Govt urged to 'boost' DB pension schemes with index-linked gilts

The government could “boost" pension funds by switching its borrowing policy to include the issuance of more index-linked gilts, according to LCP.

A blog post from the firm, which argued that the Chancellor was “missing a trick”, noted that current rates had 20-year index-linked gilt yields at minus 2.1 per cent plus inflation, while 20-year fixed interest gilt yields stood at 1.4 per cent per annum.

It explained that even if the inflation rate turned out to be 2.5 per cent, the taxpayer would be paying 1 per cent less per year than on a fixed rate gilt, which LCP said would make “a real difference” when considering that the chancellor had stated the pandemic had added £450bn to public borrowing, taking the national debt past £2trn.

Defined benefit (DB) schemes could stand in a particularly good place to benefit from this change as their commitments are also linked to inflation, with LCP highlighting the schemes as a key area of demand for any potential increase in the issue of index-linked bonds.

The post stated that the government’s current strategy was heavily inclined towards fixed gilts, with these accounting for 90 per cent of next year’s £330bn gilts.

LCP partner, Jonathan Camfield, said: “Britain’s pension schemes would be keen buyers of index-linked gilts and these could save the taxpayer money as well. With the government needing to borrow huge sums in the coming years it seems short-sighted not to issue more debt on an index-linked basis where the interest savings could be substantial.

“Issuing more index-linked gilts would be a win-win for the taxpayer, for pension funds and the members they serve.”

He added that if Westminster was concerned about future inflation sending the costs of the gilts skyrocketing then a cap could be placed on the impact which inflation could have on them.

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