The demand for safe-haven assets such as UK gilts has reached such proportions that it is creating problems for pension funds' investment strategies, according to the consultants that advise them.
Because most pensions are linked to inflation, those responsible for retirement funds like to cover themselves against rises in the years ahead. They do a lot of that by buying inflation-linked bonds from the government, which promise to pay out a yield tied to the rate of inflation. But demand for safe-haven assets of all kinds has soared, especially recently, as stock markets have fallen apart. Rightly or wrongly, investors seem to have decided that UK government bonds are in the safe category. As part of that picture, Monday saw the overall real yield - that is, the face-value yield of a bond, minus inflation - on the FTSE All-Stock inflation-linked index, dip below zero, if only briefly.
Gavin Orpin, head of trustee investment consulting at Lane Clark & Peacock, said: "I have been a pretty strong advocate of hedging real rates even at low yields, but the latest move downward has given even me second thoughts. Now we have begun to advise clients to suspend immediate hedging programmes for the time being, to wait and see if yields improve and also revisiting any hedging trigger levels that are currently in place".
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