21 January 2005

Graham Bishop: Consultation response on the issuance of ultra-long gilt instruments

Graham Bishop published his response to the UK Consultation on the issuance of ultra-long gilt instruments. Mr Bishop recommends that the government initiate a programme of annuity gilts – both conventional and index-linked – by launching an ultra-long conventional annuity bond.

Executive Summary

Life companies may respond more quickly because they can quickly economise on capital requirements. But pension funds are obliged by the Pensions Act 2004 to state their funding policies and the necessary review may lead to an asset allocation shift, partly due to the wide responsibilities imposed on trustees.

Eventual social implications may be substantial as it will empower citizens to be self-reliant via a simple, flexible product. Joined-up government points to the provision of instruments that could remove some of the existing longevity risk that is on the balance sheet of the Department of Works and Pensions (DWP). National Savings could provide a simple, low-cost mechanism to allow all citizens to benefit.

The ultimate scale of demand could be massive as Defined Benefit pension funds shift some retired life assets (£100 Billion??) and deferred member assets (£200 billion??) into this type of instrument – including index-linked. Life companies may quickly divert some of the current £8 billon annuity inflows.

The yield curve is known to be distorted so is it right for the government to take advantage of this to deprive pensioners of perhaps 25% of their cumulative income?

Stimulating private innovations may be a substantial side benefit. These could include: revitalising an ineffective annuity market; creating fixed rate mortgage annuity bonds and other corporate structures may be created.

The liquidity of the conventional gilt market may decline further if the new format becomes substantial. The gilt market has already lost its global scale, so reducing the attractions to international “index” investors may not be too important.

Data harvesting may be a bonus that enables proper analysis of the financial stability of the UK system by aggregating data supplied to the Pension Protection Fund. Data reporting formats should be synchronised with life insurance – and at an EU level.

DMO mandate should be modified to permit consideration of minimising other specific government expenditures.

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© Graham Bishop