Pension funds will increase their weightings to corporate bonds if the Institute of Actuaries' Minim...
Pension funds will increase their weightings to corporate bonds if the Institute of Actuaries' Minimum Funding Requirement (MFR) recommendations are implemented, according to Old Mutual.
The Institute is recommending a composite index consisting of gilts and investment grade bonds, covering all terms to maturity, as the basis for future MFR calculations.
Bob Attridge, head of fixed interest at Old Mutual, said in such an event managers would invest in precisely these assets, right down to BBB-grade bonds, to match their liabilities. He added: "The report encourages people in the view that pension funds will gradually increase the proportion of corporate bonds and that tends to suggest the upside for gilts over and above corporate bonds is limited.
"The effect over time should be quite positive for corporate bonds. There is a strong medium term investment case in terms of buying corporate bonds as opposed to gilts.
"It encourages a move towards the further development of the corporate bond market with people being more prepared to invest more of their portfolios in that market, both IFAs and asset managers."
Gary Marshall, managing director of Aberdeen Unit Trust Managers, said: "The ability to use investment grade bonds for MFR purposes will loosen the technical constraints that have held gilts at artificially inflated prices for some time. It should benefit the whole corporate bond sector, with increased demand likely to lift prices in the short term and generate further issuance, and therefore liquidity, in the longer term."
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