UK - Increased corporate bond portfolios will help schemes boost flagging valuations and improve their security.
Legal & General Investment Management said the UK economy “looked like it did in the 1960s” and, as a result, pension schemes should brace themselves for lower investment returns in the future. This, though, could be offset by a portfolio in corporate bonds.
LGIM said moving into bonds would also help to reduce volatility in schemes that are heavily invested in equities.
Associate director for corporate bonds Robert Barnard-Smith said: “Pension funds are overweight in equities and underweight in bonds, which is fine if you can take the volatility.”
But Hermes Pensions Management chief executive officer Tony Watson warned that schemes which take on corporate bonds may be merely swapping market risk for the risks of inflation.
And they would also still face the risk of a FTSE company defaulting or going bust – risks that were not inherent in index-linked government bonds.
Barnard-Smith said that while this view was true to an extent, corporate bonds could be diversified across many companies to reduce the risk of corporate default.
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