July 3, 2007 / 7:32 AM / 12 years ago

Bond surge may save final salary schemes

LONDON (Citywire) - Rising bond yields and asset prices could stem closures of final salary schemes and even lead to the reopening of some schemes, according to Williams de Broe.

Two weeks ago Paternoster boss Mark Wood said that rising bond yields and competition have slashed costs, which could result in more pension buyout deals.

This was on the basis that the increase in bond yields had dramatically cut pension scheme liabilities, making buyouts a more attractive prospect for trustees.

But Dan Kemp, head of fund research at Williams de Broë, said that drop in pensions deficits could even allow pension schemes to take a contribution holiday.

This would make final salary schemes more attractive than defined contribution schemes, which must still contribute to the pension regardless of any funding surplus, Kemp said. But he warned: “While increasing bond yields may help stem the tide of closures of final salary schemes, and may even prompt some trustees to reopen closed schemes, it presents a dilemma for those seeking to transfer to an alternative arrangement.”

He added: “While the effect of lower transfer values should be partially offset by a rise in annuity rates it will significantly increase the critical yield required by SIPPS in drawdown potentially needing a change in the investment strategy of the fund.”

In the last 18 months long-term gilt yields used to calculate both annuity rates and pension deficits have risen from 3.89 percent to 5.31 percent.

c Citywire Financial Publishers Ltd 2007.

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