Why Donald Trump could be great news for your pension

Donald Trump is an unknown quantity for world politics. Before the election results were in, the pundits predicted that in the highly unlikely eventuality of a Trump victory, stock markets around the world would panic and tank, plunging pension investments into a deep dark hole. What actually happened is very different, and it could end up being good news for pensioners.

An absence of bad news

After Hilary Clinton conceded, the markets did react. There was an initial sell off, and International stock markets fell dramatically, but over the course of the 24 hours after the election, most of them recovered.

Tom McPhail, head of retirement policy for Hargreaves Lansdown says: "Defined contribution investors haven't seen their portfolio values collapse. That's worth a pretty big cheer, given that in the less likely eventuality of Trump win then a hefty market sell-off was expected to ensue."

It doesn't mean we are necessarily out of the woods in share terms. Trump's policies weren't always entirely crystal clear, and although he has spoken about ending free trade agreements - including deals with China, it's not known how easy he will find this process, and whether he will choose to go ahead once he is in the Oval Office. If he opts for a protectionist stance, then this may not be the end of the stock markets woes. If he decides that there are benefits to free trade, then stocks and shares will not suffer dramatic setbacks.

The good news comes from the bond markets

But the good news for pensioners isn't just the absence of bad news, there's also a chance that a Trump Presidency will have an impact on the bond market - and even if you are not directly invested in bonds, this will affect your pension.

When you invest in bonds, you are essentially lending money to companies and governments, and they pay you a fixed interest rate. In most cases we don't lend direct, we buy these bonds off other investors, and the price we pay depends on supply and demand.

To make matters slightly confusing, the experts don't tend to talk about the price of bonds rising and falling, instead they refer to the 'yield', which is basically a measurement of how much the regular interest payment is compared to the amount you pay for the bond.

If you pay more for the bond, or you buy one offering a low interest rate, then you are getting comparatively less back in interest, so your bond yield is low. If you buy the bond cheaply, or the interest rate is higher, then the interest you get back is more impressive, so the yield is higher.

Pensioners basically want government bonds (because they are considered more robust compared to corporate bonds), but they want nice high yields from them.

McPhail explains: "Low bond yields cause problems for pension investors, both for individuals and for final salary schemes. Individuals who want to buy an annuity are effectively investing in bonds, as the insurance company's annuity rates are supported by bonds. Final salary schemes hold high levels of bonds as investments, so a rising price is partially good for them. However this is more than offset by their liabilities which are effectively linked to bond yields, with the current ultra-low yields being a significant factor in the huge deficits currently being reported by many schemes."

What's happening to bonds?

In the aftermath of the election the 15 year gilt yield spiked briefly, then fell back to the level it started at. As McPhail points out, it's worth having a bit of context in order to understand just how horribly low bond yields are at the moment. Bond yields are currently around 1.66%, but back on Brexit day on 23rd June, the yield was at 1.93%. A few years back, in December 2013, it was 3.44%, and in June 2008 it was 5.1%.

The real good news lies in Trump's future plans. As McPhail puts it: "The other thing to bear in mind is that if Trump does follow through on his rhetoric of investing in infrastructure, this could nudge inflation up, which could in turn push up bond yields."

If Trump wants to spend enormous sums, and cut taxes dramatically, then he's going to have to borrow to afford his spending plans. This means he'll need to issue a huge number of bonds. To get people to buy so many, he'll have to offer ones with high interest rates and low prices (i.e. higher yields), this will push prices down elsewhere in the bond market, so yields rise across the board.

It could help close the back hole in many company pension schemes, and vastly improve the returns people are being quoted when they try to buy an annuity.

So regardless of how anyone sees the arrival of Donald Trump in the White House, pensioners have a reason to be cheerful.