US tariffs: Implications for UK pension schemes

On 2 April, Donald Trump announced a raft of tariffs affecting all trading partners with the US. We examine the key implications for UK pension schemes focussing on what action schemes should take in response to changes in global equities, investment grade credit spreads, gilt yields and inflation.

We also provide our investment update on the first quarter of 2025.

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What US Tariffs mean for pension schemes

On 2 April, Donald Trump announced a raft of tariffs affecting all trading partners with the US. This centred around a “universal tariff” of 10% on all countries, with further so-called “reciprocal tariffs” which ranged up to more than 40% and reflected the trade imbalance with each country.

The President’s rationale is that where imports to the US exceed exports from the US to a certain country, this reflects an imbalance that needs to be corrected through tariffs. This is unconventional economic thinking and for instance does not recognise that the US might import more than it exports because it might be cheaper for the exporting country to make those goods.

Tariffs and protectionist strategies are generally considered to reduce efficiency, and result in higher prices and lower economic output. This does not necessarily mean they shouldn’t be used. There are a wide variety of circumstances where they appropriately address policy aims. However, imposing tariffs raises costs and is consequently considered an inflationary policy.

By the end of the week China retaliated with substantial tariffs on the US and there is scope for a large number of countries to respond in a similar way. If countries choose to retaliate against the US, with their own tariffs we end up with a situation of escalating costs and reduced trade.
 

So what does this mean for pension schemes and what can you do?

1. Global Equities: Down 9% between 31 March and 7 April

Equities suffered notable falls in the first week of April. These falls come off the back of more general falls that we have seen since mid-February. There is scope for this volatility to continue for some time.

Impact: In general most pension scheme’s equity levels are relatively low but if you are in a scheme that has a substantial allocation it will likely have experienced a material dent to the funding position.

Actions: With equities it is important to remember that the markets are usually quite adept at reflecting news that is already in the public domain. Trading on information that we already know will inevitably miss the boat. The priority is to ensure that you understand your funding position and that the level of risk you are taking continues to be appropriate for your circumstances. If this is the case it generally pays to persevere with your long term strategy, avoiding being caught up in any tactical selling of assets. If you are in the process of a transition of assets, it will be important to discuss your transition plan with your consultant.

2. Investment Grade Credit spreads:
   +0.2% to 1.4% between 31 March and 7 April

Investment grade credit markets have seen spreads rising only moderately and again this is a continuation of what we have seen since February.

Impact: This is an area that pension schemes will want to watch closely, as whilst many are de-risked, credit still forms a key part of a low risk portfolio. We may see this having some impact on funding levels if spreads widen further.

Actions: Monitor closely and seek to understand any impact this has on your funding position. Credit investments have the benefit that when they fall in value, they implicitly are expected to earn a higher yield over their remaining life, as long as they don’t default.

3. Inflation and gilt yields

20 year inflation expectations: -0.1% to 3.3% between 31 March and 7 April

Counterintuitively, long-dated inflation expectations fell in the first week of April. It’s not clear why this is the case given that tariffs are an inflationary stimulus but there are a number of independent factors affecting these markets at any one time, including views on the long term issuance of gilts.

20 year gilt yields: -0.2% to 5.1% between 31 March and 7 April

Nominal gilt yields have fallen a little, marginally increasing the value of unhedged liabilities, but as a result of falling inflation expectations, real yields have been largely stable and are sitting close to their highest level for 20 years.

Impact: High hedging levels mean many schemes will be insulated from yield and inflation changes. Unhedged schemes may have experienced a modest reduction in funding level.

Actions: If you aren’t fully hedged or haven’t refreshed your LDI benchmark in the last year or so, now would be a good time to review your LDI strategy.
 

4. Impact on scheme sponsor

It’s also important to be aware that these tariffs will have a very significant impact on businesses that trade with the US and it will be important to understand any impact on a pension scheme’s sponsor.