A little more than 20 years ago, nearly two thirds (65%) of all gilts were owned by pension schemes and insurers; today, that has dropped to below a quarter (24%)
Pension fund investment in bonds is falling fast, transforming what was once a portfolio mainstay into a minority asset, finds a report from Bloomberg Intelligence (BI).
A little more than 20 years ago, nearly two thirds (65%) of all gilts were owned by pension schemes and insurers; today, that has dropped to below a quarter (24%), Bloomberg Intelligence said.
The firm forecasted that, if UK pensions continue to sell off gilts at the annual rate seen in recent years, they may step out of the bond market completely.
DB schemes have traditionally held high proportions of UK government securities or gilts. But defined benefit schemes are largely becoming “a thing of the past”, said Bloomberg Intelligence, with existing defined benefit funds focusing on moving towards members’ retirements, and no new schemes being set up. As such, these schemes are selling off, instead of buying up, gilts.
Bloomberg Intelligence senior insurance analyst, Kevin Ryan, said: UK pension funds have typically invested in instruments like gilts and cash to match maturing liabilities as scheme members moved into drawing their pensions.
As companies have almost universally shifted to defined contribution (DC) schemes – and defined benefit schemes have largely closed to both new members and new contributions – pension plans have considerably less natural demand for gilts.
He said: If UK pension funds continue to sell gilts at the recent annual rate, they could be out of the bonds in seven years.
The decline in demand for UK gilts among pension schemes could pose a challenge for the UK government as it seeks investment, with a possible solution to be found in higher coupon payments, he added. The UK Office of Budget Responsibility (OBR) predicts that in fiscal 2023-24 the government will need to borrow £123.9 billion, followed by £84.6 billion the year after and £76.8 billion in 2025-26.