An increasingly expensive drive to work…

A forty-minute commute to work doesn’t float many people’s boats. Personally though, I find it gives me some down time. When I’m not analysing how bad my backhand was the night before, my mind often tries to make sense of changes in the investment world. So it’s not unusual for me to think about government bonds whilst bumbling along the back roads of Nottinghamshire, however, this morning I was reflecting on how they are currently changing people’s lives, rather than just our investment portfolios.

Earlier in the week, Richard Wilson, one of our insurance advisers, had pointed me towards an article titled “Car insurance premiums ‘set to soar’ after compensation changes!” At first I thought “nothing new there then…!” The number of claims has probably gone up or something. Besides, I’m now 26 and still waiting for insurers to stop categorising me as part of the boy-racer bracket.” The article explained that the average car insurance policy could rise by £75 per year (Source: BBC News, 2017). This was nothing to do with increases in claims though, and instead blamed changes in government bond yields.

The simple idea is that part of your insurance premium pays for reinsurance to cover the chance of compensation being needed on the back of an accident. In serious cases people get a lump sum that might have to support them for the rest of their lives. But clearly people who receive a lump sum have the chance to invest and grow it (even a boy racer like me would know that), so to account for this the insurance company reduces the compensation accordingly. The amount they reduce it by has been based on the yield on government bonds, which has dropped from more than 5%, to just over 1% in the last 10 years. So because they can’t reduce it as much anymore, they have to pay more out, and therefore so will we!

The relationship is fascinating (well to me as an investment analyst anyway). I suppose we live in a world that’s so interconnected that changes in financial markets affect nearly everything finance related.

Another recent phenomenon coming from falling bond yields is the significant rise in transfer values on final salary pension schemes. Reviewing old style pensions, whereby your employer guarantees you a certain income in retirement, have become a lot more interesting. In many cases, transfer valuations are offering £30,000 of value as a replacement for £1000 per annum of income payable in say 8 years’ time. This time last year, they were offering over 30% less. If bond yields rise in the future, then transfer values will reduce, so with bond yields around all-time lows, this is a fascinating time to have a very close assessment of old employer pension plans, assessing the difference they might make to your financial plan.

Who would have thought a simple yield on government bonds could have so many consequences? Not only is it changing advice in the pensions market but it could also cause our car insurance to go up in price!

As I pull into Newark, I’ve completed a full circle of our business; from Investments to Insurance to Financial Planning. To me at least, I’ve connected some interesting dots all linked to a yield that we are all to familiar with in the investment world. A very productive drive to work then… now what am I going to do about my backhand…?

References: BBC (2017). “Insurance premiums set to soar after compensation changes”. Available at: http://www.bbc.co.uk/news/business-39101829 . [Accessed: 05.03.2017]