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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

How pensions can help solve the housing crisis

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.’

Stable cashflow

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.’

10 comments so far. Why not have your say?

paul birtwistle

Feb 05, 2016 at 17:58

Permitting income drawdown holders to make (2nd) mortgage loans out of their SIPPs to family members would be popular.

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Feb 05, 2016 at 18:04

We are not your pensions. Why do you expect the young to be your servants, whilst not having access to the same standard of living you had? Ridiculous.

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Stephen Tiley / PensionsManager

Feb 05, 2016 at 19:26

Whilst it is true that there was a 'sweet spot' for baby boomers that retired on decent final salary pensions and enjoyed huge property gains. But they also generally paid much higher interest rates for their mortgages (although arguably this kept property prices subdued due to affordability). There are also many that fell by the wayside. The young may inherit one day and a loan from the SIPP does not make you a servant. It all goes round in circles anyway - money invested by pensioners is lent to businesses and mortgage payers - a loan to a family member just cuts out the middlemen.

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paul birtwistle

Feb 05, 2016 at 19:36

And it could be super simple, fee free. The Naysayers will of course point out that it would be a case of the better off helping their privileged children.

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Margaret deans

Feb 06, 2016 at 09:01

Seems like a no brainer, we must get houses built and this way looks workable . Nonsense to compare with previous generations, the world has changed and will keep on changing .there is nothing us oldies can do to change it, except help our own children

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Feb 06, 2016 at 10:52

The housıng crisis might also be eased if the government abolished the frozen state retirement pension policy. Recent surveys have shown that many retireees and potential retirees are reluctant to free up housing and join previously emigrated family or return to the country of their bırth or roots because of the financial implications of this policy.

A person who retired in 2000 on a full pension of £67.00 per week and lives in a frozen territory will still only get that amount from April and not the index linked £119.30. No increases ever for just 4% of all UK pensioners world wide and of increasing significance for BAME.

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C Cloy

Feb 06, 2016 at 11:02

House prices will start to fall from 2017 until 2020 as landlords offload a million properties in the next five years. Also over 500,000 will be built for help to buy so the huge pent up demand from hundreds of thousands of first time buyers will hopefuly be met. After 2020 will lower immigration & falling student numbers house prices will stabilise and returns will be low for a good number of years. Therefore not really suitable for DB investment stick to index linked gilts!

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paul birtwistle

Feb 06, 2016 at 11:14

But your SIPP fund would be "investing" in a mortgage loan, not the underlying property. The interest income would be tax free inside the SIPP and if priced at, say 2% that would be a small premium to 10year gilts but a great rate of borrowing for the borrower.

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Feb 06, 2016 at 16:42

Paul Birtwistle - SIPPs have never been allowed to make loans to connected parties. You would need a change to the primary legislation.

Besides that, investing a substantial part of my SIPP fund and getting 2% annual return doesn't look very tempting when I can get 23% from either Tritax Big Box (warehouses) or Unite Group (student residences).

The article is aimed at much larger pension funds than a SIPP. Anyone with a SIPP holding investments that behave like index-linked gilts is going to have a severe shock when he reaches retirement age.

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paul birtwistle

Feb 06, 2016 at 20:07

I wish you were correct about the yield on BBOX which I am happily invested in. More like 4.5-5.0% p.a. methinks.

The point I was trying to make is that many people would like to help their children buy a home but maybe don't have easy access to cash. Some however may have SIPPs and, if legislation permitted, would choose to use some of that value to provide that help. As an aside it is likely that some people have cashed in their SIPP or part of it, suffered tax but have done so to help their children.

New legislation might perhaps restrict the use of SIPP funds to new build only and thereby encourage housing supply.

As to the interest rate applied to the 'SIPP loan', that would be for individuals to decide between themselves. I was using the 10yr Gilt merely as an example. Not to flog this idea to death, a further benefit to the borrower would be that they would need a lower level of conventional mortgage and thus achieve a lower interest rate.

Well done by the way if you bought Unite. I've followed it for some years but have hesitated to invest due to the hitherto low yield. That seems now to be changing and investors are going to be doubly rewarded.

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