UK - Chancellor Gordon Brown's commitment to increasing long dated bond issuance has been viewed as insufficient within the pensions industry.
In his budget speech yesterday Brown said long dated gilts would increase from just under half to up to two thirds. According Nick Horsefall, senior investment consultant at Watson Wyatt, the level of commitment would equate to at least £16bn of index linked gilt issuance over the next year.
He claimed this was “disappointing” and “insufficient” to meet the structural demand of pension funds wishing to manage their risk through moves into high quality index linked assets.
Andrew Green, head of investment strategy at Mercer Investment Consulting was equally disappointed with Brown’s statement, suggesting that nominal yields could well be set for another fall.
On the face of it, the Chancellor's statement that up to two-thirds of nominal and index-linked gilts will be issued at long maturities is good news for pension funds. But, as is often the case, the detail does not live up to the rhetoric.
According to Green the proportion of the fixed gilt market represented by long-dated gilts (i.e. over 15 year) will actually shrink over 2006. The £17bn 2021 gilt will fall out of the 'Over 15 year index' - the main gilt benchmark used by the majority of pension funds - in June 2006.
Green said: “As a result, the pre-allocated issuance of £17bn long-dated gilts over 2006 will simply serve as a replacement, not increase the amount of long-dated gilts in issuance. The inevitable consequence is that nominal yields are likely to fall.”
However the Debt Management Office’s (DMO) enhanced remit has been heralded as major news in the context of UK pension schemes’ ability to manage risk and to increase the security of members’ benefits through the acquisition of suitable government debt when appropriate.
Horsefall said: “The increase in flexibility for the DMO to issue £2.5bn of debt per quarter in areas viewed as necessary and also the commitment to at least monthly long index linked auctions are positive. Likewise a move to greater access for true end users - i.e. pension funds - rather than predominately asset managers to attend 'end user consultation' is likely to help the DMO understand what pension funds actually need.
By Daniel Flatt
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