UK pension funds call for more long-dated gilts
UK - The National Association of Pension Funds (NAPF) has urged the UK government to increase issuance of long-dated gilts in 2011-12 to help pension schemes manage longevity.
In a submission ahead of the Budget, NAPF cited data showing pension fund allocations to index-linked gilts increased from 7.9% to 12.3% last year.
Its 2010 survey indicated a strong demand for long-dated gilts, with 60% of respondents saying greater assurance would help defined benefit schemes manage their liabilities.
Arif Husain, director of UK and European fixed-income at AllianceBernstein, said: "The short answer is that gilts and swaps are a good way of matching liabilities because they match the cash flow of those liabilities.
"But the question is: what state is the pension fund in? If it's running a large deficit, investing in gilts won't make that deficit any smaller."
He added: "The traditional pension fund wisdom has been to invest in long-term equities. As equities have gone up, the pension funds have reduced the percentage they allocate to equities and switched into gilts.
"Gilts effectively lock in an underfunded position - but equities might not be the right option either."
A separate report published by PIMCO said mooted "extremely long-term" US Treasury bonds of up to 100 years were "unlikely", even if they could meet unmet demand from pension funds. To date, the longest debt issued by the Treasury has been via 30-year bonds.
Steve Rodosky, managing director at PIMCO, said: "At this point, it still seems unlikely we'll see such long-dated securities being issued."
He added however, that the market would accept more supply of long-dated debt "at the right price".
He cited "a growing disconnect" between supply and demand as pension funds are forced to choose liability-hedging options from the same menu of asset choices.
"This suggests there would be a market for high quality, very long-term assets," he said.
In the US, 30-year pension liabilities account for less than 10% of the current total, compared with 10-20% of longer-dated liabilities.