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OECD warns of pensions 'vicious circle'

16 October 2006
In the latest edition of "Pension Markets in Focus", the Organisation of Economic Cooperation and Development (OECD) has warned that today's pension funds are working to create a "vicious circle" in relation to demand for investment bonds.

Derek McLean, the head of asset liability management and insurance at F&C Asset Management, agreed with the OECD observation that "the greater the demand for bonds, the lower the yield, and the lower the yield, the greater the pension liabilities, given that liabilities are discounted using bond yields".

Mr McLean noted that a greater demand for long date bonds was resulting in an "inversion of the yield curve in the UK", meaning that pension savers would be getting lower returns on their capital investments.

On the other hand, Mr McLean also said that F&C are "currently positive on the outlook for bond prices", despite the potential for a negative impact of this scenario.

"However, we would strongly encourage all pension funds to consider LDI approaches," he added. "All funds should try to hedge this risk, and if the OECD fears prove well founded, funds that react sooner will be much better protected than those that delay."

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