The collapse in the price of supposedly safe government bonds is a ‘disaster’ for hundreds of thousands of workers nearing retirement, a former pensions minister has warned.
Baroness Altmann told The Mail on Sunday it was ‘deeply worrying’ that members of workplace pension schemes were automatically put into loss-making investments that they were assured would be ‘low risk’.
Those most affected took out pensions in the 1990s and 2000s, or paid into individual stakeholder plans over the past two decades with household names.
Concern: Those most affected took out pensions in the 1990s and 2000s, or paid into individual stakeholder plans over the past two decades with household names
These pension pots ‘default’ to so-called ‘lifestyling’ funds, typically five years before retirement age.
The funds invest in fixed-income investments – including bonds –that are meant to be less risky than other, more volatile asset classes such as shares.
But the steep rise in interest rates has pushed up the yield on government bonds, known as gilts, causing bond prices – and the size of around 850,000 of these nest eggs – to fall sharply.
On Friday, the bond market rout deepened when the yield on 30-year gilts hit its highest level since 1998 amid fears that interest rates would have to stay elevated for longer to tame persistent inflation.
‘Once [people] have suffered big bond market falls on the cusp of retirement they have no time to recoup their losses,’ Altmann added. ‘Lifestyling has been a disaster for many in their 60s.’
Experts say buying an annuity – a guaranteed income for life sold by insurers – could shield ‘lifestyle’ investors from further falls.