UK - An imminent collapse in bond markets will slash firms' pension liabilities, consultants claim.
They point out that while actuaries use bond yields to calculate scheme liabilities, the bubble in global bond markets has forced yields down to “unreasonably low” levels. This, in turn, has increased scheme liabilities.
But fund managers believe a combination of global economic recovery and rising equity markets will lure investors away from bonds, which will push bond yields up.
Consultants say when this happens, it will lower scheme liabilities under both FRS17 and actuarial methods, which are based on the expected returns of index-linked bonds.
Hymans Robertson partner John Hastings explained: “People look at the equity market and the damage it’s done to schemes.
“But half of the damage has come from the fact that bond yields have fallen and people’s future investment returns yields are significantly lower.”
“If the equity market stands still and bond yields rise one point, it would remove half of the deficits that have emerged,” he added.
Barclays Global Investors managing director Mike O’Brien agreed, and said that when the bond bubble bursts, the corresponding fall in liabilities would be the “best thing” to happen to schemes for a while.
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