Global growth prospects rise; bond prices fall; yields rise; Trump’s victory spurs on US equity markets; UK property and commodity prices recover In a break with recent tradition, the OECD’s November 2016 projections

for global economic growth were revised upwards. While better for the

world as a whole, the figures paint a somewhat gloomy picture for the

UK with growth expected to drop to 1.2% in 2017 and 1.0% in 2018.

Other forecasters’ more recent UK predictions reveal a slightly brighter

outlook (see chart) – but the downward trend is clear.

Theresa May’s Lancaster House speech has brought a degree of clarity

to the UK’s Brexit negotiating stance. It’s ambitious – tariff-free trade

with Europe and control over immigration, all within a two-year time

frame. And if Europe doesn’t agree, then Britain may become a lightly

taxed, lightly regulated “Singapore-on-the-Thames”.

Pollsters got it right in Italy

Pollsters bucked their own trend by correctly predicting that the

Italian electorate would vote “No” in the 4 December referendum on

constitutional reform – yet another victory for the “anti-establishment”.

While three of the Eurozone’s four major engines – France, Germany

and Spain – are, if not purring then at least ticking over, Italy is

struggling to get into first gear. Some might argue it’s in reverse, with

the country not having grown over the last 16 years. Bigger political

tests lie ahead for investors, with elections looming in the Netherlands

(March 2017), France (May 2017) and Germany (August-October 2017).

The Trump effect

Five months earlier, investors had been shocked by the UK’s EU

referendum result. By comparison, Donald Trump’s November US

presidential victory proved positively stunning.

The late New York Governor Mario Cuomo once said of politicians:

“You campaign in poetry. You govern in prose.” As with so many things

political, Trump is doing it differently. He campaigned on Twitter

and it looks like he may govern the same way. Over the course of his

campaign, Trump managed to steer clear of much by way of specific

policy plans (after all, you can’t squeeze too much detail into 140

characters). But, tax cuts, infrastructure, immigration, deregulation and

protectionism were constant themes.

After an initial wobble lasting all of a few hours, investors seemed to

decide that Trump, initially at least, was good for the US, presaging

continued labour market strength, higher economic growth, higher

inflation, and further Dollar strength...read more

LCP investment snapshotA summary of our in-depth quarterly investment update on markets, macroeconomic outlook, topical investment issues and environmental, social and governance issues.

QUARTER TO 31 DECEMBER 2016 AT A GLANCE

Campaign in poetry, govern in prose, or, maybe just Tweet instead

Continue reading... request a copy of the in-depth LCP investment update here

Consumers have performed heroics in driving the economy forward. However, their resources and confidence are becoming stretched as Brexit-induced inflation picks up, eroding real income growth.

Consensus GDP growth forecasts

Source: Consensus Economics

0.0%0.5%1.0%1.5%2.0%2.5%3.0%

UK Eurozone US Japan

2016 2017 2018

Source: Consensus Economics

Consensus GDP growth forecasts

LCP Quarterly Investment Snapshot - Quarter to 31 December 2016 2

At a glance

Market commentary

BOND PERFORMANCE � Bond prices fell over the quarter

� The Federal Open Market Committee rose rates by 0.25% to 0.75% on continued US strength of the US economy and labour market; three more rate hikes are expected this year

� Mark Carney has “looked through” what is seen as a short term rise in inflation (fingers crossed), keeping rates on hold to provide the UK economy the support it needs

Many had thought (or perhaps hoped) that Trump’s electioneering

threats / promises were mere rhetoric. His first few days in office

suggest he intends to deliver on them.

Confrontation with China is emerging on a number of fronts – trade,

with tariffs threatened; political, with the US’ “one China” policy being

questioned; and military, with an arm wrestle over control in the South

China Sea in the offing. Elsewhere, American participation in the Trans-

Pacific Partnership deal is now dead while “very major” border taxes are

to be imposed on companies that move production overseas and then

import goods back to the US.

Short term, markets have moved higher in response to the “sugar rush”

of the new administration’s pro-growth policies. Longer term, some

elements of this mix might leave investors feeling rather sickly...read

more

EQUITY PERFORMANCE � Mr Trump’s victory and promises of tax cuts, infrastructure spending and looser regulation spurred a rally in US stocks. Other markets followed their lead

� Short term, Trump has been good for the markets. Longer term, possibly not

� We continue to recommend strategies not wholly reliant on “the market”

ALTERNATIVE ASSET PERFORMANCE � UK property transactions have recovered more quickly than expected

� Long-term, UK property remains well supported – a prospective yield in excess of gilts, often inflation-linked, is attractive. Brexit will continue to weigh on the asset class, for now

� Commodities recovered following an agreement to cut oil production – the first agreed cut since 2008. But will it stick?

