UK - Tesco's decision to issue £160m of 3.322% limited price index (LPI) bonds is significant for the pensions industry and a great boost to the cause of LPI bonds, according to Watson Wyatt.
“LPI bonds are an idea which Watson Wyatt has been talking to clients about for some time and the Tesco issue may be the most important to date,” said Bruce Wraight, spokesman at Watson Wyatt.
The firm said that LPI bonds are a very good match for pension fund liabilities. “Perhaps Boots' recent move put further focus on this,” said Wraight.
“We estimate the LPI market could potentially be over £100bn if corporates took an interest in issuing such debt in equal proportions to fixed and floating.”
Watson Wyatt partner Andrew Wise added: With the UK government issuing fewer inflation-linked gilts there is a pent up demand which currently is not being met. LPI bonds would be an excellent alternative for matching inflation linked liabilities for pension funds - the demand is certainly there.
“The overall UK economy would allocate capital more efficiently, and fund real businesses more cheaply, if corporates willing to issue bonds can get together with the pension funds and insurance companies which need more of these kind of investments presuming that we still have such cycles.”
By Janet Du Chenne
A number of pension schemes have been prompted to lock in gains with a move into bonds after the estimated deficit across FTSE 100 DB pension schemes improved by £36bn, over the 12 months ending 30 June last year, JLT Employment Benefits found.
HM Treasury has agreed in principle to give NEST a £329m contingent liability guarantee in the event of the master trust's wind up or closure.
AMP Capital has set up a dedicated team to help institutional investors, including pension funds, invest in infrastructure through direct equity allocations.