UK - Corporate limited price index (LPI) bonds offer pension funds one of the most effective ways of protecting assets and reducing account sheet volatility, according to consultants Watson Wyatt.
The bonds – which hold inflation-protected rises subject to lower and upper limits of 0% and 5% – are tailored to meet government legislation on pension funds.
Only a few organisations have so far issued the new bonds, National Grid and the European Investment Bank among the first.
The latest issue was in October when Tesco issued £160m worth of 3.322% LPI bonds.
Watson Wyatt said: “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.”
The Tesco issue was fully subscribed and Watson Wyatt believe that this may encourage other companies to follow suit. This could create a potentially big market for pension funds, looking to follow Boots in reducing the balance sheet volatility that pension scheme assets bring.
Watson Wyatt partner Andrew Wise said: “We estimate the LPI bond market could potentially be over £100bn if corporates took an interest in issuing such debt in equal proportions to fixed and floating.”
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.
LPI bonds unlike index linked bonds have an added safeguard in that they are protected against the prospect of deflation.
Wise pointed out that this is a real possibility as the RPI has over several in months in the past year shown a decrease in value.
He said further: “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.”
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