A new chance to raise gilt issuance

The main driver of compensation must cease to be comparison with competitors

Sir

As the current chancellor moves on, he leaves a strong economic legacy for his successor - with the notable exception of private pensions. We would urge the new chancellor to establish credentials in this area quickly by increasing the issuance of both conventional and innovative types of long-term government bonds, easing the funding burden on employers and trustees and improving values in the annuity market.

The Debt Management Office's recent welcome but gentle modification to its "steady as she goes" issuance policy has been insufficient to meet excess institutional demand for long-term gilts, particularly index-linked. Significant benefits would accrue from increased issuance of such debt. The government's cost of financing would decline; trustees and annuity providers would be better able to hedge their liability-related risks; calculated deficits would reduce; and companies with healthy pension funds could increase spending on investment and performance improvement, rather than battling with trustees over providing cash for pension schemes.

We call further for issuances of mortality bonds or longevity bonds to allow the key risk in pension funds to be traded, and to establish benchmarks underpinning private issuance of similar instruments. Since the early 1980s, the government has issued significant amounts of long-dated index-linked paper, permitting the creation of benchmarks for hedging long-term inflation risk, even though this increased its own exposure to inflation. It has consulted on issuance of Islamic (Sukuk) bonds. If it can innovate in such ways, it can surely recognise the readily-achievable long-term benefits to business and pensioners of significantly increasing long-dated conventional and index-linked gilts issuance, and introducing longevity and mortality bonds.

We commend these steps urgently to the new chancellor's attention.

Ros Altmann
London School of Economics

Willem Buiter
London School of Economics

Jon Moynihan
Chairman, PA Consulting Group