2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2012 2013 2014 2016 20172014 2014 (final) 2015 2015 (final) 2016 2017

Global growth estimates fall; political risks mount; yields remain ever so low; equity markets shrugged off their post Brexit blues; UK property recovers some of its composure Both the IMF and OECD revised down their global growth forecasts

for 2016 and 2017, to 2.9% and 3.2% respectively, part of an on-going

trend. For example, in mid 2012, the 2014 growth rate was forecast to

be over 4%, but was only 3.4% by the time we got there (see chart).

While the OECD’s 2016 post-Brexit UK forecast rose from 1.7% to 1.8%

in 2016, 2017’s fell sharply, from 2% to 1%. Theresa May believes, rather

enigmatically, that “Brexit means Brexit”. The OECD clearly believes it

means something rather nasty, economically speaking.

Following Theresa May’s speech at the Conservative Party conference,

the consensus is coalescing currently around ‘Hard Brexit’ (strict

immigration controls, with the UK / EU trading relationship governed by

WTO rules) rather than ‘Soft Brexit’ (flexible immigration controls with

some form of membership of the EU single market).

Wrong call, according to the currency markets – which have been

dubbed by some wags as HM’s official opposition in the absence of

Labour party visibility on the issue.

Sterling has been pushed down against the Dollar to levels not seen for

over 30 years, while the BoE recently suggested the effective exchange

rate was at a 168 year low.

Following the Referendum result the BoE, as expected, quickly injected

fresh stimulus into the system. It was not the only monetary authority to

do so.

In the absence of more radical monetary measures (anyone for time-

limited spending vouchers?), monetary policy in some regimes seems

to be running out of road. How long can the ECB effectively continue

its bond buying policy given the mismatch between Eurozone debt

issuance and its purchases of those securities.

Attention does at last seem to be shifting towards fiscal and structural

measures. Canada, Japan and the US have raised spending on

investment while here in the UK, Chancellor Philip Hammond’s has

confirmed an easing in the country’s strict budgetary stance. The

OECD has urged others to do more, most notably the Eurozone, where

the rules governing the region’s Stability and Growth Pact stymie the

introduction of a more supportive fiscal stance.

In the absence of such measures, the OECD fears the world is set to

remain in a low growth trap, with poor growth expectations depressing

trade, investment, productivity and wages ...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 30 SEPTEMBER 2016 AT A GLANCE

Global growth estimates continue their downward trajectory

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

As the prospects for ‘Hard Brexit’ rise, so the prospects for the UK economy fall – if we believe the currency markets, where Sterling is at 30 year lows versus the Dollar.

IMF global growth projections over time

Source: IMF World Economic Outlook

LCP Quarterly Investment Snapshot - 30 September 2016 2

At a glance

Market commentary

BOND PERFORMANCE � Bond yields remain at historically low levels – cheaper at one point than in ancient Sumer in 3000 BC, apparently

� The BoE’s ‘four-point plan’ of monetary policy measures helped soothe investor nerves

� Some might question the design of the corporate bond buying part of the policy – do Apple and McDonalds need the BoE to support their financing?

When once asked what he found most difficult about his job, the then

UK prime minister Harold McMillan famously replied “events, dear boy,

events”. He might therefore have had sympathy with today’s politicians

(and investors) who face a range of bear traps, pitfalls and hazards

as electorates go to the polls. The political obstacle course over the

coming year is varied - US elections and Brexit to name just two.

US data has been fairly mixed, but the economy is still the most sure

footed of all the major developed economies. September jobs growth

was below expectations, but steady. Meanwhile, the Fed is laying the

groundwork for an end of year rate rise.

Brexit’s impact on the real UK economy thus far has been fairly limited.

Although business confidence has taken a hit and multinationals

are expected to pause investment decisions until negotiations are

progressed, consumer confidence has remained steady. The test may

come as prices spike in response to imported inflation.