The US Consumer Confidence Index surged in November and December (by enough to prompt a proud ‘tweet’ from Trump)

Q4 lowest returns (GBP)

-6.0% Fixed gilts >15 years

GBP corporates >15 years-5.3%

Worst performers

Q4 highest returns (GBP)

9.0% US

Overseas (ex UK)6.8%

Q4 highest returns (GBP)

5.8% Commodities (USD)

Property2.6%Best

performersBest

performers

Data source: Bloomberg, IPD, FTSE, Macquarie, Thomson Reuters Datastream

Mar

ket

com

men

tary

Consumer confidenceEquity market reaction to Donald Trump’s election

Source: Thomson Reuters Datastream

Consumer confidence

Q1 Q2 Q3 Q42016

90

95

100

105

110

115

USSource: Thomson Reuters Datastream

Source: Thomson Reuters Datastream

LCP Quarterly Investment Snapshot - Quarter to 31 December 2016 3

At a glance

Macroeconomic outlookGROWTH ASSET VIEWS

DOWNSIDE 25-35%

Crises, political risks and economic stagnation

UPSIDE 10-15%

Acceleration of global growth as consumer and business confidence returns

CENTRAL50-60%

The global economy continues on a path of sluggish growth

++ Emerging markets - multi-asset

Long-lease property

Private credit

+ Absolute return bonds

Alternative risk-premia

Commodities (active)

Diversified growth funds

Emerging market bonds

Equities – emerging

markets

Equities – global

developed markets

Equities – global small cap

Equities – UK

Listed infrastructure

Multi-asset credit

Opportunistic credit

Protection strategies

Secured loans

Timberland

Unlisted infrastructure

- Corporate bonds

High yield debt

Insurance-linked securities

Property – European

Property – UK commercial

Property – UK residential

-- Fund of hedge funds Private equity

Government bond yields

� UK and US yields have ticked up since September 2016

� German and Japanese yields have also risen from their lowest historic levels

� German and Japanese 10 year government bond yields have moved back into positive territory

Interest rate expectations

� Expectations of UK base rates for the next 1-5 years have risen since September 2016, but fallen since December 2015

� UK base rates were cut in August 2016, but markets are not currently expecting further cuts in 2017

Comparing swap and gilt yields

� As yields on both swaps and gilts have begun to rise from record lows over recent months, clients should consider carefully the timing of hedging implementation

� Where appropriate, we recommend that clients consider an LDI approach that can dynamically switch from one hedging asset to another, selecting from a range of different hedging instruments including swaps and gilts

� Despite the recent volatility, we believe that clients should add hedging to move towards their long-term strategic hedging targets

HEDGING ASSET VIEWS

It is important to note that some of the above asset classes represent a broad range of approaches. Please contact your investment consultant to discuss the most appropriate approach for your Scheme. All non-Sterling denominated assets are assessed on an unhedged currency basis.Rankings of asset classes represent LCP’s views of their attractiveness over a medium-term timeframe (2 to 3 years) informed by our central case economic scenario for the next 12-18 months. They do not take account of scheme-specific circumstances. The order within each group is alphabetical.

Mac

roec

onom

ic o

utlo

ok

ECONOMIC SCENARIOS

DOWNSIDE Scenario 3

UK downturn led by Sterling crisis

UPSIDE Scenario 1

Negotiations calm markets

CENTRAL Scenario 2

Uncertainty in Europe, UK and Eurozone growth falls

ECONOMIC SCENARIOS(BREXIT)

DOWNSIDE Scenario 4

Wider European downturn

10 year government bond yields (%)

Market expectations for UK interest rates

CreditEquitie

s

Real A

ssets Abs

olut

e R

etu

rn

Opportunistic

Liability matching strategies

Liability m

atching strategies Liabilit

y mat

chin

g st

rate

gie

s

We recommend that investors consider using the full toolkit to enhance returns while managing risk.

STRATEGIC ASSET ALLOCATION

New asset class:Opportunistic absolute return

Source: Thomson Reuters Datastream

Source: Bank of England

Opportunistic absolute return: unconstrained, high-conviction absolute return funds that seek to exploit market inefficiencies and structural change.

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

2016 2021 2026 2031

Market expectations for UK interest rates

Dec-15

Dec-16

Source: Bank of England

LCP Quarterly Investment Snapshot - Quarter to 31 December 2016 4

GILT YIELDS AND LDI FUNDS – PREPARING FOR CASH CALLS

In our previous issue, we commented on the continued rise in UK DB pension schemes deficits due to the seemingly relentless fall in bond yields. No more. Last quarter saw a significant reversal in the trend. While overall this represents much-needed good news, it also presents a governance

challenge – you may need cash, and fast.

