GLOBAL - Pension funds run the risk of creating a "vicious circle" of demand for bonds, stated the Organisation of Economic Co-operation and Development (OECD).
"The greater the demand for bonds, the lower the yield, and the lower the yield, the greater the pension liabilities, given that liabilities are discounted using bond yields", claimed the OECD's latest edition of "Pension Markets in Focus".
Derek McLean, head of asset liability management and insurance at F&C, responded that it was "certainly" a consideration that pension funds should keep in mind.
"While it is by no means certain that demand will dominate supply to the extent that it creates a vicious circle, the current inversion of the yield curve in the UK is a feature that arises from the demand for long dated bonds.
"The risk for schemes is that with a demand-driven spiral down in yields, the first movers into LDI strategies will benefit, having effectively locked in any existing benefits, but those schemes that adopt LDI hedging strategies at a later stage will be worse off because falling yields will cause their solvency to plummet."
However, he insisted that F&C would still "strongly encourage" all pension funds to consider LDI approaches.
Canada Life has signed a £351m bulk annuity contract insuring the pensioner liabilities of 2,510 members and dependents in the AA UK Pension Scheme.
In this week's Pensions Buzz, we want to know if you believe there is ever a case for combining retirement savings products with other savings products, and if the PPF levy for sponsorless schemes is appropriate for DB consolidators.
The Insolvency Service has disqualified four directors of trustee firms from running companies for a total of 34 years following an investigation.