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NAPF: 100 year bonds ‘too long-term’ for most pension funds

The National Association of Pension Funds says 100-year bonds are unlikely to be popular with pension funds because they are too long-term.

Chancellor George Osborne aims to launch a Government bond with a repayment date lasting 100 years or more to take advantage of historically low interest rates. In next week’s Budget, Osborne is expected to announce plans for the Debt Management Office to test market appetite for the “super-long gilts”.

NAPF chief executive Joanne Segars says: “A 100-year bond would be too long for most pension funds, and we don’t think that many would buy them. Most final salary pension schemes are now closed to new joiners and are becoming more mature. Their liabilities are long-term, but not that long-term.

“Pension funds are looking for 30, 40 and 50-year index-linked debt, and would much rather the Government issue more of those. Even if a 100-year bond were attractive in duration, there would be a question mark over whether it would yield a strong enough return for investors.”

However, speaking to Money Marketing, work and pensions select committee member and Conservative MP Brandon Lewis says he can see some institutions would want to invest in the 100 year bonds.

He says: “Some institutions will invest in property but only with 99 year terms, they use it as a safe way of locking money away. These bonds work on the same logic as that so they will be popular with some.”

Aberdeen Asset Management head of global strategy and asset allocation Mick Turner says trying to lock in low interest rates is not a new idea and that something similar was done after the first world war. But, he says it is not without risks.

He says: “History has also shown that when debt issuers attempt to lock in such low levels of short term interest rates in perpetuity or for extremely long periods that it could be a sign of the bottoming out of the interest rate cycle. Certainly the risks now being taken with monetary policy in an attempt to kick start or resuscitate the global economy, suggest that the risk reward trade-off offered by a 100 year gilt appear quite skewed towards the risk and less the reward over the next few years.”

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