22nd June 2018
George Cooper helps explain how pension assets should be invested and why recent attempts to ‘de-risk’ pension schemes are causing systemic risks in the pension system as a whole. Bonds, especially long-term bonds, are a much riskier asset for pension investors than real assets like equities and real estate. In periods of high inflation, the revenues derived from bonds, being fixed in nominal terms, can suffer dramatic declines in value with respect to wages and the cost of living. Pension funds are abandoning equities in favour of bonds due to an obsession with minimising the mark-to-market volatility of pension liabilities relative to pension assets. The desire to minimise this risk has led to an almost total disregard for investment returns. If the central banks are successful in their attempts to increase future inflation – and we believe they will eventually succeed – a substantial part of the real value of long-dated bonds will be wiped out.