Trump's tariff shock: How will it impact on UK pension funds?
Image: Robert V Schwemmer/Shutterstock
Pardon the Interruption
This article is just an example of the content available to mallowstreet members.
On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.
All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.
The trade tariffs announced by US president Donald Trump this week have hit risk assets, but what has been the reaction in fixed income and interest rate expectations, and what could this mean for pension funds?
The US imposing tariffs of up to 73% on trading partners, including 10% on the UK and 20% on the EU, has stoked fears of a global recession and started a flight to safety.
“Short of military conflict, it’s hard to imagine a noisier geopolitical environment,” said Max Townshend, head of investment strategy at Local Pensions Partnership Investments.
Without any response from other countries yet markets remain volatile but negotiations are widely expected.
“While this US administration is leading with an aggressive and maximalist tariff policy, even following today’s sell-off markets are still pricing in that deals and compromise will come through with time,” Townshend said.
While equities and other risk assets have fallen, over the past week, gilt yields are down 27 basis points, US Treasuries 25bps and Bunds are nearly 18bps lower.
"That's big moves, and I think on that it's going to be helpful for some institutional investors," believes Lionel Pernias, head of fixed income investment solutions at Axa Investment Managers, arguing that for defined benefit schemes that are well hedged, it means having to hold less collateral and therefore having some cash to deploy elsewhere.
For now, investors are staying on the sideline but will probably look opportunistically at wider levels, he thinks.
Gilt yields have been driven lower because the expectations for UK economic growth have come down, with an already soft forecast by the Office for Budget Responsibility of 1% for this year likely to be further dented. Given this backdrop, Pernias expects to see three more rate cuts by the Bank of England, taking policy rates to 3.75%.
Markets are pricing in more cuts, with yields come down across the board, though the yield curve has steepened, reducing more at the short end.
This repricing opens up a derisking window for pension schemes that are well funded, Pernias insisted, and could allow some schemes to make a strategic move to match liabilities better by selling short-dated issues and buying at the long end.
“We shouldn't rush, but there will be a good entry point,” he said.
Some schemes could also accelerate plans to transfer to an insurance company. In an environment like this “it wouldn't be surprising” to see some bulk annuity insurers offering discounts, he suggested. “And I think it's for schemes to prepare for that as well.”
For the Local Government Pension Scheme, the ongoing volatility could be reflected somewhat in the 2025 triennial valuation, said Townshend, though he still expects the LGPS to show healthy funding levels.
“Timing however may add to noise; should some actuaries continue to use point in time estimates and some use averaging windows, we could well see further dispersion in funding outcomes as a result,” he warned.
For markets, the outlook remains volatile. “As the LGPS transitions towards Fit For The Future, pools will need to support their administering authorities in looking through the turbulence and appropriately positioning their strategic asset allocations,” Townshend argued.
Investment consultants appear to take a wait and see stance. Marc Devereux, head of investment consulting at Broadstone, said for pension schemes and other long-term investors, it was unlikely that any immediate action or changes to investment strategies would be merited.
“We continue to suggest that regular strategic monitoring is undertaken to understand any impact and actions required,” he said.
Schroders is reducing equities and sees value in government bonds as a hedge against the risk of recession for the first time in this cycle.
Going forward, the reaction of the rest of the world will be critical, said group chief investment officer Johanna Kyrklund, but she added that the US has now laid out a clear framework for negotiation: “This might feel like a game of snakes and ladders, but at least we are starting to understand the rules. That gives markets a basis for pricing these risks.”
How do you expect pension funds to be impacted from Trump’s tariffs move?
