In the Face of De-Risking Pressure, UK Pensions Want More Long-Dated, Inflation-Protected Gilts

As increasing life expectancy and regulations pressure pension funds to de-risk their investments, UK schemes are calling for more long-dated gilts.

(March 8, 2011) — The National Association of Pension Funds (NAPF) has called for more long-dated and inflation-protected gilts to help them hedge against increasing life expectancy.

Representing $1.3 trillion in investments, the NAPF submitted the request for more long-dated gilts to the UK Treasury ahead of the 2011  Budget, which is set to be released later this month, the Financial Times reported. The request from the association comes as UK pensions are under increasing pressure to de-risk their investments and buy safe assets that match their liabilities in the aftermath of the economic downturn.

Data compiled by the firm shows that over the past 10 years, pension scheme allocations to fixed-income and index-linked securities have risen from 16% of scheme assets to more than 30%, the FT reported. Furthermore, the group’s research shows that UK pension funds own more than $162 billion of gilt holdings and account for a major proportion of the insurance sector’s gilt holdings of more than $275 billion.

NAPF Chief Executive Joanne Segars said in a statement in response to a speech today by Iain Duncan Smith, the UK’s secretary of state for work and pensions, which set out the case for radical state pension reform: “We are at a turning point for pensions in the UK. Radical state pension reform to create a single, simple and more generous state pension could take millions of pensioners out of poverty, and provide a firm foundation for saving for old age. For the first time in a generation, people would know that it pays to save.”

The trepidation among pensions worldwide of the increasing life expectancy of its members is reflected in a study last year by MetLife which showed that sponsors and trustees are struggling to develop strategies for managing longevity risk, which they ranked as a second-most important risk factor.

“While it’s apparent that scheme sponsors and trustees show a good understanding of the impact that longevity risk poses to their schemes and their organisations as a whole, they seem unable to manage this important risk on their own,” said MetLife Assurance chief executive Dan DeKeizer in the company’s UK Pension Risk Behaviour report.

DeKeizer said that part of the reason scheme sponsors and trustees have faced obstacles managing longevity risk on their own has been due to a lack of understanding regarding available options.

MetLife’s UK pension risk behavior index analyzed how 89 trustees and sponsored viewed 18 investment, liability and business risks that impacted their pensions. The research studied how well those schemes felt they were handling their risks. A majority of respondents acknowledged that “despite an estimated £1 trillion of assets being exposed,” they had failed to manage longevity risk successfully.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742