UK – The UK’s Debt Management Office has launched a consultation on ultra-long dated government bonds following talks with the pension industry this summer.

The DMO said it has been asked by Chancellor Gordon Brown to consult the market about the possible introduction of around 50-year conventional and index-linked gilts and 50-year annuity type gilts.

The office has published a consultation document looking at the demand for such issues, the benefit to government and investors, issuance design and methods.

“As part of its continuous dialogue with investors, the DMO has already held informal talks this summer with several pension industry participants in order to gauge the size and nature of the industry’s demand for gilts going forward,” the DMO said.

“These talks suggested that demand for high-quality bonds from the UK pension industry and other investors is likely to increase in the future.”

A DMO spokesman said the office had talks with the National Association of Pension Funds and the Association of British Insurers. “In addition we talked to a number of pension fund managers/advisers/actuaries.” He did not name the schemes and firms.

The DMO said: “There are likely to be several factors at work here; not only demographic trends but also a possible change in risk management practices (i.e. closer matching of assets and liabilities, reflected in a shift from equities to bonds in pension portfolios) and the likelihood that a shift from defined benefit to defined contribution schemes will increase demand for annuities.”

It said that the issuance of so-called ‘longevity’ bonds – suggested by Bank of England governor Mervyn King recently - is not envisaged in 2005-06. But the idea might be revisited later.

Yesterday IPE quoted Ewen Cameron Watt, head of investment strategy and research at Merrill Lynch Investment Managers, as warning that institutions were buying long-dated government and corporate bonds "irrespective of price" due to the change in pension liabilities.

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