The cost of transferring pension risk could rocket if the economy continues to ape Japan's, a partner at Pension Corporation has said.
Japan's benchmark bond yields fell to below 1% at the beginning of August, and with UK gilt yields and therefore annuity rates falling fast, commentators are starting to draw parallels between the two economies.
Falling rates could spell bad news for UK pension schemes, in terms of the cost of liability. "For much of 2009 it may have made sense for scheme sponsors to hold off transferring pension risk whilst expectations were that rising bond yields would improve investment returns, reducing liabilities, and lower the cost of pension buyout," says David Collinson, partner at Pension Corporation.
"But since Easter, yields have been on a falling trend, with the pace of decline accelerating through the summer months.
"If, as some suggest, it is a ‘race to 1%' as the US and UK ape Japan, it could yet get a whole lot worse for both pension liabilities and for the strength of the sponsor covenant via reduced operating profitability.
"The cost of pension risk transfer at today's prices will seem a bargain if our economy does turn Japanese."
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