The National Association of Pension Funds (NAPF) has written to the Debt Management Office (DMO), which handles issuance of gilts (UK government bonds) for the Treasury, calling for urgent action.
Last month, yields on long-dated index-linked gilts dropped to just 0.4% on the back of strong demand from pension funds, which have been forced by accounting and regulatory changes to rebalance their portfolios in favour of risk-free government bonds.
According to the letter to the DMO from Chris Hitchen, chairman of the NAPF’s investment council, there is “a strong possibility that real yields may even turn negative at some point in the near future”, pushing pensions into even deeper crisis.
“Specifically, the NAPF believes that the DMO should increase issuance of both conventional and index-linked gilts at the long end of the maturity spectrum,” he wrote. “Such issuance will need to be of the magnitude of between £50 billion and £100 billion to materially reduce the supply-demand imbalance.”
One way of achieving this, he suggests, is for the government to redeem some of its short-dated gilts. The DMO said it was considering proposals from the industry, but that no announcement was likely before next month’s budget.