Our annual review of the FTSE350 defined benefit (DB) pension schemes shows that a 15% fall in equity values – a potential result of the escalating trade war – would increase the FTSE350 aggregate deficit by £21bn.  

In a trade war, states raise trade barriers against each other such as tariffs.  This pushes up inflation and reduces growth as companies are forced to pay higher prices for imported goods, find local replacements that may not be as cheap, or reduce production if they cannot afford to meet the price increase.  All of these would dampen equity market returns.

Few people alive have experienced a full-blown trade war, and even the more recent and much smaller trade interventions are now beyond the memory of the majority of the investment industry, leaving markets unprepared for the consequences.

For bonds the outcome is less clear and depends heavily on how the central bank reacts.  In the short term a “flight to safety” is most likely to result in a fall in government bond yields. The funding position of DB schemes is highly sensitive to movements in the bond markets – a 0.5% fall in bond yields would push the aggregate deficit up by £30bn.

With such economic uncertainty are you adequately protected from your DB investment risk?