UK - The gilts crisis, which has left UK pension funds with rapidly escalating deficits, has been attributed to regulation and changes in how deficits are calculated, with one expert claiming funds were in effect being forced to hedge against an accounting system, rather than the market.
Recent gains in the equity markets have counted for nothing following sharp falls in real yields with the yield on the benchmark 1.25% Index-Linked Gilt 2055 falling from 0.59% to 0.48%. As many pension funds rely on these instruments to fund future liabilities, a massive supply problem has developed, forcing down yields.
Con Keating, principal at The Finance Development Center, said: “There is a very fundamental misunderstanding of what is going on out there. If you are matching benefits you are hedging an accounting convention.”
Suggesting that deficits were far less serious than the new accounting system revealed, he said the current system had lead to a situation where “investment bankers get rich providing solutions to a problem that does not exist”.
Jeremy Toner (pictured), fixed income portfolio manager, Investec Asset Management, said: “We believe this significant move does not simply represent a market anomaly but a potentially dangerous bubble. A vicious circle of regulation, risk-reduction and demand/supply imbalance is now in operation in the UK bond market.”
Derek McLean, head of insurance asset management andasset liability management at F&C, said: “Most funds cannot and do not measure this change on a daily basis so they will be largely unaware that the deficits will have swollen rapidly in the last few weeks, and that the current position will be much worse than the position at year-end, which they may not have calculated yet.”
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