DENMARK - Pension funds in Denmark reacted enthusiastically to news that the central bank would soon issue inflation-linked bonds for the first time, saying the instruments would help bolster the buying power of tomorrow's pensions.

Anders Svennesen, co-CIO for investments at ATP, told IPE: "We really welcome this decision. It makes good sense."

PKA, which administers five pension funds, also welcomed the new type of bond.

Inger Huus Pedersen, head of fixed income at PKA, said: "We have a very positive perspective on this bond issue because it increases the opportunities for us."

Even though Danish pension funds - including ATP - do not promise inflation-linked benefits, funds said investing in index-linked bonds would help their pensions keep up with prevailing consumer prices.

"Obviously, as a pension fund, you want your pensions to have the same purchasing power, so for that reason we use inflation-linked bonds in our portfolio," Huus Pedersen said.

Steen Jørgensen, managing director of Finanssektorens Pensionskasse (FSP), said: "Inflation-linked bonds provide better protection against capital losses in case of rising interest rates."

The fact Danish pension funds have not been able to invest in such instruments before has not been a major problem, he said, since they could buy index-linked bonds within the euro-zone.

"However, with the increasing concerns about sovereigns even within the euro-zone, it provides better protection to be able to buy Danish bonds," he said.

Svennesen said ATP would not use these bonds for hedging its nominal guarantees, but, as its objective was to get the best purchasing power for pensions in the future, it would use them in its investment portfolio.

A quarter of ATP's total investment risk is allocated to inflation - in other words, assets that will do well if inflation increases, he said.

"Until now, we haven't been able to buy any liquid inflation exposure in Denmark," he said.

Consequently, ATP has had to buy index-linked bonds abroad. While this makes sense from a diversification point of view, as a Danish investor, the forthcoming Danish government inflation-linked bonds will fit in well, Svennesen said.

He believes the way the central bank has decided to open the new bond shows it is committed to issuing more of this bond type in the future.

The timing of the first auction - which is set for the second quarter of this year - means the first bonds will have a maturity of almost 12 years, he points out.

"So the bond will probably have reached a decent size when it has 10 years to maturity, allowing it to build up a benchmark size," he said.

"This means the central bank is committed, and it is also makes sense for the bank to have access to funding in different parts of the market," he said.

The 10-year maturity on the new bond was also positive for ATP as an investor, Svennesen said, as too short a maturity would result in the bond becoming more influenced by realised inflation than expected inflation.

Huus Pedersen pointed out that it was important to wait and see how the bond was priced.

"It's an investment as well, and inflation-linked bonds consist of two elements, one being inflation and the other being the interest rate risk.

"Given the current level of interest rates, this isn't going to be a cheap buy."