UK – The corporate limited price indexation (LPI) bond market in the UK has the potential to grow to around £100bn (e161bn) as pension funds seek investments to match their inflation-linked liabilities, according to consultant Watson Wyatt....

The consultant is calling for a debate on the issuance of LPI’s, currently an almost non-existent market, which it thinks would benefit both pension funds and bond issuers.

“Pension funds need investments, which match their inflation-linked liabilities,” says Andrew Wise, a partner at Watson Wyatt.
“With the UK government issuing fewer inflation-linked gilts there is a pent up demand, which currently is not being met. LPI bonds would be an excellent alternative for matching inflation linked liabilities for pension funds – the demand is certainly there.”

Companies traditionally issue 50% fixed and 50% floating rate bonds, which they consider to be the norm, says Watson Wyatt.
However, it argues that LPI bonds offer an attractive and cost-effective alternative.
Wise comments: “Current market conditions imply that the most likely scenario for inflation is that it stays close to the 2% target. Here, the LPI bond will pay out a little more when inflation is picking up, but many companies might find that their revenues were somewhat more buoyant in such economic conditions too – it might be a fair swap for a lower interest bill as the economy slows down.”

If the current balance of fixed and floating rate bonds would change to one-third each of fixed, LPI and floating bonds, says the consultant, the LPI market could reach more than £100bn.

However, the consultant points out that there are some difficulties in issuing LPI bonds to the market.
“There are real concerns about corporate LPI bonds, not least difficulties in pricing these bonds and their likely low liquidity. But a serious debate on this innovative form of corporate borrowing is well overdue,” says Wise.

Topics