Commenting on the announcement regarding costings for the energy cap announced in today’s Budget, Chris Arcari, Head of Capital Markets, Hymans Robertson says:

“The energy price guarantee support to households and businesses, alongside permanent tax cuts will likely lead to a marked deterioration in public finances from October, when the energy support package takes effect. Indeed, the Institute for Fiscal Studies and Citi have said the budget risks putting the UK public finances on an unsustainable path. The cost of the energy support package is unknown as it will depend upon volatile gas prices, but external estimates have placed the bill as high as £150bn. As the government embarks on tax cuts, the cost will need to be met by additional borrowing, and so the deteriorating fiscal position should lead to an increase in the supply of government bonds. We expect the budget will deliver a short-term boost to demand, potentially lessening the depth of the current growth slowdown. However, given the UK already has a relatively deregulated economy, based on barriers to firm entry and competition and the strictness of employment protections, and there is little correlation between tax burdens and prosperity among large high-income countries, it remains to be seen whether suggested tax cuts and promised deregulation, and indeed the new real growth target, will do much to alter the longer-term growth outlook.

“The government intervention on energy prices is likely to limit the near-term peak in energy prices but the fiscal loosening is likely to support aggregate demand at time of existing high inflation and generate greater medium-term inflation pressure than would otherwise have been the case. As a result, the BoE are unlikely to shift from their hawkish stance and the recent fiscal developments may even lead to greater monetary tightening for a longer period than was previously envisaged, despite the actual headline rate peaking at a lower level (now anticipated to peak around 11% year-on-year in October). This, and the additional issuance required to fund large fiscal intervention could place ongoing upwards pressure on gilt yields in the near-term. At the same time, the Bank of England is expected to begin quantitative tightening (i.e. active gilt sales) at the end of September. This has been well telegraphed to the market but is yet one more near-term technical headwind for gilt markets. In concert, greater issuance, medium-term inflation concerns, and gilt sales are likely to place further near-term upwards pressure on interest rate expectations and yields. A further large rise in interest rate rises is already priced into the market, with Overnight Index Swaps suggesting UK rates will rise close to 5% p.a. by the end of next year, but we anticipate further volatility and potentially further upwards pressure on longer-term yields.

“Sterling has weakened materially this year, most significantly against the dollar, as the economic outlook has deteriorated. Sterling took yet another leg lower upon Liz Truss winning the Conservative leadership contest and the release of early details of her energy support package and deregulation and tax-cutting agenda. The gilt and currency markets are likely reflecting concerns around the medium-term growth and inflation outlook as opposed to reflecting an expectation of a higher real growth target being realised. Sterling weakness year-to-date has enhanced overseas returns to unhedged sterling-based investors but, while sterling looks cheap relative to measures of fair value, it is difficult to see a near-term catalyst to support a stronger sterling.

“A lower near-term peak in inflation than otherwise would have been the case is positive for pensions schemes, as pensions with CPI linkage will not rise as much as initially feared. However, potentially higher medium-term inflation would have the opposite effect. Higher gilt yields increase the rate at which liability cashflows are discounted and so the rises in yields year-to-date will have improved funding levels for schemes with less than 100% interest rate hedging. However, rates volatility and sharp rises in yields have placed hedging programs under strain, with schemes required to find additional cash to meet collateral calls. Sterling weakness has cushioned market falls this year to an unhedged sterling-based investor, but again, this will have increased costs for those with hedging in place. Sterling and gilts have fallen a long way this year, but if the market does not view the government as providing a credible plan for managing the public finances, gilts and sterling could come under further pressure.”

Commenting on the announcement in today’s Budget around levelling up and charge cap, Callum Stewart, Head of DC Investment, Hymans Robertson says:

"We welcome the government’s continued commitment to exploring how they can remove barriers to investing in illiquid assets and its inclusion in the first Fiscal Statement from the new Chancellor. We believe some “illiquid” assets can improve member outcomes at retirement and as schemes become larger, the more traditional problems such as daily liquidity are likely to be less of a challenge. As with any investment, it will be critical to explore where these asset types can add most value for members through their pensions journey and not simply regard them as a panacea.

“We acknowledge that more investment in illiquid assets investment by DC schemes could make a big difference in society given their potential to contribute to projects such as renewable energy. If we can also use this as a way to engage members in their pension savings – because they can physically see the good their money is doing – we can also potentially encourage them to contribute more to their pension savings. This will add to an improvement in overall long term outcomes.

“However we remain concerned that at a time of further worry for many, comments around charge cap are distracting from the bigger issues. Within the industry, we are afraid that pensions savings will be the first thing to be cut for many, leading to an ever increasing number of pensioners and future pensioners heading into pensioner poverty. Tinkering around the edges won't address these big issues. We would advocate a material overhaul of the auto-enrolment legislation, with much more done to encourage individuals to forward plan and invest in their pensions and enable them to do so when their position improves. We also need to move the dial on investment approaches, with more focus on embracing potentially significant opportunities to improve outcomes, rather than tinkering with the minutiae in the regulations. Without this, we are not going to address the concerns for many and support much better long term outcomes.”