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100-year bonds would be 'no use' to UK pension funds, says NAPF

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  • 100-year bonds would be 'no use' to UK pension funds, says NAPF

UK - UK government plans to launch a "perpetual" gilt or 100-year bond would be of no help to most pension funds because the bonds would not match their liabilities, according to the National Association of Pension Funds (NAPF).

Joanne Segars, chief executive of the industry body, said: "A 100-year bond would be too long for most pension funds, and we don't think that many would buy them.

"Most final salary pension schemes are now closed to new joiners and are becoming more mature. Their liabilities are long term, but not that long term."

The UK chancellor George Osborne will say in the Budget next week that he wants to issue the bonds to "lock in" the country's low borrowing costs, according to a report in the Financial Times.

Robert Stheeman, chief executive at the Debt Management Office (DMO), said: "The chancellor is expected to announce a public consultation exercise to take place in financial year 2012-13 to consider the issuance of 'super-long' gilts -that is, with maturities longer than 50 years and/or perpetual gilts.

"The aims of the consultation are to establish the scale of possible demand for such instruments and whether there would be good value for the Exchequer, in order to inform the government's decision on whether or not to proceed with issuance."

Segars said pension funds were looking for index-linked debt with maturities of 30, 40 and 50 years, and would prefer the government to issue more of those bonds, she said.

She added: "Even if a 100-year bond were attractive in duration, there would be a question mark over whether it would yield a strong enough return for investors."

Russell Investments also saw many pension funds shunning the proposed new government debt because the terms would not suit them.

Lloyd Raynor, senior consultant for EMEA at the firm, said: "Longer-dated gilts are potentially a useful addition to pension schemes' liability hedging toolbox. 

"In stating this, these gilts will be viewed by many as longer than ideal, and current gilt rates continue to be too low for many schemes. We don't see gilt rates rising soon."

Raynor said the new bond proposal did not change the problem relating to the levels of rates, but he added taht issuance of the gilts could help the profiles of liability-hedging arrangements.

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