Citywire printed articles sponsored by:
View the article online at http://citywire.co.uk/money/article/a877737
How pensions can help solve the housing crisis
Investing in new housing developments could provide income for retirees and new homes for young people.
by Michelle McGagh on Feb 05, 2016 at 15:13
Older people are struggling to find secure income investments and younger people are battling to buy their first homes but there may be one solution that could help both parties.
Investing in infrastructure, particularly new build housing developments, may be the boost that both ends of the age spectrum are looking for.
Legal & General Capital, which invests in infrastructure projects, has teamed up with Dutch pension fund manager PGGM to launch a ‘build to rent’ housing scheme in the UK.
Through the scheme, an initial £600 million of pension money will be invested to provide 3,000 homes. It believes this type of infrastructure investment can kill two birds with one stone as the income generated by buy-to-rent properties can be used by defined benefit (DB) pension funds and annuity providers who need steady streams of money to pay out to members.
And on the other hand, increasing the number of homes in the UK helps to ease the pressure on a market that is struggling with high housing demand and low supply, pushing up prices that make it more difficult to purchase a home.
Richard King of L&G said DB pension schemes, which pay out an income to former workers based on a multiple of years worked and a percentage of final salary, have struggled to find secure income streams. The same is true of annuity providers, which also pay out income to pensioners who buy the insurance contracts with their pension pots.
‘If you are a DB pension scheme or annuity [provider] your liabilities run out into the future…you want an income stream that is linked to inflation, [as measured by the] retail price index (RPI).’
He said normally these schemes and annuity providers would use fixed income investments and government bonds, known as gilts, to produce the income but the returns were low at the moment and often the duration of the investments were not long enough.
The duration is typically around 10 or 15 years, whereas workplace pension schemes and annuities could be paying out for far longer due to rising life expectancy, meaning those future liabilities aren’t covered.
‘The houses are managed on behalf of the annuity or pension fund that wants access to the income stream. The rents [from the build-to-rent scheme] are paid over a 15, 20, or 25-year period,’ said King. ‘That is longer than government gilts and bonds and you also have an asset that could be capital appreciative.’
Mike Weston, chief executive of the Pensions Infrastructure Platform, which aims to encourage pension funds to invest in infrastructure projects, said these investments could help pension schemes balance their liabilities and risks.
‘As DB pension schemes mature, their tolerance for funding risk falls, leading to a demand for assets that move more in line with their liabilities and potentially generate more stable cashflow,’ he said.
‘DB schemes have historically invested in index-linked gilts in order to better hedge their liabilities. However, yields on index-linked gilts have been on a declining trend for the past 20 years, making it more expensive for schemes to purchase them as part of a de-risking strategy.’
He added that infrastructure investments provided ‘low risk, long-term, inflation-linked returns’.
While infrastructure investment has been popular with DB schemes, the introduction of pension freedom could encourage those retiring with defined contribution (DC) pensions – which provide the retiree with a pot of money rather than an income – to look at the investments.
‘Historically, investing in infrastructure has been popular with DB pension schemes, but in the new world of pension freedoms DC pension savers will also be looking for their DC pot to provide them with an inflation-linked income in retirement,’ said Weston.
‘You can see how infrastructure might play a part in providing this inflation-linked income as part of the investment strategy for the DC journey – especially as savers approach retirement and when they are ready to access their pension pot.’
More about this:
More from us
- Could buy-to-let clampdown boost property funds?
- Rate expectations tipped to slow house price rises next year
- Chinese market woes could push up London property prices
Weekly email from The Lolly
Get simple, easy ways to make more from your money. Just enter your email address below
An error occured while subscribing your email. Please try again later.
Thank you for registering for your weekly newsletter from The Lolly.
Keep an eye out for us in your inbox, and please add firstname.lastname@example.org to your safe senders list so we don't get junked.
Latest from Investment Basics
by Gavin Lumsden on Oct 23, 2016 at 00:01