Pension Funds Shift Out of U.K. Index-Linked Gilts on Valuation

U.K. pension funds are seeking alternatives to index-linked gilts for inflation-protected cash flows as the securities have become expensive, according to consultancy JLT Employee Benefits.

The funds are diversifying into assets such as infrastructure and property projects to meet long-term obligations to retirees, Julian Brown, director of investment consulting at JLT in London, said in an interview.

“Index-linked gilts are very expensive and they are giving you negative real yields,” Brown said at a conference run by the National Association of Pension Funds, whose members have combined assets of nearly 900 billion pounds ($1.41 trillion). “Corporate index-linked bonds are available but they are also expensive if you take into account credit risks,” he said.

Ten-year index-linked gilts have yielded less than zero since September 2011. The rate was at minus 0.24 percent today after declining to a record minus 1.64 percent on April 5. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

“Infrastructure investments provide an inflation-protected alternative that investors are looking for,” Brown said. “They might not be as liquid as bonds but if you are a long-term investor liquidity might not matter that much.”

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