market environment in recent years, will the current conflict in Ukraine change this? 

 

Investment performance and an employer injection worth £700m have helped the £37.2bn Barclays UK Retirement Fund move into surplus, lifting it from a funding level of 97.5% in 2020 to 101.7% in 2021 - a significant improvement on the situation in 2019, when the scheme had a £2.3bn deficit.  

 

Barclays bank had agreed to make payments to clear the fund’s deficit by 2023, but investment markets have done their bit too, although this was partially offset by high inflation; over the past five years, the fund’s investment returns exceeded the returns required to maintain the funding level.  

 

The trustees seem sceptical when it comes to returns going forward, however, pointing out that market performance could still reverse the gains. “We recognise that our funding level is influenced by things like investment market performance, and that any financial checks we do are a snapshot based on the circumstances at the time,” the scheme told members, adding: “In practice, our funding level is constantly adjusting. This means that our current small surplus is volatile and there is a chance that our full review at 30 September 2022 may show a deficit.” 

 

 

Market volatility has increased recently. Devan Nathwani, investment strategist at Secor, says the conflict in Ukraine is one reason, and will impact underfunded schemes that hold more equity risk in their portfolio most. 

 

“Ukraine is one reason. The other is concern is around inflation [and] whether central banks will have to take aggressive action on rates,” said Nathwani, as higher interest rates would make equities less attractive. “The market is pricing that in,” he added, saying this was the main driver behind falling equity markets. 

 

While the situation in Ukraine is still highly uncertain, he highlighted that Russia and Ukraine are not a very large part of the global economy. “We are not expecting a big earnings shock to equities,” he said, but investor reactions suggest that they are repricing the equity risk premium – the additional return required for holding equity risk. 

 

 

Overall, it will be a mixed story for investments, with some energy firms benefitting in the short term but facing an uncertain longer term outlook, and the possibility for holders of emerging market bonds to see Russia defaulting on its debt. 

 

Trustees should engage with their asset managers, Nathwani advised, ensuring active managers take the best decisions within each asset class. “We don’t encourage trustees to trade around geopolitical events because they are very binary,” Nathwani warned, adding that if trustees happen to make the right call they could look like heroes – but there is also a high chance that they could get burnt; schemes that sell could incur high bid ask spreads and discounts.  

 

So far, the TfL Pension Fund trustees have come out saying they are instructing their managers to freeze all existing direct holdings in Russian-domiciled investments, as is the Universities Superannuation Scheme, while the Church of England has said it is selling its Russian holdings. 

 

The situation “highlights how important ESG is when looking at emerging markets and sovereign exposure”, he said. 

 

Brendan McLean, investment research at Dalriada Trustees, also advised trustees to avoid making decisions on short-term events. “Do not panic,” he said. "Historically, most geopolitical shocks do not result in long bear markets, and whilst the current situation is serious and losses are large, markets generally recover relatively quickly as the crisis recedes,” he argued, saying that a diversified portfolio is essential in times of crisis to reduce volatility, with safe haven assets including gold and government bonds going up. 

 

For schemes that have just moved into surplus, McLean advised to derisk the portfolio – “because there may be adverse market movements, such as currently, which would reduce the surplus”. 

  

Many schemes in a surplus have a low-risk portfolio therefore should not experience significant movements, but if they do, they should not make any sudden decisions, he added, instead considering if any changes are in line with their long term plans.