Bitesize: What might pension funds do when bond yields fall?

Matt Roberts-Sklar

Government bond yields fell sharply mid-2019, especially at longer maturities. For defined benefit pension funds, lower yields tend to mean deficits widen as discounted liabilities increase by more than the value of their assets. How might pension funds respond to this?

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Pension fund deficit risk

Matt Roberts-Sklar

In recent years, the volatility of pension fund deficits has been dampened by pension fund assets behaving more similarly to pension fund liabilities. This is partly because bonds make up a bigger share of assets than a decade ago, and partly because bonds and equities are moving more closely than before. Both factors have increased the correlation of assets with pension funds’ liabilities which tend to be intrinsically bond-like. This matters because the volatility of pension deficits can affect pension fund investment decisions. Given their size, changes in pension fund asset allocation can materially affect asset prices.

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