The Eurozone remains weak, growing by a meagre 0.3% over the year

to June 2016. As well as looming Dutch, German, French and Italian

electoral challenges, the region’s banking fragility has raised its head

once more. Italian and Portuguese banks have now been joined on the

naughty step by Germany’s Deutsche Bank, described by the IMF as

‘the world’s most dangerous bank’ ...read more

EQUITY PERFORMANCE � Equity markets shrugged off their post Brexit blues remarkably quickly, apparently – UK and US indices reached records highs over the quarter

� Easy money continues to act as the market’s life support amidst a troubled backdrop, but seems to be approaching its limits

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

ALTERNATIVE ASSET PERFORMANCE � UK property fell sharply on Brexit, but has since recovered some of its composure

� UK property is supported by easy money and has several features that are attractive to the long-term, income oriented, investor

� Diversified growth funds could hardly fail to rise in a quarter where almost all asset were up sharply

Investment grade credit spreads contracted over the quarter. UK spreads fell sharply following the BoE’s announcement of its corporate bond buying programme.

Q3 highest returns (GBP)

12.9% Index linked gilts > 15 years

GBP corporates – all stocks10.1%Best

Performers

Q3 highest returns (GBP)

12.3% Asia Pacific ex Japan

Japan12.1%

Q3 highest returns (GBP)

4.1% Diversified growth

Infrastructure3.4%Best Performers

Best Performers

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

Mar

ket

com

men

tary

Investment grade credit spreads

Source: Thomson Reuters Datastream

LCP Quarterly Investment Snapshot - 30 September 2016 3

0.0%

1.0%

2.0%

3.0%

4.0%

Sep 2016 Sep 2021 Sep 2026 Sep 2031

Market expectations for UK interest rates

Sep-15Sep-16

Source: Bank of England

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 market 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

High yield debt + to -

Government bond yields

� German and Japanese yields have reached their lowest historic levels

� UK yields are historically low but could still fall further towards German and Japanese levels

� Japanese and German 10 year government bond yields remain in negative territory

Interest rate expectations

� Expectations of UK base rates for the next 1-5 years have fallen further

� UK base rate rises have been increasingly pushed back

� UK base rates were cut in August 2016, and could be cut further in 2016 / 2017

Comparing swap and gilt yields

� At record low yields on both swaps and gilts, clients should consider carefully the timing of hedging implementation programmes

� 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

*New asset class added Q3 2016It 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 amedium-term timeframe (2 to 3 years) informed by our economic scenarios 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

Protection strategies - to +

Multi-asset credit ++ to +

Long-lease property and Private credit + to ++

Source: Thomson Reuters Datastream

Source: Bank of England

LCP Quarterly Investment Snapshot - 30 September 2016 4

DIVIDENDS AND DEFICITS

Recent figures from the PPF highlight the worsening financial health of UK DB pension schemes, with aggregate deficits reaching record highs.

The prime driver of the deterioration has been the sharp rise in liabilities, caused by the seemingly

relentless fall (rise) in bond yields (prices), a trend most recently exacerbated by the Bank of England’s decision on 4 August 2016 to cut interest rates from 0.5% to 0.25% and to restart its bond purchasing programme. While asset values also rose, buoyed by cheaper Sterling, the effect was modest by comparison.

� According to recent data released by the PPF, DB schemes’ aggregate funding deficits are at record highs

� In many cases, the cash is there to (at least partially) fix the problem. Not so much ‘can’t pay, won’t pay’, more ‘can pay but would prefer not to pay, too much, right now’

� With the size of some firms’ DB scheme deficits causing investor jitters, it may simply be enlightened self-interest for management to rethink cash priorities (ie a bit more for the scheme)...read more

EMERGING MARKETS – ON THE UP. CAN THE GOOD TIMES LAST?

Emerging markets have tried investors’ patience sorely in recent years. Now that patience is at last being rewarded.

Over the three years to 30 September 2015, both emerging market equities and emerging market bonds lagged badly relative to developed markets.

� There are a number of reasons to invest, or to stay invested, some good, some not so good (but not necessarily bad)

� Emerging markets presently hold an almost irresistible allure for yield-starved investors...read more

On balance, for emerging markets, it’s better to be in than out, given both the near-term outlook and the prospects for long-term growth.

QUANTITATIVE EASING – LAST ORDERS PLEASE?

These days, anyone with even a passing knowledge of financial matters will probably be able to have a good stab at explaining quantitative easing (QE).

It is though a relatively new phenomenon. It first appeared in the East (although some argue that the US Fed engaged in a form of QE to combat the Depression).

