DMO should issue pension and annuity gilts

by Dr. Ros Altmann

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Sir

Gerald Holtham’s suggestion that the government should beware of financing tax cuts by issuing short-term bonds is correct. There is a much better opportunity here. Pension funds and insurance companies have been desperate for safe assets that will help them match their liabilities. This is a potential natural source of domestic buying to finance extra government borrowing. Issuing a range of ‘pension gilts’ – some with long durations, some linked to limited price inflation rather than retail prices (pension funds need a floor of zero to offset the risk of deflation), some linked to changes in longevity or mortality – would provide a win-win for everyone. Pension scheme funding would improve, thus helping to protect pensions better, insurance companies’ annuity books could be better backed by safer assets rather than riskier corporate bonds, thus helping annuity pricing and strengthening insurers, and there would be far less need to rely on foreign investors, since there is currently more than enough domestic demand for such gilts.

Government finances are in trouble, pensions are in trouble, ‘pension gilts’ could help alleviate both problems.

Yours faithfully,

Dr. Ros Altmann
London School of Economics
c/o 9 Fairholme Close
London N3 3EE