Bond market turbulence could hit pensions

Check how your scheme's affected, says expert

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Retirement incomes could be under threat following a massive sell-off in the global bond market.

In recent weeks, a reported $450 billion has been wiped off the global bond market, with another significant bout of activity experienced yesterday, triggered by weakness in the US Treasury market.

Returns on bonds move in the opposite direction to their price. And, after years of low yields, they're currently at an all-time high. This is because of concerns that Europe could slip into deflation, as well as a £793 billion bond-buying programme by the European Central Bank, which inflated demand.

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As a result, investors have been rushing to sell, most notably in German bunds, or government bonds, where the sell-off was described yesterday by Goldman Sachs analysts as 'large and vicious'.

And, says Nigel Green, founder and chief executive of financial advisory organisation deVere Group, this could have a significant effect on retirement incomes in the UK.

"It is still unclear whether we're about to enter the end of the incredible three decade bond market rally – but what we do know is that the currently tumbling bond market is pushing company pension deficits even further into the red," he says.

"As such, the bond market sell-off is threatening the retirement incomes and ambitions of a large number of workers."

The situation could be particularly risky for those in so-called 'gold plated' final salary schemes, which are typically invested in bonds as they are seen as less risky than shares.

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Already seeing record deficits, such schemes could now be hit even harder thanks to the sell-off.

"Many people with a company pension wrongly assume their retirement incomes are safe. Perhaps they were when they joined. But this isn't the case today due to the skyrocketing pension deficits which are now being exacerbated by a volatile bond market," says Green.

"I would urge people to have their company pensions checked sooner rather than later. This is because it is likely that their values could fall further as most trustees have already made almost every change possible, such as raising retirement age and amending the amount of pension increases, yet the schemes remain extremely vulnerable."

If the turbulence in bond markets continues, interest rates could also rise, potentially affecting mortgages - although savers could benefit. And share prices, too, could be affected, with higher bond yields making shares look less attractive.

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