Reports in the media suggest that the terrorist attack in the World Trade Center on September 11 have ‘changed the world forever’. For those directly involved that must tragically be true.
However, in the broader sense, what has changed in the professional lives of those of us involved in the financial markets – particularly in the management of pension schemes and the continuing investment of their assets?
What were the issues for trustees? Their fundamental risk, as ever, is that the fund assets under their stewardship will not be sufficient to meet the liabilities of the scheme. The past few years have seen an increasing focus on the nature and term of pension scheme liabilities leading to allocation strategies – ie, the proportions invested in bonds and equities – designed to minimise the risk of mismatching in the long term.
The relevance of such strategies has been brought into focus in the UK by the application of the Minimum Funding Requirement (MFR) because the downside of mismatching and markets going the wrong way can lead to short-term cash calls on sponsors to make up deficits. Where scheme’s assets are mis-matched relative to the MFR liability model, it is almost always by holding a greater proportion of equities.
Any scheme forced to certify its MFR position at the end of September could have suffered severely especially if heavily mismatched in favour of equities.But by mid October half of the market fall of the second quarter has been recovered and, who knows, maybe by Christmas, markets will be back where they were at the end of last year. However, companies with December 31 year-ends (a substantial majority) are completing budgets now for calendar 2002, and are having to do so in recognition of current market positions.The reader may quite properly take the view that this says a great deal more about the systems of measurement used to satisfy rigid and hidebound accounting conventions than it does about any real change in risk following the terrorist attack on the World Trade Center.
Tim Evans is director of consulation at Jardine Lloyd Thompson in London