UK may not issue CPI-linkers for 18 months: Redington
UK - It may take the UK's Debt Management Office (DMO) up to 18 months to issue consumer price index (CPI) linked bonds that comply with recently announced CPI-linking of pensions, Robert Gardner of investment consultancy Redington has warned.
Gardner, founder and co-chief executive of the company, went on to warn about further unintended consequences of the announcement, which he said the government should have consulted on more widely.
It was announced last week that private sector pensions would be linked to CPI rather than the retail price index (RPI) from next year, following the news that the same would be true for public sector pensions.
However, the UK market currently does not offer any CPI-linked assets, and the DMO may take up to 18 months to begin issuing them, Gardner warned.
He said the fastest turnaround the DMO was capable of would mean the first new bonds could be issued nine months after consultation had begun, while he estimated the timeframe would more likely be "between a year and 18 months".
Gardner also criticised the government for not consulting properly on the issue before announcing the changes.
"It's fair to say there has been a huge amount of unintended consequence of this announcement, and there should have been far more consultation from the government around switching from RPI to CPI," he said.
He added the worst-case scenario would currently be a "perverse situation where you end up with indexation with the better of RPI and CPI".
Brian Peters of PricewaterhouseCoopers added the lack of CPI-linked gilts would also affect the pension buyout market.
"Unless CPI-linked gilts are issued, pension schemes will have no means of hedging their risk, and insurers may charge greater premiums," he said.
"This, in turn, could mean any cost savings are not fully reflected on the pensions buy-out market."
Gardner said new CPI-linked bonds would start emerging from the sources that currently issue RPI-linked bonds, naming housing associations as one potential source.