Company pensions: the perfect storm is looming

Company pensions are becoming more and more untenable following the decline in government bond yields and low rates.

Since the Coronavirus crisis hit, the yields of government securities – in which pension funds heavily invest – have fallen considerably.

Traditionally, institutional investors, like pension funds, have always invested in government bonds, as they’re broadly viewed as a safe haven.

Nevertheless, we’ve seen the world change dramatically over the past six months.

On a global scale, government bond yields are plummeting as a direct result of the record-busting asset purchase schemes implemented by central banks to help soften the blow of the economic slump due to the COVID-19 pandemic.

Furthermore, as the historic stimulus is here to stay, or even increase, the pressure placed on bond yields is predicted to strengthen.

Indeed, the extensive stimulus agendas, coupled with over 10 years of ultra-low interest rates – which may go lower still – are creating a perfect storm for company pensions, which are already being impacted by rising deficits.

We’re seeing more and more that government bonds are no longer delivering the returns needed to fulfil the obligations made to retirement savers.

In addition, in terms of the wider bond market, the plummeting yields have led to pension funds, and other institutional investors, to make highly atypical changes to their asset allocation mix as they look for better returns with risker assets.

However, then we have to ask ourselves, if pension funds don’t purchase government bonds, who will?

In the past, China has been a key purchaser of U.S. bonds to keep its export prices down. Indeed, with its $1 trillion hoard of Treasurys, it is the number two holder.

However, the ongoing geopolitical tensions and new economic landscape have led to Beijing shedding some of its U.S. bonds. Back in March, China sold $8 billion, the same time as overseas investors and central banks abandoned $300 billion of Treasurys to raise dollars.

Bonds usually make up over half of the assets held by pension schemes. However, because of the declining bond yields, the potential for negative interest rates and growing deficits, holders of company pensions should seek advice on the available ways to protect their retirement income.

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