UK – Goldman Sachs says UK pension schemes will still need long-dated fixed income – despite the equity market rally and lower liabilities.

“Pension schemes have benefited from the recent equity rally and sell-off in the fixed income markets (causing asset portfolios to rise and pension liabilities to decline respectively),” Goldman noted in an economic research note.

“Nevertheless we view relatively smaller deficits as an opportunity for corporates to close their pension fund exposures.” The lower deficits will mean hedging pension risk will be cheaper, it argued.

“We therefore continued to believe that there will be an ongoing bid for long-dated assets from the pension fund constituency,” said analyst Dambisa Moyo.

The note - “The UK’s Duration Gap – How Big is it Now?” – estimated the gap between assets and liabilities is now around $800m (€623.9m) – down from Goldman’s previous estimate of $2bn.

It said it continues to expect “significant interest rate hedging via the UK's long end fixed income market, and anticipate sizeable asset reallocation shifts from riskier assets (such as equities) into bonds and alternatives”.

“Publicly announced asset reallocations by some UK companies in the past few weeks support this view.”

It estimated $69bn of equity selling, $62bn of fixed income buying and $2bn and $4.6bn of purchases of property and other assets respectively.

Goldman put the potential fixed income demand at nearly four times greater than expected long-end gilt supply.

“What is more, it would take the deployment of nearly the whole announced UK government gilt issuance programme of $118bn (£63bn) to wipe out the full duration demand of the ‘at-risk’ companies alone,” it said.

And the emergence of new firms, like Paternoster and Synesis Life, to manage pension liabilities “only underscore fixed income demand, as these bulk buyers need to hedge the pension exposures they take on from companies”.