L&G urges pounds 90bn switch to longer-term gilts

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The Independent Online
LEGAL & GENERAL, one of the UK's leading fund managers, yesterday urged the Treasury to switch over pounds 90bn of short-term government debt into longer-dated issues in an effort to help the funding of pensions and reduce the volatility in the market for long-term debt.

Under the Government's Minimum Funding Requirement (MFR) rules, pension funds must match their pension liabilities with an equal amount of assets, such as gilts, with maturities of over 15 years. However, L&G said Britain's pension fund managers are having to pay inflated prices to meet the MFR because of the short supply of long-dated gilts.

According to L&G estimates, there is only about pounds 60bn of outstanding government debt with maturities of 15 to 30 years, compared with over pounds 160bn with maturities of one to five years.

David Rough, L&G head of investments, said the small amount of long-dated bonds issued, the rally in long gilts prices and the volatility in some issues were making it difficult to obtain the required assets. "The long end of the gilt market is a casino. The volatility in some of the longest- dated stock is just unbelievable," he said.

The government's Debt Management Office (DMO) announced an additional pounds 400m tap issue of a long-dated gilt, the 6 per cent Treasury Stock 2028, today. It said it would be consulting on the rest of this year's auctions in September. "We are aware of the problems in the market," a spokeswoman said.

But she added that the DMO had to consider the interests of different types of investors. Insurance companies and pension funds hold about 63 per cent of the gilts in issue, and an increasing proportion of issuance has been long dated.

Any significant changes in the balance of different types of gilts issued would have to be incorporated in its remit for next financial year, published in March after the Budget.

Mr Rough said the Government could ease fund managers' problems by rolling over some pounds 90bn of debt due to be repaid over the next five years. According to L&G, the switching of the debt into longer-term paper would boost the supply of long gilts and push down prices.

Mr Rough said a roll-over could be a "win-win" solution for both the Government and the pension fund industry. He argued that rescheduling the debt would enable the Treasury to swap costly debt taken up in the 1980s, when inflation and bond yields were much higher than at present, with cheaper, lower-yielding long paper without issuing additional debt.

L&G also urged the Government to allow pension funds to buy corporate bonds to meet their MFR.

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