Pension scheme fiduciaries should be moving away from investing in government bonds due to falling gilt yields, according to Cambridge Associates.

Its managing director, Himanshu Chaturvedi, stated that the once considered risk-free investment option are likely to lose money over an investor’s lifetime, as 10-year bonds are currently yielding less than 0.5 per cent.

He believes that the day when government bonds start to trade at negative yields “may not be far” off and if that day comes, scheme fiduciaries will “face a very significant dilemma”.

Chaturvedi has advised trustees to evaluate whether the discount rates to value their liabilities should be reduced to zero.

“By flooring discount rates at zero, trustees ensure that the notional present value of liabilities, which in turn determines their solvency, is not overinflated simply due to the quirks of the bond market,” he said.

Trustees should also consider examining any investment guidelines for funds in their portfolio to assess whether they would effectively force them into holding these investments.

He continued: “These guidelines may need to be amended to specify what action is to be taken with regards to securities with negative yields. Trustees should be prepared to actively reduce their holdings of government bonds to lock in profits if yields turn negative.

“In such a scenario, positive yielding bonds issued by high quality corporates may represent lower risk of capital loss than government bonds.”

Currently, negatively yielding bonds make up more than £12.3trn of outstanding debt, representing more than 25 per cent of the total investment grade bond universe.

Chaturvedi concluded: “Bonds are the bedrock of most pension fund portfolios and have historically been where pension funds put money for it to be safeguarded and ready to pay beneficiaries when the time comes.

“Even though falling yields have boosted the value of the bonds that pension funds own today, most pension funds don’t hold enough of these assets. Higher prices are putting these assets out of reach and hurting funding levels.”

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