UK pension schemes will be frustrated in their attempts to de-risk by an insufficient supply of index-linked gilts until 2040, says investment consultancy Towers Watson.
Index-linked gilts are a favourite choice for pension schemes pursuing low-risk investment strategies. The bonds are in high demand as large numbers of schemes reduce their allocations to equities and increase allocations to fixed income.
Towers Watson says schemes should consider alternative assets that can plug the supply gap, such as property or infrastructure assets that deliver low-risk, index-linked cash flows. Another option is to explore risk transfer deals.
“While the current pricing of index-linked gilts is slowing down the pace of de-risking, rapid innovation is starting to deal with this mismatch between supply and demand, notably alternative LDI [liability driven investment], risk transfer and do-it-yourself buy-in,” says Alasdair MacDonald, head of investment strategy at Towers Watson.
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