UK - Bonds with very long maturities are good news for the government and pension funds, but not pensioners, says Intelligent Capital’s Avinash Persaud.
Persaud, former head of research at State Street and head of currency research at J P Morgan, said long-term bonds offered at best an opportunity to launch better products. But at worst they were an opportunity for trustees to make an “expensive move”.
He was speaking at a conference organised by the National Association of Pension Funds.
The UK Treasury is set to issue bonds for a total of £51.1bn, of which £17.9bn are committed to long-term bonds, according to Robert Stheeman, chief executive of the UK Debt Management Office, DMO, who debated the issue with Persaud.
Stheeman said the issue followed a public consultation, which included pension funds and insurance companies.
There was a “consensus that there is significant and sustainable demand for ultra longs” and for both conventional and index-linked bonds, Stheeman said.
Persaud said ultra-long gilts “save pension funds labouring under accounting_standard FRS17” but “serve trustees who incorrectly interpret their mandates as minimising risk”.
“For the pension funds with long term liabilities the best way is to find the right risk, not the least risk” he argued.
He pointed out the 50-year–long bond did not necessarily benefit every pension pot, as investors could pay for features they do not use, “ 50 years gilts, do not make 50 years liabilities” he said recommending to hedge risks rather then “locking away” resources.
Persaud also mentioned the risk that the gilt could be not liquid enough and the investment would reduce returns as well as risks. Stheeman maintained that the government would ensure liquidity and sustainability.
Persaud continued that pension funds would be better off spreading risk via a well-diversified portfolio instead.