UK - A pension scheme backing its liabilities with the recently issued 50 year index linked gilt would require a contribution rate of some 35% of pay to provide a typical final salary benefit, according to consultancy, Hymans Robertson.
But Russell Chapman, senior investment consultant, Hymans Robertson, added: “Seen as an investment, the very long term and low yield that you’re locked into doesn’t look attractive but this is very much a defensive instrument for an investor.”
The 1.25% index linked gilt (ILG) 2055, issued in September, was almost twice over-subscribed and started trading with a real yield of 1.112%.
Hymans believes ultra long bonds represent a good match for the longest term pension liabilities, particularly those in respect of members still in work. The low level of yield, however, would be costly to fund a scheme in this manner. The yield on the 50-year bond is some 0.2% below that of the 30-year ILG.
A partner at Hymans Robertson, David Bowie (pictured), added that if the market is right in its expectation for real yields then they will continue to decrease for a long period and perhaps go down to 0.8% per annum.
He said: “Thinking back to the wild swings in price levels over the past half-century, getting a real return of any sort on top of such “insurance” might arguably be seen as attractive.
“In any event, the relatively high price paid for this bond and the shape of the yield curve would point to accruing DB pension promises becoming an even more valuable benefit for members.”
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