One has to feel a little sympathy towards the actuarial profession. Charged with the job of reviewin...
One has to feel a little sympathy towards the actuarial profession. Charged with the job of reviewing the controversial Minimum Funding Requirement (MFR) for pension schemes, a team of actuaries beavered away for over a year attempting to find a workable solution.
Their weighty review was finished in May and then passed to the Government. The gilt market anxiously awaited its contents and anticipated its speedy publication. The DSS, however, proceeded to sit on the report for the best part of four months.
Then, with a degree of diffidence, they issued a consultative document, which was to provide input into Paul Myner's broader review of the investment world. Thus the work of the actuaries became de-emphasised.
Adoption of their recommendations then seemed no more likely than the adoption of some other scheme, still to be thought through or even to be thought up. It even began to appear possible that the survival of the MFR itself was in question.
Still, perhaps this is no bad thing but what does this all mean for the gilt market? At 4.6%, long gilt yields remain some 0.6% below the average of G7 government bond yields, and 0.8% below it after deducting the current level of inflation.
The fact that UK pension funds have effectively been forced buyers of gilts has not been the only contributor to the expensiveness of long gilts.
Insurance companies have needed also to buy gilts to cover liabilities arising from guaranteed annuity contracts.
Perhaps the Bank of England's deft handling of the economy has kept inflation expectations low, and thereby helped to some extent justify the low yield level.
On top of all this has come the diminishing supply of new Government stock. Benefiting from bumper tax receipts over the past few years, the Government has had a much reduced need to issue stock.
Just as the Government's borrowing needs have fallen, those of the telecom companies have risen significantly.
Across Europe as a whole telecom companies are estimated to be likely to spend around £95bn to obtain licences. As the debt of these companies has risen, so their credit ratings have fallen. In a highly simplistic way, the investor has a reduced stock of high quality (Government) debt in which to invest, while gaining a large amount of single A rated (or lower) telecom debt.
The investment world as a whole is being forced fed on a new bond diet, one that has a higher risk content.
A sign that some adjustment is indeed occurring, however, is in fact contained in the actuarial review of the MFR.
One of their proposals would promote greater diversification, by pension funds, into corporate bonds.
The higher yields available should, over the longer term produce higher returns and ultimately the breadth and liquidity of this market would increase.
John Hamilton is head of fixed interest at Jupiter
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