The vast majority of people over 50 in DC are heavily invested in Government and Corporate Bonds to protect us against the volatility of growth stocks (equities and other real assets) and offer us stability in later life.
If you think that bonds are a stabiliser of your DC pot then think again. They’re fine for DB schemes and the few of us who fancy buying an annuity but a nightmare for the ordinary pension saver.
The current bond yield is at 5.8%, that compares to 4.3% at the peak of the Truss crisis. Thankfully we haven’t got another LDI crisis to deal with and DB schemes will see their ephemeral surpluses grow still further as a result of what we hope is a spike. But I read whenever I open twitter that we are now in the “5% world”.
This is a frightening world for Government and for those who support the Government, the British tax-payer; this is the harsh reality spelt out in the FT
For those who are in DC pensions, your bond values are crashing, this chart is provided by Hargreaves Lansdowne – here’s the link
What was a couple of months worth well above £38 is now worth less than £34. Not to put too fine a point, your fixed interest gilt edged security has crashed as the market has the cost of borrowing to government soaring. I was asked by a journalist to try and explain this to a member of a DC scheme who was invested in gilts for “safety.
Most people think that “fixed interest” means a guaranteed way to save.
But while the interest is guaranteed , the value of your “bonds” goes up when your interest is more valuable and down when the interest is less valuable.
Right now interest is easy to come by, the Government has to pay a lot to borrow money. That means your bonds have gone down in value. So while the interest is fixed, the value of the bonds you’ve got in your pension pot is falling in value.
This week the value of bonds is so low experts can’t remember the price of bonds or “fixed interest” having fallen so much.
This is great if you want to buy an amount of income paid to you for ever (an annuity). . It pays till you die and it’s backed by guaranteed bonds.
But if you own a lot of bonds in your pension or elsewhere and aren’t about to buy an annuity , you will find the value of your bonds has fallen a long way and there’s no upside. Fixed interest maybe, gut guaranteed not to go down? Think again!
There are people buying annuities right now, they will get a good deal. Mark Ormston has pointed this out, he runs an annuity brokerage who must see plenty of smart people at their door.
A word in the ear is all that’s need for the smart investor but what about the average punters who are destined to hold bonds and drawdown? What of those who will belatedly find themselves in default funds that revert them to equities when they’ve been in a drift to bonds known as a lifestyle structure?
The inexorable rise of long dated bond yields over the last month is indicative of the risks that bonds bring us.
It is of course us, the tax-payers who will suffer from what’s going on in Westminster. As Starmer gets a kicking and possibly gets to be kicked out, the tax-payer will pay the extra bill of Government borrowing and find their DC pensions decimated (that means losing 10% BTW) in the last month. Indeed if yields have risen from 4 to nearly 6% the cost in terms of capital value may be higher.
We don’t get to hear our “DC educators” talking much about this, because it’s not an easy conversation for them to have with us punters. But the truth is that most of us are in gilts and other forms of bonds for no good reason. We should be in growth seeking assets like shares and infrastructure and other real assets and not lending money to Government to our great cost.
It’s time that we had some honesty from DC providers about what is happening to DC funds and why the value of our money sitting in bonds, is non-existent.