Business View: The name is bond, long-term bond. I'm in short supply

Market madness means pension fund havoc. There is another way

When Mercer Investment Consulting said three weeks ago that pension deficits for FTSE 350 companies had gone up by £20bn in a month, all hell broke loose. It even made the news on BBC Six Music, a digital channel which slips a few snippets of news in between the latest Arctic Monkeys release and a classic Genesis track from 1975. When, last week, rival actuary Watson Wyatt pointed out that the deficits of FTSE 100 companies had fallen by £11bn, it hardly merited a mention anywhere.

But the two estimates were essentially the same story. There weren't any more pensioners demanding a decent pot to retire on. The stock market hadn't crashed - indeed, its steady accumulation should have been cutting deficits. No, these wild fluctuations were functions of movements of ultra-long bond yields.

Now, I'm not going into the details of the long-bond market, nor would you thank me if I did. But ultimately it all comes down to the basic economics of supply and demand. Pension funds need to buy long-dated bonds, for reasons I will explain later, and they are in short, supply, at least in sterling. When demand exceeds supply, prices go up. And when prices of bonds go up, yields fall.

This should make issuing long-dated bonds more attractive. And last week the Debt Management Office, the part of the Treasury in charge of these things, met with market experts to talk about doing just that. The meeting was inconclusive, though everyone expects the Treasury to start selling a few billion of gilts with 40- or even 50-year maturities in the coming months.

Yet while everyone sees long bonds as something the Government should be offering, what about corporates? When I was a lad, companies used debentures to finance themselves, and these often had maturities of 25 years or so. These are as rare as rocking-horse droppings today.

Why is that? The aptly named Tim Bond, a top strategist at Barclays Capital, tells me that company finance directors feel they should borrow only to match their current need for money. The idea of borrowing cheaply for a rainy day doesn't cut it any more.

Some people might be tempted into the longer-term market - quasi-government borrowers such as PFI/PPP projects or Network Rail. With between £6bn and £9bn of new investment in hospitals each year (if Patricia Hewitt allows it) coming on stream, and the operating licences for PFI/PPPs typically lasting for 20 or 30 years, this could provide a great source of long-dated bonds. Similarly, Network Rail, which already has around £5bn of long-term debt, is going to issue another £10bn over the next four years. It makes sense for it to tap into the demand for long-term bonds.

But the real solution is a bit of common sense. Pension funds are being forced to invest in long- term bonds because regulators, actuaries and accountants think this is the safest way of matching assets and liabilities. But studies show that, over 20 or 30 years, investing in shares produces a better return, with as little or even less risk, than buying bonds.

And there are lots of shares available.

Brown's double u-turn

In journalism, we call it a reverse ferret: you make a hasty decision and then have to unmake it when circumstances change. For editors, it is understandable. For the Chancellor, less so.

Gordon Brown did a reverse ferret late last year on self-invested personal pensions. He did it again on the Operating and Financing Review, the document he said companies were to produce to detail what good corporate citizens they were. Then he decided they didn't have to produce it. Now, under pressure from Friends of the Earth, he has decided to review that decision.

This is what might be called a double reverse ferret, or a flip flop. Or losing focus, perhaps.

j.nisse@independent.co.uk