GLOBAL - Analysts have claimed that the 0.50% cut in policy interest rates by the Federal Reserve may prove to be a double-edged sword for pension funds.
And they also warned there was the possibility of more turbulent times ahead.
Setting recent developments in context, Peter Black, principal of Punter Southall, said the recent banking crisis has had a significant effect on UK financial markets, with interesting consequences for UK pension schemes.
“We estimate that the fall in banking sector shares over the last month will have directly reduced total assets by around £3bn,” said Black.
Meanwhile, Colin Robertson head of asset allocation at Hewitt, said: “The cut was meaningful if a pension fund was currently in the process of implementing LDI or switching asset allocations, [as] it would affect the timing of that, but [it] would not affect their long term strategies.”
Despite these comments, Carl Hess, US head of investment consulting at Watson Wyatt, said the equity rally was welcome, as was the slight rise in the long end of the yield curve because it lowered the value of liabilities.
Hess said: “The rate cut may also ease the liquidity crunch in mortgage exotica, which has been impairing some bond managers. While the rate cut was welcome in general, it is not a panacea and there could be more difficulties ahead."
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