Retirement incomes threatened by bond market turbulence
The caution comes after an estimated $450bn was wiped off global bond markets in recent weeks, with another significant bout of bond market turbulence experienced yesterday.
“It is still unclear whether we’re about to enter the end of the incredible three decade bond market rally – but what we do know is that the currently tumbling bond market is pushing company pension deficits even further into the red,” said Nigel Green, deVere Group’s founder and chief executive.
“As such, the bond market sell-off is threatening the retirement incomes and ambitions of a large number of workers. So-called ‘gold plated’ final salary schemes, which already have record deficits, are being hammered further because these pension funds are typically largely or wholly invested in bonds as they are perceived to be less risky than shares.
“Many people with a company pension wrongly assume their retirement incomes are safe. Perhaps they were when they joined. But this isn’t the case today due to the skyrocketing pension deficits which are now being exacerbated by a volatile bond market.”
He added: “I would urge people to have their company pensions checked sooner rather than later. This is because it is likely that their values could fall further as most trustees have already made almost every change possible, such as raising retirement age and amending the amount of pension increases, yet the schemes remain extremely vulnerable.”
Chris Maule, chief executive of the UK Bond Network, also commented on the sell-off.
“The news that investors are rapidly selling government bonds highlights the risk of holding longer-dated fixed income investments. While bond yields have been low for a number of years, the lack of inflation has made them a relatively safe, if not hugely profitable, investment. However, there comes a point when the returns do not justify the risks and we may have now reached that point.
“It’s difficult to know at present if this market shift is a correction or if it’s the start of a new short or medium term trend. In either case, investors will want to know where they can place their money. Previously, we would have expected money to flow out of bonds and into equities but since the advent of quantitative easing, asset classes are moving broadly in line – consequently equity markets are also experiencing aftershocks. In such an environment, where should investors look for yield?
“One answer might be SME bonds. Medium-sized private non-financial corporations is now the segment most starved of access to credit across all UK business, according to the most recent Bank of England Trends in Lending report. By participating in this underserved segment, investors are able to access attractive and secured yields, while investing in what are arguably relatively creditworthy companies – and importantly in short-dated bonds which will be far more resilient to any forthcoming increase in inflation.”