Neil Collins

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Gilts buyers forced to pay protection money

June 25, 2009

It’s expensive, this risk-free investment business. You can lend to the UK government for 28 years and be guaranteed a real return, after inflation, of  a magnificent 0.816 per cent on your money.

Put another way, if there was no inflation over the period, 100 pounds would have turned into about 125 pounds by 2037, to add to the 81.6 pence a year (before tax) you’d have had in annual interest.

Yet on Thursday the DMO managed to sell 500 million pounds-worth of an index-linked gilt on these terms. Furthermore, it could have sold three times as much, such was the enthusiasm of the buyers for the paper.

Why on earth were they so keen on something so palpably unattractive? The answer is the increasingly unreal rules covering company pensions. Driven by an unholy alliance of actuaries and accountants, companies have been forced to find assets to match future pension liabilities.

Index-linked gilts are about the only way of doing so that keeps the actuaries happy. It’s not their problem if the demand they are driving pushes the prices to such ridiculous heights.

For its part, the government (as usual) is making things more difficult. It has told the DMO to find 220 billion pounds in new money this financial year, but to issue just 30 billion in index-linkers.

Do you think this artificial scarcity is (a) to bankrupt company pension schemes or (b) to ensure it can inflate its way out of trouble when the need arises?


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  • About Neil

    "City Editor, The Daily Telegraph 1986-2005 City Editor, The Sunday Times, 1984-1986 City Editor, Evening Standard, 1979-1984 Director Templeton Emerging Markets Investment Trust plc, Finsbury Growth and Income Trust plc Passion: fly fishing (and wife Julia and seven-year-old twins)"
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