Boost for Hunt as UK's largest pension scheme will return to buying gilts

The investment will come as a relief to Chancellor Jeremy Hunt who needs to close the £131bn gap between tax revenue and government spending. Zara Farrar/HM Treasury

Britain's largest pension scheme will start investing in securities for the first time in years, easing pressure on Jeremy Hunt as soaring earnings spur some of the biggest funds to buy UK debt.

The National Employment Savings Fund (Nest), which looks after the retirement savings of a third of the UK workforce, is planning an initial investment of hundreds of millions of pounds after years of avoiding UK debt.

Nest's decision has been made after the Bank of England was forced to raise interest rates sharply to try to contain inflation, which in the UK has proved more stubborn than in other major countries.

This resulted in borrowing costs in the UK higher than elsewhere as investors bet Threadneedle Street would have to raise rates higher than other central banks to tame inflation.

However, an increase in investment from pension funds will bring relief to the Chancellor. which needs to borrow about £131bn this fiscal year to close the gap between tax revenue and government spending.

0308 Bank discount rate reaches 5.25

The Bank's decision to start selling some of its government bonds back to investors has also turned one of the largest buyers of securities over the past decade into a seller.

Short-term borrowing costs have topped their October low. — fiscal highs in June amid fears that policymakers have failed to prevent a wage and price spiral.

The move triggered a spike in bond yields as investors, who earn fixed income on most government debt, demanded rate hikes to lend UK.

However, there are also signs that UK inflation is starting to come down, giving investors more confidence and higher returns. This has prompted some investors to bet big on guinea pigs. Increased demand is putting downward pressure on borrowing costs as bond yields move in the opposite direction to prices, which could ease the burden of the UK's huge debt pile.

The growth of yields on securities should stimulate depositors by providing pension funds. who are buying them at steady profits after years of cheap government debt.

UK inflation

Nest, the UK's largest member pension plan, will start buying guinea pigs regularly as part of a change in its investment strategy. The scheme has 12 million members and £30 billion in savings.

Edoardo Cetraro, investment manager at Nest, said: “Nest does not currently invest in gilts. In recent years, returns have been very low and we have not seen rewards for our members compared to other asset classes. Given the recent increase in interest rates, we now believe securities can play a strategic role in our portfolio and will be instructing our fund managers to consider potential deals.» they have been joined by other pension fund giants who also plan to increase their investment in gilts.

People's Pensions, which manages £20bn pension baskets for six million members, said it was considering additional purchases of gilts.

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David Sack, head of investment strategy at the People's Partnership, which administers the National Pension, said: “Bonds have been completely revalued over the past 12-18 months as central banks have tightened monetary policy.

2907 UK borrowing costs

“The returns are significantly higher and offer more value than before. Sterling debt was part of that move, and now securities are worth more than US Treasuries across the curve, which was not the case 12 to 18 months ago, so they look more attractive in relative terms.”

At the beginning of the year, the yield on 2-year securities was 3.49% compared to 4.43% for the US Treasury equivalent.

Today, the yield is 4.85% and 4.8%, respectively. Benchmark 10-year yields rose from 3.36% at the start of the year to 4.381%, while the 10-year Treasury yield is now 4.08% from 3.875% in January.

On Thursday, the Bank of England again raised interest rates by 0.25%, bringing the base rate to 5.25% and a 15-year high. Andrew Bailey said that interest rates are now expected to remain high for a longer time and inflation, which stood at 7.9% in June, is still well above the Bank's target of 2%.