One of the biggest drivers of corporate bond returns over recent years has been demand for long dated assets by company pension schemes in order to match retirement liabilities. We think this trend will continue, not least because the length of time we are expected to live after we retire is increasing rapidly.
John Ralfe, the pensions consultant who famously switched the Boots pension fund entirely into bonds, said last week that BT is underestimating its pension fund liabilities by £3bn, simply because it expects its pensioners to die at 83.3 years of age, whereas the more conservative Royal Mail pension fund is using a life expectancy of 86 years. The US Census Bureau forecasts that there will be 5.3 million Americans over the age of 100 by the start of the next century – all consuming pensions and increasingly expensive healthcare. Bad news for pension funds, but also bad news for our children’s generation who will bear a massively increased tax burden in order to support the ageing population. I wonder if certain company finance directors read the scare stories about a future bird flu epidemic with interest, rather than fear. For the record, the Bible says that Methuselah lived to be 969.