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Harashima Senju

Harashima Senju

Ton up Member
I am revising the flashcards and I can't quite put my head around the following

if bond yields fall, causing annuity rates to reduce, then this is offset by a corresponding increase in the market value of bonds in the pension scheme fund

If bond yields fall how is this related to annuity rates?
 
Hi
The "annuity rate" is usually the percentage rate at which a pension fund can be converted into an annuity. So an 8% annuity rate means that a £100 fund can be converted into an annual pension of £8.
If bond yields fall, then annuities become more expensive because the discounting of the future cashflows is lighter. If annuities are more expensive then less of them can be bought with the pension fund, and so the rate is said to reduce.
Hope that helps.
 
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