UK – The Bank of England says pension funds could be behind the decline in long-term real interest rates.

“The fall in long-term real rates could also have been driven by the behaviour of pension funds,” the central bank said in its quarterly Inflation Report.

“Pension funds’ liabilities are similar to the government’s obligations on the debt it issues, in that the pension fund is committed to making a series of regular index-linked payments in the future.

“Holding long-dated government bonds is therefore an effective way for pension funds to match their assets and their liabilities.

“UK pension funds have increasingly adopted this matching strategy over the recent past and that may have helped to push down long-term yields,” the report said.

It noted that funds’ demand for long-dated bonds has been further boosted by the need to purchase assets in order to reduce large deficits.

It said: “And the recent decline in long-term interest rates will have put further pressure on pension funds’ deficits, because the value of those liabilities is calculated using current market interest rates to discount future obligations.”

In December the bank said schemes were buying index-linked gilts at virtually any price – caught in a vicious circle of falling yields and falling funding ratios.

There is an auction of 50-year gilts tomorrow. "Long term nominal and real yields have risen over recent weeks reflecting trends in international bond markets and this, in conjunction with the undoubted strength of pension fund demand for long dated gilts should ensure that the auction is a success,” said Jon Cunliffe, head of interest rate alpha at ABN Amro Asset Management.