� Over quarter 4 2016, the seemingly relentless fall in bond yields reversed

� If the trend continues, scheme trustees may need to pay money into their LDI funds, and quickly

� To do that, trustees need to be clear about how they will source the required funds

� For most trustees, this is one of the few occasions when having to

shell out cash should be seen as good news...read more

THE FCA’S ASSET MANAGEMENT MARKET STUDY – FEES HIGH, TRANSPARENCY LOW

In November 2015, the FCA set out the scope of its market study of the asset management industry, focusing on whether institutional and retail investors are getting value for money. The interim findings published in November 2016 indicated there is room for major improvement.

� The FCA has found weak price competition and high levels of profits in the asset management industry. It calls for greater transparency to improve matters

� Within the institutional investment advice market place, competition

is also seen to be weak...read more

The FCA’s full report is expected to be released in the second quarter of this year. Responses on this interim report are being accepted until 20 February.

BUILDING IN INFLATION PROTECTION – HOW ABOUT A BIT OF INFRASTRUCTURE?

December’s CPI figure was up to 1.6%, the highest since July 2014. Longer-term inflation expectations are also at a two-year high – currently expected to hit 3% in the next 5-10 years. What can pension scheme trustees do?

� For those who need inflation-linked cashflow matching assets and not too concerned about mark to market matching, infrastructure is worth considering

� While government can sometimes act as a hindrance, the re-emergence of fiscal policy as a means to stimulate economic growth provides a supportive backdrop

� Asset managers are responding to both the investment opportunity and to pension schemes’ need for long-term inflation-linked

cashflows...read more

OUR ANNUAL DE-RISKING REPORT

Looking back at 2016, volatile markets and uncertain economic conditions, fuelled by the world’s changing political situation, generated challenges for pension schemes looking to de-risk, but also opportunities.

� The market accelerated in the second half of 2016, following the bedding down of Solvency II, with over £17bn of insurer capacity being deployed.

� Pensioner buy-in pricing is currently at its most favourable level since 2011. Non-pensioner pricing has improved over the year.

� There are currently seven insurers in the market positioned to write business competitively under Solvency II, compared with nine at the end of 2015.

� In 2016 short-lived opportunities for particularly favourable buy-in pricing were driven by the Brexit vote and market volatility.

� We predict that buy-in and buy-out volumes will set a new record in 2017 of over £15bn, exceeding the £13.2bn of buy-ins and buy-outs in 2014.

Read the full report here

LCP VISTA: A PERSPECTIVE ON TODAY’S INVESTMENT IDEAS

LCP Vista aims to offer you access to our latest investment thinking, enabling trustees and employers to make good decisions about managing risk and making sure schemes can pay members’ promised benefits.

� Macro-economic outlook - Democracy posing some challenges?

� Can real estate solve a real problem?

� Getting your scheme through its mid-life crisis

� Buy-ins: making volatility work for you

� DB investment platforms: keeping trustees in the driving seat

� Governance: enhancing your decision making

Read the latest LCP Vista here

WHAT’S ON THE HORIZON FOR DC?

2016 was extremely busy, with a new DC Code of Practice, further reductions to pension taxation limits and the cessation in April of member-borne commission payments / active member discounts.

� Money purchase annual allowance could reduce

� Pension scams – ‘enough is enough’

� TPAS launches online pension scam guidance tool

� Royal Assent received for the Lifetime ISA (LISA)

� Financial Conduct Authority (FCA) proposes enhanced ISA approach to regulating LISAs

� Pension providers making good progress on reducing fees and charges

� Financial Reporting Council tweaks SMPI assumption

Read the latest DC Update here

At a glance

Topical investment issues

10 years on… and one million pensions in the UK have now been insured through buy-ins and buy-outs.

LCP PENSIONS DE-RISKING 2016

BUY-INS, BUY-OUTS AND LONGEVITY SWAPS

DECEMBER 2016

Top

ical

inve

stm

ent

issu

es

Reserve your seat for LCP DC Conference Wednesday 22 March 2017

#LCPVista

IDE

AS

AN

D V

IEW

S

IDE

AS

AN

D V

IEW

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1 LCP Vista Investment

VISTAMAGAZINEOUR INVESTMENT VIEWISSUE 5 NOVEMBER 2016

MACROECONOMIC OUTLOOKDemocracy posing some challenges?

LONG-LEASE REAL ESTATECan it help you solve a real problem?

BUY-INSMaking volatility work for you

What else is inside? � Getting your scheme through its

mid-life crisis � DB investment platforms: keeping

trustees in the driving seat � Governance: enhancing your

decision making

LCP Quarterly Investment Snapshot - Quarter to 31 December 2016 5

“A CODE WITH TEETH” – THE TRIPLE-TIERED UK STEWARDSHIP CODE

At a glance

Environmental, social and governance issues

ASOS, in October, became the latest company to come under fire for poor distribution centre working practices. Its Barnsley warehouse, described as “Victorian” by the GMB Union, joins Sports Direct’s Shirebrook hub in the workplace doghouse. While life expectancy continues to improve, it seems unlikely that many of the firm’s warehouse operatives will be able to put in the 214 year shift necessary to match CEO Nick Beighton’s 12 month package.

