Pension funds want government help to hedge spiralling deficits

Oliver Gill
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Pension funds are keen for the government to pour out more index linked bonds (Source: Getty)

The government has responded to calls for help from Britain's pension funds in managing their ever-growing deficits.

The UK Debt Management Office released its latest consultations on Tuesday and concluded it would sell three tranches of index-linked debt within the third quarter of this year – one through a syndicated sale and two through an auction.

Long-running pension scheme deficits have widened further since the Bank of England's interest rate cut on 4 August. As gilt yields have fallen to record lows, liabilities – whose value increases as yields decrease – has risen.

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However, one tool funds have left to mitigate the situation is to hedge inflation risk.

"Pension funds have to hedge inflation risk as around 70-80 percent of the liabilities are inflation-linked. The main means by which you do that is the index-linked gilt market so there's enormous demand," said Jonathan Crowther of AXA Investment Managers.

The available stock of inflation-linked bonds is just £396.5bn, according to the UK's debt management office, compared with £1.1 trillion of conventional gilts.

"Many pension funds are struggling to stabilise their balance sheets – you can see that reflected in the real yields on long-dated inflation-linked gilts. More issuance would certainly provide some relief," said Sorca Kelly-Scholte of JP Morgan Asset Management.

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