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Countries such as Denmark have introduced changes to reduce pension funds’ need to buy debt to match their obligations. Sweden recently changed the way liabilities are calculated. But elsewhere pension funds are piling on government debt.
Stewart Cowley, head of fixed income and macro at Old Mutual Asset Managers, says this is a mistake because the asset class will not match future liabilities: “And yet at the same time, government bonds are being pushed out and force pension funds to buy the wrong thing."
A “tsunami of government bonds” is expected to be issued globally in the next few years. In the US alone, $5 trillion of new bond issuance could take place by 2017, Schroders, the FTSE 100 fund manager, forecasts.
Government bonds currently have two major risks attached, says Mouhammed Choukeir, chief investment officer at Kleinwort Benson: “The first is that a flood of money into the market is leading to inflation and therefore a rise in interest rates to compensate. The second is the credibility of sovereigns to pay. With huge debt burdens and budget deficits as far as the eye can see, it is difficult to see how [governments] are going to plug that hole.”
Others, however, are less convinced that government debt is inappropriate for pension funds. Charles Cowling, managing director of JLT Pension Capital Strategies, says: “You have to start from the presumption that if you are a pension scheme delivering a guaranteed promise, then the most sensible investment is the one closest to matching the liability that you’ve got. This is sovereign bonds.”