UK - Lord Myners has branded advice to increase scheme fixed income allocations as "nonsense" and warned the bond market is an "enormous bubble which will burst".
In a speech to local authority funds last week, Myners – a former City minister and fund manager – said schemes are wrong to buy bonds in the current economic climate as long-term interest rates are likely to double over the next four years, a shift that would force down bond prices significantly.
He also said inflation will rise due to recent quantitative easing – reducing the real value of the asset class.
Myners said: “The bond market in my view is an enormous bubble which will burst.”
He added: “I find it an absolute nonsense that your actuaries and your advisers are telling you to buy bonds at these ridiculously low rates of interest, particularly if I’m right that we are on the threshold of major inflationary risk.
“Holding bonds is a very high-risk strategy for a pension scheme. I would encourage you when you have your next investment meeting to ask yourself has it ever, ever, ever been right to buy UK gilts on a yield of 3.5%.
“Let me tell you, it has never been right to do that, and yet, pension schemes collectively are putting more and more money into these assets.”
Despite this, Mercer European director of consulting Nick Sykes said Myners was presenting the risks associated with only one of several outcomes for the UK economy.
He explained: “Lord Myners is talking about the inflation risk scenario, which is more likely than it was three years ago, but I think there is also more risk of deflation than there was then.
“The problem with fixed income is that if you’re going to have deflation, then fixed income bonds are really the only place to hide. Bonds can also be inflation-linked so obviously holding inflation-linked bonds if inflation is expected to increase is not necessarily risky.”
Towers Watson senior investment consultant Alasdair MacDonald said schemes normally held bonds to match their liabilities – and agreed most schemes were protected against rising inflation as they were invested in index-linked gilts.
He added: “You could say there’s an opportunity cost in holding bonds if yields increase in future but bonds reduce risk relative to liabilities.”
Schroders global head of fixed income Karl Dasher agreed: “For pension plans, investing in high quality nominal and inflation-linked bonds is not necessarily a return seeking proposition but an important risk-mitigating proposition.”
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