UK - Long-term mortgages will become a crucial asset class for pension schemes looking for secure income streams, Lane Clark & Peacock claims.
The actuarial firm explained that this type of mortgage could also be the key to the long-term products that chancellor Gordon Brown proposed in his budget last month.
LCP partner Jonathan Camfield said that mortgages set with fixed index-linked payments could start with repayments that were up to 20% lower than conventional fixed-rate products – a benefit to many consumers as well as pension funds.
He added: “Pension funds need to invest in secure long-term, inflation-linked income streams to meet their pension promises.
“Long-term mortgages could provide just such an income stream. The key is to make repayments linked to inflation.”
LCP asset strategy partner Phil Boyle suggested that increases could even be capped at a maximum of 5% per annum and the product would still be very attractive to pension funds.
He explained that the stream of repayments from such a mortgage mirrors the pension outflows from a pension fund – so schemes would be willing suppliers of the capital for such mortgages.
Camfield added: “These mortgages would not solve the pensions crisis overnight, by any means.
“But they would make a real difference because they would provide a new investment giving the opportunity of better returns than conventional index-linked gilts.
“However, without government encouragement, what promises to be a most exciting new initiative will simply not get off the ground.”
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