Rapid changes in life expectancy will continue to drive the bond market

Life expectancy isn’t just increasing, the rate of change is actually accelerating, thanks to rapid medical advancements. Great news for humankind, great news for owners of long dated bonds, but a nightmare for pension funds.
Recent research from Paternoster, a company that buys up final salary pension fund schemes, has published a report estimating that if life expectancy continues to increase at its current rate, pension funds will be in deficit of £175bn. Even if the rate of change slows, pension fund liabilities will still exceed pension fund assets by around £75bn.

Any increase in pension fund liabilities means that companies will need to increase pension fund assets, and long dated bonds are the best assets to match with long term liabilities. The total supply of gilts maturing in at least 25 years is only £74bn, and this huge demand/supply imbalance should continue to support long dated bonds.

You might like to also take a look at Jim’s recent article Longevity starts to worry the actuaries.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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