The structure of pension funds is such that there has always been an obligation for them to buy bonds, the traditional income-producing asset class that enables schemes to match pensioner liabilities.
No matter how loved or unloved bonds might be at any given time across the broader market spectrum, pension schemes are well and truly fettered to this asset class.
They can be at the mercy of having to buy when the bond price and yield seesaw is not necessarily in their favour.
The prolonged and unrelenting low-yield environment has forced schemes to explore more esoteric forms of credit for both better yields and index linkage, which is no bad thing for diversification. Although of course this unfamiliar territory brings its own risks.
The post-crash, quantitative easing world that pension funds have been operating in over the past few years has at times seen this hunger for a decent yield turn to famish.
Illustration by Ben Jennings
More recently, though, it is the lack of availability of corporate bonds that has been getting attention. US pension funds have been clamouring for long-dated US corporate bonds, as was reported in the Financial Times last month.
However it's not just US pension plans that are affected – last week we looked at how the hoovering-up of these assets by investors could spill over to affect UK pension schemes.
The equivalent market for index-linked bonds in the UK is paltry by comparison – the US is estimated to have issued around £379bn worth in 2015 alone, versus just £13bn in the UK.
As a result, UK schemes have been buying US corporates and then hedging currency risk, with the aim of replicating something approaching a UK-esque inflation trajectory.
Not only is that an imperfect match, but the crunch in the US spells problems for UK schemes, as buyers of these bonds tend to squirrel them away, further reducing supply on the secondary market.
Whether schemes’ newer, more diversified approaches to credit more generally will see them through remains to be seen, but we already know that income streams from real asset investments are even now facing supply pressures of their own.
Maxine Kelly is editor at Pensions Expert. You can follow her on Twitter @MaxineEK and the team @pensions_expert.
