Company Pensions Are Set For Another Fall

15 Nov

The unexpectedly large spike in inflation confirmed yesterday and the BoE’s inflation forecast today could spell trouble for company pension holders. The Consumer Price Index rose from 2.2 per cent in September to 2.7 per cent, and hours after the Bank of England forecast that inflation would not fall back towards the government’s 2 per cent target until the second half of 2013, which is later than previously thought. Governments around the World have been printing money for sometime now, this I believe will ultimately cause inflation. The recent figures are creeping up more than had been expected, to an embarrassingly high figure especially considering there is little growth in GDP. I don’t expect inflation to suddenly surge but I think it will increase in about 12 to 18 months time. When this happens, government bonds will nose-dive in value – and this is bad news for company pension holders as in recent times we’ve seen an increasing number of company pensions investing in government bonds, known as ‘gilts’, as they were perceived as ‘safe havens’.  Some company pension schemes have as much as 80%  of their money invested in Government bonds. At some stage in the future there will be a blood bath in the bond market. It might not happen for 18 months to 2 years but it will happen at some some stage. Company Pensions are already in a massive deficit situation. I’m guessing the situation is only going to get worse and that  most company pension schemes will be caught with their assets in exactly the wrong place at the wrong time.

Nigel Green deVere Group

Blog written November 15th 2012

 

 

1 Comments

  1. Unfortunatly a bond “bubble burst” would not be restricted to company pension schemes but would also have a huge impact on defined contribution pension plans. A recent report, conducted by Towers Watson, showed that 93% of defined contribution schemes have a default investment option. Some of the default options have a weighting of upto 87% in bonds and gilts so any crash in bond prices will have a huge impact on an individual retirement fund, leading to a greatly reduced pension.

    Just because an investment was deemed as low risk at outset does not mean that it will remain low risk years down the line. It is vital that individuals seek regular pension reviews with a qualified Financial Advisor to ensure that they understand how thier funds are invested and the risks associated with those investments.

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