Pension fund investment in bonds is falling fast, transforming what was once a portfolio mainstay into a minority asset, according to a report from Bloomberg Intelligence (BI).

A little over 20 years ago, almost two thirds (65 per cent) of all gilts were owned by pension schemes and insurers; today, that has fallen to below a quarter (24 per cent), BI said.

The firm predicted that, if UK pensions continue to sell off gilts at the annual rate seen in recent years, they may step out of the bond market completely.

Defined benefits (DB) schemes have traditionally held high proportions of UK government securities or gilts. But DB schemes are largely becoming “a thing of the past”, said BI, with existing DB funds focusing on moving towards members’ retirements, and no new schemes being set up. As such, these schemes are selling off, rather than buying up, gilts.

BI senior insurance analyst, Kevin Ryan, said: “UK pension funds have typically invested in instruments such as gilts and cash to match maturing liabilities as scheme members moved into drawing their pensions.

"As companies have almost universally shifted to defined contribution (DC) schemes – and DB schemes have largely closed to both new members and new contributions – pension plans have significantly less natural demand for gilts.”

He added: “If UK pension funds continue to sell gilts at the recent annual rate, they could be out of the bonds in seven years.”

The fall in demand for UK gilts among pension schemes could pose a challenge for the UK government as it seeks investment, with a possible solution to be found in higher coupon payments, Ryan stated: “The UK Office of Budget Responsibility forecasts that in fiscal 2023-24 the government will need to borrow £123.9 billion, followed by £84.6 billion the year after and £76.8 billion in 2025-26.”

He concluded: “Insurers running DB pension schemes are unlikely to be buyers, given that most of these schemes are closed and running off, paying the members' pensions. Attracting new investors to the UK may present challenges that only high coupons are likely to solve.”

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