Negative Gilt Yields To Take Toll on Plan Sponsors

01 August 2012 (PLANSPONSOREurope.com) – Negative gilt yields could pile pressure on plan sponsors to fund defined benefit liabilities through alternative sources of income, according to Robert Gardner, co-CEO of City pension consultancy Redington.

Gardner says gilts are set to follow Swiss and German government debt into safe-haven status in which investors accept negative returns in exchange for security of capital.

Two-year gilts currently return just 0.09% because "significant political risk throughout the Eurozone is helping UK assets appear very attractive to investors.”

According to Gardner negative gilt yields would increase the value of pension scheme liabilities "piling pressure on scheme sponsors to fund that cost through alternate sources of income, he said. " He adds the silver lining for pension funds is that non-gilt assets continue to offer attractive risk-adjusted returns. For example, corporate credit spreads are far wider than during the previous downturn. A package of long-dated corporate bonds and inflation assets currently provides a real yield of around 2%.

“This low-to-negative yield environment highlights the need for schemes to source exposure to positive real returns from non-traditional assets. The Pension Infrastructure Platform being put together by the NAPF (National Association of Pension Funds) and PPF (Pension Protection Fund) may well be one source for schemes to access these real returns.

"We are seeing a paradigm shift with the continued knocking down of widely-held assumptions about the economy and financial markets. There is no script to deal with these issues.

“Less than 12 months ago, many perceived that real yields could not go below zero. That proved to be untrue. The common perception now is that nominal yields cannot go below zero but this myth has already been busted by a number of European countries."

PLANSPONSOREurope Staff
editors@plansponsoreurope.com