Gilt Purchases by U.K. Pension Funds Double to Record in 2011

U.K. pension funds invested a record 12.8 billion pounds ($20 billion) in gilts in the first three quarters of 2011, more than double the 5.6 billion pounds bought in the year-earlier period.

The purchases increased the amount of U.K. government debt owned by domestic funds by 10 percent from the 122 billion pounds they held at the end of 2010, according to figures from the Office of National Statistics released on Dec. 21.

A continuation at that pace in the fourth quarter would drive the annual amount of gilt buying to almost 10 times its six-year average, according to an analysis of the ONS data published in today’s Bloomberg Risk newsletter. The funds owned more government debt than either equities or corporate bonds at the end of 2010 for the first time, the figures show.

Overseas investors boosted their U.K. government bond holdings by the most in more than three years in November as they sought refuge from the euro area’s sovereign debt crisis.

Net purchases climbed to 16.3 billion pounds, the biggest monthly increase in holdings since September 2008, according to Bank of England figures published Jan. 4. That compares with net buying of 12.5 billion pounds the previous month.

Domestic investments in gilts may increase further after the European Insurance and Occupational Pensions Authority confirmed its intention to apply lower insurance-like discount rates to defined-benefit pension liabilities in an October discussion paper, prompting warnings from the U.K. National Association of Pension Funds about the effect of the changes.

Accelerating Trend

“This is one of the key issues that have been raised, and the trend away from U.K. equities and corporate bonds into gilts has become apparent in recent years,” James Walsh, senior policy director at the NAPF, said in a telephone interview. “We feel that the new proposals would accelerate the trend from corporate securities into gilts.”

The NAPF estimates that the effect of applying a swap-based discount rate to U.K. defined benefit pension plans would increase liabilities by 337 billion euros ($429 billion), according to the trade body’s submission to EIOPA published on Jan. 4. Analysts at JPMorgan Asset Management have estimated that figure at 600 billion pounds.

The U.K. Financial Reporting Council has called for a study of the effect of the changes before the proposals are finalized. “The FRC is particularly concerned about the large increase in the regulatory burden that Solvency II-style regulation would impose,” the group said in an e-mailed statement on Jan. 4. “The FRC strongly urges EIOPA to carry out a thorough impact analysis before making any recommendations to the EC.”

Seeking Exemption

Pension funds have been lobbying for exemptions to the rules. “The use of a risk-free discount rate is inappropriate for long-term pension provision, not least if we wish to encourage pension schemes to invest at least partly in risk-seeking, higher-return assets,” the NAPF submission said.

Gilts returned 17 percent last year, including reinvested interest, the most among 26 government markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. The 10-year gilt currently yields 2.03 percent, after reaching a record 1.93 percent on Dec. 30. The two-year yield is 0.41 percent, up from an all-time low of 0.271 percent at the end of last year.

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