We have to take a deep breath when looking back at 2022. To give a very brief summary of some of the biggest events last year:
- Russia’s invasion of the Ukraine
- Soaring energy prices, inflation and rising interest rates around the world
- Political turmoil in ‘stable’ democracies; US Congress being invaded by an angry mob; the UK’s revolving door of cabinet and prime ministers
- The death of the Queen, with King Charles’ Coronation running concurrently to the Harry and Megan ‘soap opera’
- A popular uprising against the theocracy in Iran
- The end of Covid restrictions in much of the western world, and greater analysis of the cost of economic and social cost of lockdowns.
- It’s clear that 2022 was an extraordinary year – the list above could have kept on going. These global events led to some unprecedented activity in the financial markets.
Between January 2017 and January 2022 the UK 30 year gilt yield index traded in a range of between 0.5% to 2.0%, with annual changes being measured in fractions of a percent. However, triggered by the ‘Kami-Kwarsi’ mini-Budget, 30 year gilt yields spiked by 120 basis points in just three days, triggering a liquidity crunch on pension funds and making DB pension investments temporarily front page news. Rising gilt yields had already been a trend of the year, with a move from around 1.5% to around 4.0% over the course of 2022.
This significant rise in gilt yields led to falling DB transfer values and rising annuity rates. The big question is – what will happen next?
So what does this mean for 2023?
We have already seen gilt yields start to reduce, which may continue to be a theme of the year. Key drivers of this include the rate of inflation and the markets’ long term expectation for Bank of England base rate. Whilst UK inflation eased a fraction to stand at 10.5% in the year to December 2022 (down from 10.7%), and the Bank of England expects prices to continue falling in the first half of the year, we still don’t know where the rate will settle. Furthermore, even if inflation should fall sharply, we do not expect the Bank of England to consider cutting interest rates until they can be confident that inflation is returning to its 2% target.
It is always interesting to speculate on what might happen if different geopolitical events occur. For example, if China looked to annex Taiwan we’d expect another period of market volatility; if the war in Ukraine ends and energy prices fall we’d expect long term gilt yields to reduce.
However, when giving advice we have to look at each individual member’s circumstances and what is appropriate for the here and now. We expect that a looming recession and cost of living squeeze will lead to more clients accessing their savings to maintain their living standards.
Origen can help by offering impartial advice on the options available from their defined benefit pension scheme, as well as education and support on the current cost of living pressures and the options that may exist for members.