UK - Pension schemes that move into bonds are leaving themselves exposed to huge risks, PricewaterhouseCoopers warns.
The consultant said many schemes believed that by investing in bonds they were ridding themselves of nearly all their investment risk. But it warned that this might not be the case.
PwC said many investments in bonds were too short in duration. It added that many bond funds managed against benchmarks with an average duration of just 12 to 13 years.
PwC investment practice senior manager Paul Sweeting said: “This means if interest rates fall, while your assets go up, your liabilities could go up by a much greater amount.
“What this can mean for some pension schemes with, say a 50/50 equity/bond split, is that they are getting as much of their risk through not having a long enough duration in their bond portfolio as they are from investing in equities.”
Sweeting pointed out that pension funds did not get any extra return for the risk that they were taking by picking bonds of the wrong duration.But he outlined things pension schemes could do to solve these problems, including:
- Using swaps and derivatives to extend the duration of a bond.- Buying triple-A rated bonds which have the right yield for the particular scheme.
“This should be an opportunity for fund managers to come out with pooled products which attempt to match particularly long durations rather than particular indices,” he added.
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