On Friday, we hosted Ben Gold, Head of Investment at pensions consultant XPS (N/R), to give his views on what had happened in the defined benefit pensions market, and what might happen going forward. XPS is a top five UK pensions consultant, with 90 people advising 400 schemes with £90bn of assets. He said that his team had been busier than in any other crisis because schemes needed to act, rather than just sit out volatility. The key action that pension funds have been taking has been the sale of assets to de-leverage and de-risk post the September 23rd spike in UK long-dated gilt yields. Ben estimated that de-risking of pension funds would total £100-150bn in asset sales. He estimated that half or just over half of the process had likely been completed, based on his discussions with clients, with the end of the bond buying programme by the BOE on October 14th seen as something of a deadline. He said that the most favoured asset classes to sell had been equities and corporate bonds, with some trying to access property investments, and looking at illiquid assets and closed end funds. Ben said that he thought demand for pension buyouts by life insurers will increase, due as much to improved scheme funding positions, due to rising yields, as to concerns with the LDI model. He thought that this environment would allow insurers to be more selective as to the schemes they wrote. We would note, however, that rising interest rates reduces the size of liabilities to transact, such that the historic £2trn DB market is likely closer to £1.4-1.5trn now. As well as increasing demand for pension scheme buy-outs, the impact of asset de-risking should be increasing opportunities for annuity writers to get yield pick up at better prices. To the extent that life companies can better handle illiquidity than pension funds, and get matching adjustment benefits for the various assets, current market conditions should provide opportunities for better returns on capital over time. However, we would note that the near-term impact on risk prices from pension fund de-risking could have further to run, impacting Own Funds and solvency positions. Remember that Chesnara has less than 1% of its liabilities as annuities, so has much lower exposure to corporate bonds and illiquids than peers, although it does have higher exposure to equity markets. While all life stocks arguably look cheap based on long-term dividend yields, these discounts are eroded by rising risk-free rates, as are Own Funds – we forecast a higher return on Own Funds for Aviva versus Phoenix, on similar multiples, hence our preference for the former. Please contact the author or rahim.karim@investec.co.uk if you would like to follow up with XPS management on market dynamics and opportunities for the UK’s only quoted pension consultant. For a replay, please email. nomi.smyth@investec.co.uk