GLOBAL - The Organisation for Economic Cooperation and Development says new accounting standards may have set up a "vicious circle" of bond demand from pension funds.

The situation was most notable in the UK, the OECD stated in the latest edition of ‘Pension Markets in Focus'.

In addition to the difference in regulatory regimes, another factor with an increasingly important impact on pension fund investment in major OECD counties, notably the United Kingdom, relates to the recent changes in pension accounting standards," the OECD noted.

The new IAS19 standard stipulates that the difference between the assets and liabilities of defined benefit schemes should be reported on the balance sheet.

"In the UK, the FRS17 requires immediate recognition of actuarial gains and losses. Under FRS17 volatile assets such as equities introduce more volatility onto corporate balance sheets creating a preference for bonds.

"This arguable can create a vicious circle as the greater the demand for bond, the lower the yield, and the lower the yield, the greater the pension liabilities, given that liabilities are discounted using bond yields."

The OECD also updated its findings into the scarcity of long-0term government bonds for pension funds, first released last year. The latest findings by Sebastian Schich confirmed that "the demand for long-term government bonds may exceed the supply by a large margin".

Elsewhere, the report said total pension fund assets in the OECD area amounted to $17.9trn in 2005, up from $13trn in 2001.

"The annual aggregate growth rate of pension fund assets in US dollar terms was 8.7% between 2001 and 2005."

The Netherlands and Iceland had the largest pension assets in relation to gross domestic product, at 124.9% and 123.2% respectively.

At the other end of the spectrum were Luxemburg, Turkey and Greece at 0.3%, 0.3% and 0% respectively.