Over the next few days, I think I might dig out some of my old blogs.
Here’s one written on 1 July 2005
The big news last night was the Federal Reserve. Boris Becker even mentioned it on Wimbledon Round-Up. Although, on reflection, maybe he was talking about the Federer serve.
Either way, US short interest rates are up 0.25%, pretty much as expected. There is clearly an intention to keep inflation under control, and today the markets think that means we’re unlikely to need big hikes later. So it’s a normal day – long rates stay low and pension funds continue to ponder just how much risk they should be taking.
All of which brings us rather neatly to the instructive case of Julius Caesar’s mum. Not much is known about the lady, but one nugget survives: she had terrific common sense.
As Tom Holland says in his marvellous book, Rubicon – The Triumph and Tragedy of the Roman Republic:
“Perhaps it was from his mother that Caesar first learned to practise one of his greatest skills, the art of distinguishing an acceptable risk from a reckless gamble”.
And that’s the point – sometimes it’s a very fine line – often, the difference between triumph and disaster. Pension fund risk management provides a classic example. If any scheme (and that’s all of them) doesn’t have bonds providing enough interest rate or inflation protection, then, at these levels, the stakes are high and Trustees need to think about two things very hard – strategy and tactics.
Not everyone is agreed on either, but for those of you who are interested in our thoughts, here goes:
Strategy: Hedge your interest rate and inflation risk. Use swaps, pooled funds, gilts, bonds or anything else you can lay your hands on, but lose the risk. There are two reasons. A) It is bigger than any other risk you or the sponsor knowingly run; B) it is slowly destroying the pension scheme. You can tamper with the benefits, throw money at the deficit or make people work until they’re ninety – if the real yield falls to 1%, the liability will be a shockingly large number.
Tactics: Do not try to second guess the market. Start the hedging process. As Keynes famously said – “Markets can remain irrational longer than you can remain solvent”.
Yesterday we had Ling Chi. Today, I give you Confucius: “A journey of a thousand miles begins with one step”.