Company pensions are becoming increasingly unsustainable due to the plunge in government bond yields and low interest rates, warns the chief executive of one of the world’s leading advisory and fintech organisations.
“Institutional investors, such as pension funds, have always traditionally invested in government bonds, as they’re widely regarded as a safe-haven. However, the world has changed considerably in six months,” said deVere CEO Nigel Green.
He explained that the yields of government securities – in which pension funds heavily invest – have fallen dramatically since the coronavirus crisis.
“Around the world, government bond yields are plunging as a direct result of the record-breaking asset purchase schemes introduced by central banks to help ease a severe worldwide economic slump due to the pandemic.
“And as the historic stimulus is set to remain, or even be expanded, the pressure on bond yields is expected to intensify.”
Green added that the far-reaching stimulus agendas and more than a decade of ultra-low interest rates – which could be going even lower – are creating a perfect storm for company pensions, which are already feeling the squeeze of ballooning deficits.
“Increasingly, no longer are government bonds delivering the returns required to fulfil the obligations made to retirement savers.”
The deVere CEO also underscored the ongoing issues of the wider bond market.
“The falling yields have forced pension funds, and other institutional investors, to make highly unusual changes to their asset allocation mix as they seek out better returns in riskier assets. But then, the question is: if pension funds don’t buy government bonds, who will?”
Green explained that China has been a major purchaser of U.S. bonds in the past to keep its export prices down. With its $1 trln of Treasuries, it’s the number two holder.
“But the new economic realities and geopolitical tensions have prompted Beijing to shed some of its U.S. bonds. In March alone, China sold $8 bln of its hoard – in the same month as overseas investors and central banks got rid of $300 bln of Treasuries to raise dollars.”
Green concluded that typically, bonds account for more than half of the assets held by pension schemes.
“Due to the falling bond yields, the potential for negative interest rates, and the already chronic deficits, company pension holders should seek with their adviser the available ways to safeguard their retirement income.”