UK ultra-long gilts sag after government pension reform

By David Milliken

LONDON (Reuters) - Prices of ultra-long British government bonds fell slightly on Monday after the government said more workers than originally planned would be able to cash in pension savings early, potentially reducing demand for long-dated debt.

Britain's finance ministry said members of some 'defined-benefit' pension schemes - who receive a percentage of salary on retirement - would be able to withdraw money from the age of 55, subject to getting independent financial advice.

This is in addition to plans first announced in March to allow employees spend savings as they wish, rather than buy an annuity which gives a fixed income for life, if they build up a pension pot in a defined contribution scheme.

Thirty-year gilt yields rose more than 2 basis points to peak at 3.339 percent shortly after markets opened, but pared losses as investors digested the news and were flat on the day at 1530 GMT (4.30 p.m. BST).

"The pensions consultation is a very, very small negative in the short term for gilts. In the medium to longer term, I don't think this will damage demand for fixed income in a material way," said Sam Hill, an economist and gilts specialist at RBC.

A strong performance for long-dated U.S. Treasuries and ongoing geopolitical worries about the situation in Ukraine and Gaza supported gilts later in the session.

Ten-year gilt yields edged lower to just under 2.57 percent, and their spread over Bunds finished the day little changed at 142 basis points, despite underperforming earlier in the session.

Hill said the restrictions on members of defined-benefit schemes cashing in their pensions were tighter than they appeared at first glance. The finance ministry consultation said only around 10 percent of people in defined benefit schemes were likely to want to take cash out early, he added.

Defined-benefit pension schemes usually invest heavily in long-dated gilts to provide a steady return to retirees, and a fall in their popularity could remove an important source of demand for the debt, which attracts few overseas investors.

"The fact that some restrictions have been put in place means the scale of any negative (gilt market) reaction is limited," Hill said. "Overall the level of interest from defined-benefit schemes should hold up."

This view was shared by Britain's finance ministry, though it added that some pension funds might need to invest in more liquid assets to allow scope for withdrawals.

There was no major British data on Monday. Tuesday brings June public finances numbers, which analysts will be looking at closely to see if they continue the weak trend of the first two months of the tax year.

Hill said that if June borrowing reached his 10.5 billion pound forecast then the government would have borrowed over a third of its full-year limit within just three months - the worst start to a tax year in five years.

"It would start to raise questions about how effectively the public finances are benefiting form the economic upturn," he added.

(Editing by Angus MacSwan)