NAPF criticises Osborne 100-year gilt

The National Association of Pension Funds on Wednesday criticised the chancellor’s plans for an “Osborne bond” – a 100-year debt issue or even a perpetual gilt that never matures – saying it would prefer shorter maturity debt that was protected against inflation.

It is a blow to George Osborne’s bond initiative, which may provide a centrepiece of next week’s Budget, as pension funds are seen as some of the most likely buyers of the debt to match their liabilities.

Other investors attacked the plans as a “political gimmick” that could backfire because there may not be enough demand for the product, once a market consultation process is completed following the Budget on March 21.

Joanne Segars, NAPF chief executive, said: “The problem with these super-longs, is that they are too long for my members. Given that most pension funds are now closed, they are looking for bonds maturing between 30 years and 50 years. And we have been saying this for a long time, they want inflation protected bonds, not conventional bonds.”

However, some investors insisted the bonds may prove attractive. Insurance funds, for example, might deem them as a useful asset for portfolios, given the increasing life expectancy of their clients. Overseas funds may also be attracted to a century bond from the UK, which would be the first from a triple A rated sovereign.

Mr Osborne signalled his intentions on Tuesday as he hopes to take advantage of the country’s historically low interest rates.

The plan echoes similar bonds issued to finance debts after the 18th-century South Sea Bubble and the first world war.

Mr Osborne will say in next week’s Budget that he wants to “lock in” the benefits of Britain’s low borrowing costs, which he says reflect market confidence in his fiscal plans.

Broadly, investors are divided over the bonds’ attractions. Some said they liked the idea of a safe security with a fixed interest for such a long period, but others said they would be reluctant to buy such debt because of the low yields, or returns.

Mr Osborne will announce plans for the Debt Management Office to test market appetite for “super-long gilts” of 100 years or more, designed to cash in on investor confidence.

He also wants to test the case for launching “perpetuals”, bonds that pay interest indefinitely, with the principal never being repaid.

Benchmark gilts, which have to be repaid after 10 years, yield 2.27 per cent while the longest dated conventional bond, which matures in 2060, trades at about 3.22 per cent.

The most liquid perpetual bond, known as the “war bond”, was issued in 1932 to pay for the costs of the first world war and has a yield of about 3.8 per cent.

There is also a bond in existence that was issued in 1853 in exchange for old South Sea Bubble securities.

The “Osborne bond” would follow a tradition of naming perpetual or ultra-long securities after chancellors. Just after the second world war “Dalton bonds”, which were perpetuals, took the name of Hugh Dalton, the then chancellor.

Robert Stheeman, head of the Debt Management Office, said: “The chancellor is expected to consider the possibility of issuing ‘super-long’, that is longer than 50 years, and/or perpetual gilts. As always, the DMO’s normal practice would be to conduct a full consultation to establish the scale of possible demand for such instruments.”

One senior UK fund manager said: “This could be of interest for pension funds as it would be a good match for their liabilities.” But another said: “We would not be buyers of this debt because the yields are too low. It would be great for the government and the British taxpayer, but I don’t think we would want to lock in yields so low for such a long time. Yields are artificially low because of the Bank of England’s quantitative easing initiative.”

Other issuers of 100-year bonds include Mexico, the Massachusetts Institute of Technology, French power company GDF Suez and Rabobank, the Dutch bank.

The news emerged as Mr Osborne joined David Cameron on a visit to Washington, where he will hold talks on the eurozone crisis and other issues with Christine Lagarde, IMF managing director, and Tim Geithner, US Treasury secretary.