PPF demands BoE issue CPI-linked gilts

In its response to the Bank of England’s ongoing consultation on whether to create a market in bonds tied to the inflation measurement – which is now the legally recognised minimum for uprating pension benefits – the PPF has warned not doing so will harm its bid to reach full funding by 2030.

Because the PPF now increases benefits based on CPI, its RPI-tied index-linked gilts portfolio is less suitable for liability matching.

PPF financial risk director Martin Clarke told PW this inefficiency will cost the fund on average £100m a year, unless a sufficient number of CPI-linked government bonds are issued in the next five years to be traded with the same liquidity as gilts.

The fund’s latest Long-term funding strategy update claims the impact of the worst-case scenario of this market failing to develop – the most dramatic increase in liabilities for which it models – comes at a cost of £14bn.

“We would be able to continue to hedge our liabilities pretty closely and the insurance companies would be better able to price our compensation,” said Clarke.

“This would have an impact on the levy, which is not to say it would definitely come down by the full £100m a year, but we would have that choice and it might bring about a levy reduction sooner rather than later.”

Clarke added the PPF has taken a significant corporate debt position in its global bond portfolio this year.

The £3.5bn portion of the fund was previously all international government bonds, but £500m of this has been sold to buy corporate paper since April.

Meanwhile the PPF annual report last week showed the fund was in £678m surplus at the end of March, an increase of £248m from 2010.