Pension funds\u2019 almost price-insensitive demand for long-dated bonds over many years moulded the term structure of the market and the shape of the yield curve. But on Monday, the UK Office for Budget Responsibility \u2014 in its annual assessment<\/a> of fiscal risks and sustainability \u2014 called time on the relationship.<\/p>\n From a gilt-holder\u2019s perspective, this is their wow chart:<\/p>\n <\/p>\n As Sam Fleming and Mary McDougall reported in MainFT<\/a>:<\/p>\n The watchdog projected that UK pension fund ownership of gilts will fall from almost 30 per cent of GDP in 2025 to 11 per cent by 2074.<\/p>\n<\/blockquote>\n As the chart makes clear, the big change is among private sector defined benefit pension schemes that are closed to either new entrants or further accruals. <\/p>\n These funds collectively own around \u00a3560bn of gilts, according to the OBR\u2019s estimates. As scheme members retire or die over the next twenty odd years, so will they liquidate their holdings \u2014 and the OBR projects that the bulk will be sold liquidated over the next decade.<\/p>\n For comparison, the Bank of England\u2019s QE stock of gilts<\/a> stood at around \u00a3590bn at the beginning of July, and QT has been running at \u00a3100bn per annum<\/a> (though the pace is expected to slow<\/a> from September).<\/p>\n And neither bulk annuity insurers nor defined contribution pension funds will be taking up the slack. <\/p>\n DC pension allocations to gilts today are a modest 7 per cent of assets, and while the size of the DC funds are projected to grow, the OBR does not project an increased allocation \u2014 or at least not one sufficiently large to offset the DB fund sales. Even in an alternate scenario where fund assets allocated to gilts ramp up by 25 percentage points, they see overall pension demand falling.<\/p>\n Helpfully the OBR \u2014 drawing on analysis by the PPI<\/a> \u2014 breaks down current gilt holdings across the \u00a33.2tn funded UK pension system. Hover your mouse over our Marimekko chart to see how many gilts are owned by each pension fund type:<\/p>\n <\/p>\n Closed defined benefit schemes are the two categories on the left \u2014 collectively accounting for more than \u00a31tn of assets, and each allocating more than half of their assets to gilts. These funds are in run-off mode and will have expired over the OBR\u2019s long-term forecast horizon, having sold all their assets.<\/p>\n<\/a><\/p>\n
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