13 December 2022
2022 has seen some extreme market conditions. Inflation has been rising, mainly driven by increases in the price of food and energy. Reasons for this have been pent up post-pandemic demand, further compounded by the invasion of Ukraine, which has meant that supply of energy from Russia has been restricted, as well as reductions in the amount of grain exported from Ukraine. This has led to rising interest rates as the Bank of England attempted to control inflation back to its long-term target of 2%.
The UK mini-budget in September 2022 announced large unfunded tax cuts, leading to a complete loss of confidence by investors. Sterling fell, and gilt yields rose dramatically. The International Monetary Fund took the unprecedented step of writing to the chancellor expressing concern, and the Bank of England stepped in with temporary quantitative easing measures to stabilise the situation. Pension funds were making the headlines due to the impact that this situation was having on them. Many of these measures were reversed in the Autumn Statement, but the environment remains challenging. Local authorities and most public sector services will need to make significant cuts to balance their budgets.
The cost-of-living crisis affects Wiltshire Pension Fund across the entire fund. Our full report looking at this situation can be viewed below , covering the following highlights:
What does the full report cover?
- How our investment performance has been impacted
- What has changed with our funding position
- How the broader changes are driving a shift in our cashflow position
- The impact on our members, and how we administer the Fund
- Our comms response
- The impact on our team and resourcing
These are challenging times, with competing pressures in the form of high inflation (applied to pension increases), low wage growth, a tough financial situation for both our scheme members and the public sector bodies who make up our employer base, as well as being a difficult year for investment returns. As an open pension scheme with a long-term time horizon, WPF is able to weather many of these challenges.
Perhaps the area of most concern in the short term is cashflow, caused by rising pension payments alongside static contribution receipts. Our rough estimates indicate that we should be positioned to deal with the expected magnitude of changes to our cashflow demands, however due to the importance of this area, more analysis is needed, and we have commissioned further modelling work from the Fund's actuary.
Our investment strategy has recently been reviewed, and the modelling shows that in spite of the recent turmoil, we should be well positioned to deliver the investment returns needed over the long term. We will continue to keep the situation under review and proactively address any emerging concerns.