The entry of Google’s owner into the UK bond market made an undeniable splash, but the impacts on defined benefit (DB) pension schemes are more likely to be gentle ripples, writes Bradley Gerrard.
Alphabet’s first sterling debt issuance – which included a rare ‘Century bond’ – instantly made the US tech giant the fifth-largest investment grade corporate bond issuer in the UK from a standing start.
The roughly £5.5bn of sterling issuance means the company in just one day issued more than 10% of the approximately £50bn of corporate debt released annually in the UK, albeit it remains small in the context of the entire UK debt market, where about £5trn of volume was traded in 2024, according to the Financial Conduct Authority.
But while some believe the Alphabet issuance could affect how companies reporting long-term pensions obligations set their discount rates, the scale of this effect seems unlikely to be significant.
Experts believe there could be other risks that DB schemes would need to consider if they searched for exposure to the tech firm’s bonds, though, and note the debt’s presence in the market could have a potential modest effect on buyouts.
Modest impact
Consultancy group LCP notes that when companies sponsoring DB pension schemes measure their liability values for their annual reports, they use yields on high-quality corporate bonds to set their discount rates.
Tim Marklew, a partner at the firm, says that until Alphabet’s 100-year bond, schemes were “guessing at what a high-quality corporate bond of 100 years would be priced at”, but now they had an example which, under accounting standards, could enter that equation.
“I think the effect of the bond has been to increase yields, which means a decrease in liabilities, but I don’t think the impact will be huge,” he adds.
While having long-dated assets to match long-dated liabilities makes sense, Alphabet’s Century bond is, some argue, too long to be helpful in many cases.
Rob Skelton, head of investment research at First Actuarial, says: “Most DB schemes won’t have anyone to pay pensions to in 100 years as the youngest people in them now are around 50 years old, and no new members are joining.”
As such, he believes it “isn’t a very good fit” to match liabilities, unless the likes of local authority schemes are considered, where new members are joining.
Complex assessments
Barry Jones, chief investment officer at Isio, agrees that shorter-duration bonds issued by Alphabet were “more interesting”, partly because assessing aspects such as their risk and value was potentially easier.
The 100-year bond has more interest rate sensitivity due to its length, Jones explains, adding that it is “quite hard to conduct credit analysis on it” because of the clear hurdle of not being able to know what the world will look like in 2126.
“It’s also hard to work out how much excess return you would get as there is no equivalent risk-free asset to work out how much credit spread you would be receiving,” he says. The longest-dated UK gilts in issuance are 30 years.
Jones acknowledges that the coupon on Alphabet’s 100-year bond was “quite high”, meaning some DB schemes could find it “attractive from an income perspective”.
However, he expects that the more common buy-and-maintain approach adopted by DB schemes would mean few would rush in.
Ripple effects
Experts appreciate the diversification that Alphabet’s entry into the UK bond market brings, but some suggest caution if schemes access long-dated bonds through passive funds.
That’s because, as some, including LCP’s Marklew, state, Alphabet’s presence in the likes of a 15-year-plus tracker could be so significant that any downturn in its performance could “distort” figures for the wider long-dated market.
Some also hope Alphabet’s UK debt debut could encourage others. If so, there could be an impact on buyout pricing.
“Scheme trustees need to give insurers money in a buyout situation, and the amount is driven by how insurers value their liabilities,” Skelton says.
“Corporate bond yields can influence that, so the higher yields are, the cheaper that insurance might be,” he adds, albeit acknowledging the impact on yields after the Alphabet issuance had been “marginal”.
