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Does President Trump offer any good news for UK pensions?

Tom McPhail, head of retirement policy:

"Does the latest political upset hold any upside for UK pensions? Maybe a little. Firstly, stock markets haven’t crashed today (though if you were overweight and unhedged in Mexico, you may be going up the wall right now), so defined contribution investors haven’t seen their portfolio values collapse. That’s worth a pretty big cheer, given that many expected either a Clinton win, or in the less likely eventuality of Trump win then a hefty market sell-off was expected to ensue. This in turn could have driven a flight to security, with investors abandoning equities in favour of government bonds, driving up prices and yields downwards.

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.

So what of the bond markets now? The 15 year Gilt yield, a useful benchmark for looking at annuity rates and final salary scheme liabilities, did have a bit of a wobble this morning. From a low point of a yield of only around 0.93% back on 11 August, it has clawed its way upwards, to around 1.66% now. It did spike upwards briefly mid-morning today, to around 1.69% before falling back again, but let’s put that in context. Back on Brexit day, 23rd June the 15 year Gilt yield stood at 1.93% (so we’re still below that point); as recently as the end of December 2013 it stood at 3.44% and back at the end of June 2008 it was at 5.1%.

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."


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