How Might the Next Gilt Crisis Start? Like This.
Companies are rushing to offload pension plans to the insurance sector. The resulting shift in asset allocation has unnerving implications.
What happens if the natural buyers of UK stocks disappear?
Photographer: Andy Shaw/Bloomberg
UK companies are falling over themselves to offload their pension-plan liabilities to the insurance industry. The changes in investment strategies that are likely to accompany the shift have serious long-term implications for UK gilts and equities, removing a natural buyer for those assets from the markets.
So-called defined-benefit pension plans are a headache for the corporate sector. The promise to pay a lifetime income linked to retirees’ past earnings is hard to quantify, especially as the pledge carries some inflation protection. The accounting treatment of pensions introduces volatility into balance sheets: The liability calculation changes as bond yields and actuarial assumptions fluctuate, while assets backing the promises are recorded at current market values.