Commonwealth Bank of Australia (CBA) rubbed shareholders up the wrong way. After a series of company scandals, CBA’s bright idea was to reward senior management with a “culture bonus” for putting things right. You really couldn’t make it up, although CBA’s executives gave it a good go.

Sky at its AGM in October, embarrassingly, more than 50% of Sky’s independent shareholders voted against James Murdoch’s election as Sky chairman. Many shareholder advisory firms encouraged investors to vote against, arguing that, self-evidently, Murdoch was not independent. Royal London Asset Management, owner of 0.3% of Sky, said the resolution was not in the interests of the firm’s minority shareholders

Well Fargo’s “employee sales goal programme” – “eight is great” has rather backfired. Following evidence of malpractice in its implementation, the company’s share price fell; shareholders are now suing the company, while fines have hit $185m and public trust has

collapsed. Not so great....read more

CORPORATE ENGAGEMENT – FOURTH QUARTER 2016

� The Financial Reporting Council has introduced a strict categorisation system for those asset managers who are signatories of the UK Stewardship Code

� Appearing in the third and lowest tier implies lack of effective adherence to the principles of the Code

� Those ranked in Tier 3 have six months to improve to Tier 2; failure to do so will result in a removal from the list of signatories

� Managers on the naughty step have to decide whether to up their game or slouch off sulking. The latter is potentially dangerous, at least if new institutional business wins figure in those managers’

long-term growth plans...read more

ESG

issu

es

QUESTIONS TO CONSIDER

� We recommend clients make themselves aware of how their investment managers are ranked, and consider this as part of any decision making. You can check the classification here for managers. You can also see how service providers and asset owners rank.

� It is also possible to become a signatory of the UK Stewardship Code as an asset owner. Why not consider it as part of an increased effort to encourage higher corporate governance standards?

GREEN PAPER ON CORPORATE GOVERNANCE REFORM

� In November, the Government published a Green Paper setting out plans for corporate governance reforms in the UK, and inviting comment from business, investors and the public on how best to achieve them

� The Green Paper followed a number of bold statements from Theresa May, outlining a series of wide-ranging proposals aimed at tackling corporate excess, employee board representation, and tighter controls on executive pay

� Following criticism from big business, the plans set out in the Green

Paper fell short of expectations...read more

THERESA MAY’S LATEST PROPOSALS TO REFORM CORPORATE GOVERNANCE

� Shareholders may be granted more power over executive pay

� Companies may be forced to reveal pay ratios between chief executives and average workers

� Employee representation should be improved, but there will not be mandatory board seats for employees

� Existing governance rules could be applied to large privately-held companies

All rights to this document are reserved to Lane Clark & Peacock LLP (“LCP”). This document may be reproduced in whole or in part, provided prominent acknowledgement of the source is given. We accept no liability to anyone to whom this

document has been provided (with or without our consent). Lane Clark & Peacock LLP is a limited liability partnership registered in England and Wales with registered number OC301436. LCP is a registered trademark in the UK (Regd. TM No

2315442) and in the EU (Regd. TM No 002935583). All partners are members of Lane Clark & Peacock LLP. A list of members’ names is available for inspection at 95 Wigmore Street, London W1U 1DQ, the firm’s principal place of business and

registered office. The firm is regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain

circumstances to offer a limited range of investment services to clients because we are licensed by the Institute and Faculty of Actuaries. We can provide these investment services if they are an incidental part of the professional services we

have been engaged to provide. © Lane Clark & Peacock LLP 2017.

Lane Clark & Peacock LLP London, UK Tel: +44 (0)20 7439 2266 enquiries@lcp.uk.com

Lane Clark & Peacock LLP Winchester, UK Tel: +44 (0)1962 870060 enquiries@lcp.uk.com

Lane Clark & Peacock Ireland LimitedDublin, Ireland Tel: +353 (0)1 614 43 93 enquiries@lcpireland.com

Lane Clark & Peacock Netherlands B.V.Utrecht, Netherlands Tel: +31 (0)30 256 76 30 info@lcpnl.com

LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment, insurance and business analytics.

Ken WillisPartner ken.willis@lcp.uk.com

Natalie BrainAssociate Investment Consultantnatalie.brain@lcp.uk.com

Contact us to discuss the work we have been doing and how we can help you identify opportunities for your pension scheme.

+44 (0)20 7439 2266

Paul GibneyPartner paul.gibney@lcp.uk.com

@LCP_Actuaries

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3 February 2017