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UK Debt Management Office concedes 'growing case' for CPI issuance

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UK investors have continued to lobby the Debt Management Office (DMO) over the issuance of index-linked Gilts based on the consumer prices index (CPI).

The DMO – an executive body of the UK Treasury that manages all Gilt issuance – recently held annual meetings with its Gilt investor base, with the group acknowledging a “growing case” for CPI issuance as the number of pension funds using the measure increases.

In the past, it has been reluctant to increase index-linked issuance – or issue CPI-linked paper – due to weak demand and the risk of alienating other customers. 

However, in 2011, the government changed the official inflation measure for the civil service pension scheme to the CPI.

Subsequently, many of the private sector pension funds that followed suit found it increasingly difficult to hedge inflation risk and called on the DMO to help.

Government index-linked debt has traditionally been linked to the retail prices index (RPI), but the UK statistics office abandoned it as an official measure after its calculation formula came in for harsh criticism.

In the minutes from the DMO’s latest meeting in Edinburgh and London, the body said: “It was noted by some that the growth of CPI linkage within the pension industry was increasing the case for the launch of CPI-linked Gilts in the future. It was suggested the case for their introduction was not necessarily pressing now, but that it was likely that the case for their introduction would increase with the passage of time.”

The Edinburgh meeting also concluded the level of index-linked issuance was acceptable.

In London, the DMO reported “mixed views” on the need for CPI-linked debt despite acknowledging calls to increase the level of issuance.

The UK issued around 23.6% of its £1.44trn (€1.92trn) of debt index-linked, with pension fund and insurance companies owning 26% of total DMO issuance, third behind overseas investors (including pension funds) and the Bank of England after quantitative easing.

In an 2014 interview with IPE, DMO chief executive Robert Stheeman said there would be no concrete plans for CPI-linked debt until the demand base became stronger.

He added that the office saw index-linked issuance as cost effective, but that it could not issue this exclusively.

The National Association of Pension Funds has long called for CPI issuance to help ease the burden of inflation hedging for members forced to increase payments by CPI.

Earlier this month, a review by the UK Statistics Authority called on the Office for National Statistics to scrap use of the RPI altogether, including for the issuance of debt.

AXA Investment Managers argued that such a move might alienate pension fund investors continuing to uprate pensions by RPI, but added that a duel approach could appease the DMO client base.

For more from IPE on inflation hedging and investments, click here.

Readers' comments (1)

  • I do not agree that the DMO “concedes growing case for CPI issuance”

    I think that on a careful reading of the Minutes of the Annual Consultation with Scottish investors the INVESTORS’ view that there may be a growing case is minuted. That’s not the same thing as saying the DMO “concedes” there is a growing case.

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