Occupational Pension Schemes had a tough year in 2008 with most generating sizable deficits. The fund managers for these schemes are still putting too much faith in a recovery of the stock market, when in my view, a wholly ‘Safety First Strategy’ - using certain types of gilts - is needed. Without changing course I can see bigger losses and many schemes going bust.
In 2005 I predicted that the Pension Protection Fund would be drained of cash from claims. So unless the government underwrites future losses many pensioners could find that their private pension income falls, or that it is lost altogether. It has been reported that the PPF is having trouble balancing its books.
On a more positive note, I think that when we have reached the depths of this depression the government will relax their pension rules so that unemployed people with a personal pension plan will be allowed to draw a temporary income from their fund without having to buy an annuity.
‘MANAGED’ FUNDS
Managed Funds have been especially popular with people who have Personal Pension Plans because, like With Profit funds, they have a broad spread of investments allocated by an investment manager. However, this ‘eggs in different baskets’ investment approach has not worked in the current economic climate as most asset classes (the different baskets), with the exception of gilts and cash, have suffered large losses.
Consequently the Managed Fund sector is down in value by between and 20 – 30% from its peak (October 2007) with most of that decline occurring since October 2008.
The investment management industry is currently spinning the line that once the recession is over investment markets will recover and everything will be rosy in the garden. I do not agree. My prediction is that Managed Funds will carry on falling - 25% to 50% by June 2010 at the latest.
This means that someone who had £100,000 in their Managed Pension Fund in October 2007 could potentially see its value plummet from £70 - 80,000 now to £35 - 60,000 within the next 18 months - with little prospect of the fund recovering!
‘WITH PROFIT’ FUNDS
I have stopped recommending ‘With Profit’ Funds as they lack transparency and because I am no longer convinced that insurance companies always have the best interests of their policy holders at heart.
Furthermore, I do not think it is currently possible to manage a With Profit Fund, using a balanced spread of investments, without losing money. This is evidenced by the fact that With Profit annual bonus rates have been low for a long time now and most insurers (e.g. Norwich Union, Prudential and Legal & General) are applying Market Value Reductions (MVR’S) of up to 30% when people surrender their policies. They are doing this because the shares and commercial property that make up a large slice of these funds have fallen in value by around a third. The only asset classes that have made money over the last 15 months are gilts and cash.
Consequently my prognosis for With Profits Funds is that they have a bleak future. I believe that prospective investment returns range from poor to appalling and that most of the insurers who operate these funds will go bust. Therefore, with some notable exceptions, investors who stay invested are likely to lose money.
CORPORATE BONDS
With savings rates low and falling, the high income streams available from corporate bonds look attractive. However, given the risk of capital loss due to the increasing number of corporate insolvencies, I say why take the risk, when the potential total return (income plus capital growth) from some gilts is so much higher? Gilts are regarded as the safest of investments – particularly when interest rates are falling or stable.
My prediction is that Corporate Bonds will fall in value by an average of 40 - 60% and not recover.
SAVINGS / INTEREST RATES
The Bank of England (BoE) reduced the base rate by 0.5% from 2% to 1.5% on 8/1/2009. This is the lowest rate since the BoE was founded in 1694. In the USA the base rate is 0-0.25% and in Japan it is 0.1%! My prediction is that the rate could be zero as early as March/April this year and could stay there for 5 years or more!
In 2003 I said: “The Bank of England (BoE) base interest rate is unlikely to exceed 4.5%. If it does it will not stay there for long. It will most likely fall to 1 - 1.5%, but could easily hit zero”. Clearly I was right!
My ‘Safety First Strategy’ - using conventional long dated gilts to protect income and capital was based upon this prediction.
It is great news for borrowers but calamitous for savers whose income from savings accounts has plummeted, with many accounts now paying less than 1% interest. A recent survey revealed that most savers think that they are getting much more interest than they are because they had not kept up with the very large monthly drops in the base rate since October 2008. In fact most people thought that they were getting about 4% on their savings!
It is therefore inevitable that the interest rates payable on the best savings accounts are likely to fall to virtually nothing within the next 3 - 6 months. However a viable long term and low risk alternative to savings accounts is our ‘Safety First Strategy’ which uses conventional long dated gilts to provide a guaranteed income plus the potential for capital growth – please see the gilts section on the next page.
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