It’s madness. As pension funds attempt to reduce risk, and follow rules set down by the FSA, the crisis becomes deeper. In attempting to reduce risk, it would appear the FSA unconsciously took an even bigger risk with our long-term prosperity.
As equities tumbled during the first few years of this decade, pension funds were forced to sell at or near bottom, and buy supposedly risk free bonds.
This led to a boom in the price of bonds, the yield fell, until yesterday the yield on a 50-year inflation-linked bond was just 0.46 per cent, the lowest ever recorded since these particular bonds were first launched in 1981.
And yet, because the yield is low, the long term value of the pension falls, leading to a rise in the deficit, and the pension fund managers are then being forced to buy more bonds, making the situation even worse.
Despite the rock bottom rate of yield in yesterday’s offer, it was over subscribed.
Of course, it was good news for the government- it may be borrowing, but at that rate of interest it will hardly notice the repayments
Maybe, from an individual’s point of view, the best way forward is to manage his or her own pension and make their own risk assessment, one that takes into account there is no such thing as zero risk, and a minimal risk strategy can in the long term, be highly risky.
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