GLOBAL – The Organisation for Economic Cooperation and Development has flagged up the potential scarcity of high-quality long-term government bonds for pension funds.

It cited the fact the lower interest rates have led to large increases in the present value of pension liabilities.

“As a result of this experience, as well as recent regulatory and accounting changes, there may be a secular shift in strategic asset allocations towards a greater share if high-quality, long-term bonds,” the OECD says in the new issue of its ‘Pension Markets in Focus’ newsletter.

Researchers Sebastian Schich and M Weth have compared pension fund assets with the outstanding amount of government bonds in G-10 countries.

Schich said in the article: “The calculations show that, given the existing structure of government bonds, attempts by pension funds to immunise their liabilities against interest rate risk using such a strategy would result in a significant excess demand for long-term government with maturities of 10 years or longer.

“This measure of ‘scarcity’ varies across maturity segments, as shown in the figure, as well as across currency segments.”

He suggests that G-10 pension funds would find it relatively more difficult to match (in terms of cash-flow matching) their payment promises for the period after 2015, given the current supply of G-10 government bonds, compared to the next few years.

Earlier this week the Bank of England suggested pension funds in the UK were buying index-linked government bonds almost regardless of price.

The full study will appear in the next OECD Financial Market Trends next year.

Topics