The hunt for yield - fixed income panel

• How desirable are longer dated fixed income assets than those currently on the market for pension schemes?

Stephen Jones: We were intrigued by the government's announcement that it is considering issuing bonds with a 100-year repayment date. This would be the first AAA sovereign debt issue of its kind and certainly revises the definition of ‘long term'.

Some might expect schemes underweight interest rate exposure to be keen to buy these ultra-long gilts when they decide to reduce their risks. But we suspect there will be limited demand from most pension schemes. Some will see the gilts as a simple way of increasing their duration but the reality is that the 100-year gilt will not have much more duration than the existing long maturity index-linked gilts.

Pension schemes would probably prefer the government to increase the supply of longer dated index-linked gilts in the 30-50 year range, and perhaps a bit longer while they still have some longer-term liabilities.

Jon Taylor: As announced in the Budget, the prospect of the government issuing 100-year bonds is interesting but not compelling. Recognising that it is important for the government to nurture and maintain a robust government curve for the efficient pricing of risk in financial markets, the usefulness of a 100-year bond is probably quite limited.

While longevity has increased measurably over recent decades and pension schemes need longer-dated assets to manage longer-dated liabilities it is unlikely that there will be strong demand for a 100-year bond. It would be rare for a pension scheme to require a 100-year asset.

It is also questionable whether investors will trust the government and the Bank of England to keep inflation in check for 100 years and not debase the value of the securities. 

The Bank of England has garnered immense credibility in recent years, but there are clearly elements of risk outside of the control of the Bank that make extremely long-dated assets risky. It is unlikely that investors would be adequately compensated for the extra risk and volatility of a 100-year bond. These bonds would likely be held by a very limited number of investors who had a compelling need to hedge very long term risk. This would limit liquidity quite severely.

• To what extent has this year's Budget had an impact on pension scheme's fixed income assets? Would additional government action help or hinder UK schemes?

Stephen Jones: There wasn't a great deal in the budget that will affect pension schemes' fixed income assets, and certainly nothing that compares to the current challenges schemes face - including the current economic environment, the Bank of England's gilt purchases and the impact of Basle III on banks' debt issuance.

What will help UK schemes deal with low funding positions and unaffordable contributions are rising bond yields and rising equity markets.

This will only come as the global economy improves, which will take time. However, the debates around restoring the dividend tax credit and lifting the mandatory retirement age warrant serious consideration.

Jon Taylor: On balance, the Budget had a limited impact on financial markets except to reinforce the government's commitment to a credible austerity plan designed to get fiscal balances and debt levels back on a sustainable trajectory.

Credible fiscal discipline is the most important contribution the government can make toward ensuring the long-term viability of the bond market and pension schemes.

Pension schemes are, in effect, forced holders of gilts and, as such, are heavily dependent upon the government to maintain the investment quality of government debt.

Maintaining the AAA status of gilts is critically important for pension schemes so that participants have a high degree of confidence in the long-term viability of their pensions.

The government must strike a delicate balance between the need to restore fiscal discipline and the need to ensure that fiscal drag does not derail the delicate economic recovery.