Bond Bubble Burst

This could be yet another disaster for ordinary savers thanks to our dysfunctional financial services industry.

This morning I read a newsletter from a respected firm of pension solicitors highlighting 10 key issues for 2013.

Number 8 was to beware of a possible "bond bubble". The concern is that bond prices (government loans called gilts or other traded loans to companies) are so over priced that soon there will be a "crash". Gilt yields (due to high prices) are currently at a 200 year low.

If this happens then the value of personal pensions for many people approaching retirement who will tend to have most of their money invested in bonds will be devastating.

It's complicated because a fall in gilt prices should mean an improvement in annuity rates (the amount of money you will actually get each year if you retire on a personal pension) and will also help out defined benefit schemes. But there is no doubt that if you are in a standard "lifestyle" personal pension plan (which most people in "normal" times should be in) then in the 5 years before your retirement most of your money will be moved away from long term savings in equities and into bonds and cash. A predicted 40% crash in bonds would be a disaster.

As always, wealthy or financially sophisticated investors will avoid the risk. Joe Public will not. This is another reason why individual defined contribution (or defined ambition) schemes are not the answer to the pension problem in this country.

With individual defined contribution schemes (personal pensions in all their shapes and sizes) ordinary individual savers have to take all the risk over their pension fund asset allocation and investment strategy. That is not their job. That is not what they are good at in life. Their funds are usually far too small to be able to afford the expert and ongoing advice needed.

While most trust based collective defined contribution schemes can afford this advice and will hopefully will put in place measures to protect members I cannot see how they will be able to fully protect those about to retire if bond prices collapse. The "market" is not the answer to everything.

The answer is of course decent modern defined benefits schemes for all.

"The Emperor has no clothes": but still killing retirement hopes and dreams

This cartoon is from Friday's "Inside Housing" Magazine about the £5 billion Pension Trust which is forcing out, for no good reason, many third sector employers from its defined benefit scheme, while pricing out others due to huge rises in contribution rates.

While I am pleased that Inside Housing has led this debate in our sector and had a news article, analysis and editorial on this subject, it has hasn't quite got it right about some pretty important issues.

1. Why is the Pension Trust writing to employers threatening to force their their workers out of a decent pension scheme on the basis of discredited "mark to market" accounting measures? Why are they increasing contribution rates on this basis to such levels as to force even more schemes to close.?

2. Why is the Pension Trust not talking to the Pension Regulator about extending its deficit repayment period to take into account the 200 year abnormal gilt yields, which are making schemes seem to be in trouble, when they are clearly not? Other social pension funds have done so successfully, why hasn't the Pension Trust?

3. The Pension Minister Steve Webb MP himself has recognised "mark to market" is a nightmare which is killing perfectly good pensions schemes and has promised to do something about it. Why force schemes to close when change is likely to happen soon?

4. Why isn't the Pension Trust thinking about asking the highly paid to pay more? They already pay less than the low paid due to high rate tax relief? Why aren't they encouraging or looking into salary sacrifice, contribution "caps and shares", changes in retirement ages, hybrid schemes or investment fund merger?

5. Was the Housing Charity "People Can" forced into administration by the Pension Trust, discredited pension accounting measures or Government cuts? What are the real reasons? Who is really to blame?

6. The Pension deficit is not "the result of poor returns on government bonds in which the scheme had invested heavily" (page 12).  The problem is not investment returns it is the way you calculate the cost of pension promises (liabilities) which are currently based on government bond yields.  This is absolutely crucial for people to understand. The deficit has increased in the last 3 years even though the scheme investments have increased in value.

7. What has changed? Have people suddenly started living longer in the last 3 years? No, the only thing that has changed is that gilt yields are at a 200 year low due to reasons completely unrelated to the real cost of a pension.

8. So "The Emperor has no clothes" the deficit is not real. So why close and force people out of decent pensions for no good reason?

9. It is a fact that closed schemes become more mature and are forced to have smaller and smaller levels of equities and more and more traditionally low return bonds and cash holding. While at the same time paying the same level of huge fees and commissions.

10. Closing schemes does not get rid of any deficits, in fact they can make things much worse.