In a letter sent to Darling on Friday, Hitchen said issuing more long-dated fixed and index-linked gilts would result in a “win-win” situation for pension funds and their members as well as the Government and UK companies.
He said pension funds and insurance companies could benefit from increased availability of a strategic asset and reduced pressure on their balance sheets.
Meanwhile the Government would have greater access to funding at low rates of interest and companies would have increased access to finance at short and medium durations with less “crowding out” by Government borrowing.
He said: “You will be aware that the yield curves for both conventional and index-linked gilts are often inverted, with lower yields available to long-term investors than short-term investors. The NAPF believes this is clear evidence that more issuance can be absorbed at the long end.”
If issuance is substantially skewed towards the long-end it would eventually cause yields to rise according to Hitchen. But he said in the meantime the Government would have the opportunity to raise funding at low cost.
He said: “Pension funds will be able to obtain greater quantities of low-risk assets, thereby reducing risks for scheme sponsors, members and the Pension Protection Funds. Just as significantly, because liabilities are valued by reference to long bond yields, there will be a notable improvement in scheme funding levels. This will be an important factor in helping to keep DB schemes open in the current economic downturn.”
Hitched added that the Government is best placed to issue long-dated paper as investors are unwilling to risk long-term exposure to corporate covenants.