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UK schemes respond to gilts consultation

UK – Pension schemes have responded to a consultation on ultra-long government bonds, the Debt Management Office says.

The move comes as Merrill Lynch has said that a lack of government action on issuing long-dated bonds is “punishing UK private sector companies” by causing pension deficits to rise.

“The DMO issued a consultation document in effort to gauge whether there is a demand for new ultra-long gilt instruments and we have received responses from a variety of sources including pension funds, representative bodies, academics, investment banks and members of the public,” a spokeswoman for the DMO said.

She said the names of the respondents would be released when the government’s response is published alongside the annual budget.

The DMO launched its consultation about the possible introduction of 50-year conventional and index-linked gilts and 50-year annuity type gilts in December last year following talks with the pension industry in the summer.

Meanwhile, Merrill Lynch has called for radical action in the area to ease pension deficits.

“The UK desperately needs higher long-dated inflation-linked and nominal supply,” Merrill said. “Pension deficits increased in 2004 due to falling 30-year yields (i.e. falling discount factors) and rising longevity.”

It said this was “deeply troubling” against the background of great asset returns. “The lack of radical government action on this issue is punishing UK private sector company worth.” It added that the new Pensions Act 2004 did not alter the picture of “accelerating” index-linked demand.

“Falling index-linked yields from lack of issuance means deficits are rising, not falling,” it declared.

“The only way to drive yields up is by a more radical approach from the supply side.” It added that tinkering would not be enough.

The debt office did not respond to Merrill’s comments.

Merrill said the DMO proposals would not necessarily help to reduce either deficits or annuity costs, but they would “help brake a clear tendency for them to get worse”.

Merrill said that some pension schemes could be up to three years away from having to address a tougher funding standard than now applies.

The DMO has said there is “widespread support” from market players for its proposals.

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