Benson Hersch, CEO of the ASTL


Brexit and its possible consequences has been much in the news of late.   Whilst there is no doubt that the road ahead may well be rocky, the size of the rocks has yet to be established and the conversation at many dinner parties will no doubt be animated.  The pessimists will forecast doom and gloom, the optimists will no doubt wave the flag, but neither side really knows what will happen.


What is not in doubt, however, is that a pension crisis is slowly unfolding.  What many people are not yet aware of is the fact that this could have a significant knock-on effect to both the bridging market and mainstream mortgage market, lowering LTVs and increasing rates.


Current low interest rates, and the expectation that these will continue into the foreseeable future, are causing massive problems for final-salary schemes and pose a threat to the future performance of many public companies.   This can be seen, for example, at Tesco, where shares jumped after the third quarter of sales growth; but since February, the pension deficit has increased massively – from £3.2bn to £5.9bn.   This has been ascribed to the collapse in bond yields. Tesco is not alone in this regard and the long-term result may be lower dividends whilst companies divert funds to shore up pension funds.   The BHS pension disaster could be the tip of the iceberg, with government in the form of the Pension Protection Fund having to ride to the rescue.


The same issue faces pensioners who face lower interest income and less attractive annuity payments, as well as inhibiting the desire of younger people to put money into pension funds.   There has been talk of the UK government introducing a scheme whereby contributions will be supplemented by the treasury, based on the age of the contributor, with more being given the younger you are.   Part of this, of course, is a reaction to the idea that the baby boomer generation has had the lion’s share of wealth, and “something needs to be done”.  



Those people working in the state sector will see pension contributions increasing, funded by, of course, you and me, the taxpayers.   Will this be funded by higher taxes or by yet more government indebtedness?   The answer, at the moment, seems to be the latter.  At some stage, something will have to give and taxes and interest rates will rise.


What has this got to do with property prices and mortgages?  Well, as Alan Capper pointed out to the ASTL Conference in September, pension trustees are going to have to look at non-traditional ways to supplement income and build up reserves.   He mentioned that in the Netherlands, trustees face penalties if funding levels drop below 105%.  He also mentioned the Canadian model, where investment in infrastructure has overtaken more traditional sectors. This approach may well be adopted in the UK.


Legal and General Insurance has teamed up with a Dutch pension fund manager (PGGM) to construct 3,000 flats in the UK under a £600m build-to-rent plan.   Major developers are also entering the rental market.   This presages a situation where, rather than fund mortgages for private landlords, institutions will enter the property market directly.  The knock-on effect could be that less (and more expensive) money will be available for mortgages, where returns are at a record low, thus putting the squeeze on lenders who depend on institutional funding.  


Funding for private investors may become even more difficult to obtain, as affordability and stress testing will inevitably mean that lending LTVs will drop.   For non-corporate investors taxation changes will also contribute to this as they militate against high gearing.


All in all, the non-institutional buy-to-let market is facing a hard time ahead.   Property prices will continue to rise in certain areas until supply increases, but at the same time funding will be more difficult (and possibly more costly) to get.   This is a challenge, but somehow both lenders and intermediaries will need to rise to it.



Funding of defined benefit pension schemes (“final salary schemes”) - rising capital values meant an improvement in 2014, but the situation is now almost as bad as in 2009, with little improvement expected.



This is what a Canadian scheme is doing to improve matters:



A version of this article appeared in the November 2016 edition of Bridging Introducer