� Quantitative easing (QE) has been front and centre of central banks’ successful attempts to avert economic heart failure following the financial crisis

� But, its effectiveness appears to be waning, with the economic patient still looking rather peaky

� Some are calling for more radical medicine. No, that low rhythmic whooshing sound you hear overhead is not the air ambulance, but the sound of helicopter money

� By stimulating demand in the short term, helicopter money can generate a self-sustaining economic recovery. Perhaps...read more

IORP II AND ESG – WAKE UP AND SMELL THE COFFEE

On 30 June the final draft of the long-awaited new European Pension Directive (IORP II) was agreed. Given the likely timeframe for Brexit, it is expected that this will be implemented in full in UK law. The new Directive includes far-reaching provisions relating to environmental, social and

governance factors (ESG).

� The IORP II Directive is on its way to a pension scheme near you, almost certainly

� The Directive has major implications for ESG-related issues

� The Pensions Regulator is ‘on message’ as far as ESG is concerned, stating that “I would urge any trustee or asset manager out there who still thinks these [ESG] things don’t matter to wake up and smell the coffee”

� Double espressos all round ...read more

THE ASSET CLASS THAT NEVER QUITE WAS

The government’s decision to kill off the secondary annuity market caught everyone by surprise. Many will be disappointed at the news, including many of the pensioners who were forced to buy an annuity before April 2015. Still, there must be some sympathy for the new government’s

position and ultimate decision, given the potential risks to the elderly and the vulnerable.

� An inability to balance a vibrant market with sufficient consumer protections was the reasons for the move

� From a pension scheme perspective though, it would have been interesting to have seen this market develop and grow, given the prospects for constructing diversified portfolios with income characteristics similar to bonds but with general longevity protection...read more

At a glance

Topical investment issues

Top

ical

inve

stm

ent

issu

es

GET LCP VISTA ISSUE 4 HERE

LCP Quarterly Investment Snapshot - 30 September 2016 5

ASSET MANAGERS IGNORE RESPONSIBLE INVESTMENT COMMITMENTS

At a glance

Environmental, social and governance issues

Starbucks’ decision to allow proxy access mirrors that of several other US companies including Apple and Microsoft. The debate over proxy access has gained momentum over recent years, with pension funds putting forward more than 100 proxy access resolutions on US companies during 2015.

Ryanair investors remain dissatisfied with executive pay. Rather sniffily, a spokesman noted that “Mr O’Leary thinks he’s seriously underpaid…” Roger and out. Rather bizarrely, non-executives are allowed to participate on the company’s share option scheme. Best practice is for a fixed fee.

Sports Direct featured for the fourth time. Previously, it was to report investor outrage at the riches directors wanted to lavish on themselves. This time, it’s about the company’s shoddy treatment of its workers.

Goldman Sachs’ investors were unhappy with CEO Lloyd Blankfein’s $22.6m pay deal. The episode is a reminder of the “heads I win, tails you lose” mind-set that once characterised the investor / banker relationship and, in some cases, still does.

CORPORATE ENGAGEMENT – THIRD QUARTER 2016

A recent study carried out by the Asset Owners Disclosure Project

(AODP) has revealed that several investment managers who are

signatories of the UN-backed Principles of Responsible Investment

(PRI) are not acting in accordance with the commitments made when

signing up to the PRI.

� By rejecting a resolution at ExxonMobil’s AGM (covering disclosure of financial risks associated with climate change), asset managers seemingly failed to abide by their UN PRI commitments

� BlackRock was accused of “disturbing hypocrisy”, voting against climate change resolutions on the same day it released a report on responsible investment...read more

ESG

issu

es

We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole.

QUESTIONS TO CONSIDER

� Are you addressing members’ interests and responding to their concerns in relation to voting activity?

� Why not ask your investment managers about their views and how they voted on the climate-related issues? Should those that voted against and are signatories of the PRI be challenged on their contradictory actions?

THE LIVING WAGE

� In contrast to the statutory ‘national minimum wage’, the Living Wage is voluntary and is deemed to be the wage necessary to address the basic cost of living for individuals and their family

� The Living Wage Foundation supports employers in applying the Living Wage and provides formal accreditation of those that do

� Are your investment managers part of the Investor Collaborative for the Living Wage? If not, how do they engage directly with investee companies on staff pay?...read more

PRI mission

INVESTOR COLLABORATIVE FOR THE LIVING WAGE

� This is a group of institutional investors encouraging FTSE100 companies to adopt the Living Wage

� Significant progress has been made since the Colloborative’s launch in 2011, with the number of accredited FTSE100 employers increasing from two to thirty

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 2016.

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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8 November 2016