PwC: Smarter strategies for pension scheme gilt holdings equals savings

By Rob Starr, Content Manager, Big4.com

According to new research by PwC, now is the time for pension scheme sponsors and trustees to re-examine if the gilts they hold are still fit for purpose, or whether gains made to date should be banked and used to purchase assets which could lead to improved investment returns.

The eurozone crisis and the Government’s quantitative easing programme has forced UK gilt yields to historic lows and has left pension schemes holding billions of pounds of gilts at arguably inflated values. UK companies whose pension schemes continue to hold their current gilt portfolio could be foregoing a potential saving of around £20bn over the next decade.

Returns on longer-dated gilt yields have fallen dramatically in the last two years. For example, an investor buying a 2060 fixed-interest gilt today would lock into a return of around 3.2% a year, which is down 1.1% a year from the return on the same bond last summer, before the second round of quantitative easing and the worsening of the eurozone crisis.

“While there were compelling reasons for schemes to hold gilts in the past, the financial crisis, quantitative easing and eurozone troubles have meant gilt returns have kept falling and are now at historically low levels,” says Raj Mody, head of pensions at PwC. “With another round of quantitative easing announced, sponsors and pension trustees need to ask themselves whether holding gilts is still the best option, depending on their attitude to risk and return.”