It is a decade since the start of the financial crisis. What started in the US housing market later engulfed the global economy and is having an enduring legacy on the UK – perhaps most notably on savers.
The first signs of the financial crisis emerged in April 2007 when New Century Financial, a US sub-prime lender, filed for bankruptcy protection. Within weeks some banks stopped lending to each other and by the autumn there was a run on Northern Rock, interest rates were cut in the US and UK and banks announced huge mortgage-related write-downs.
One of the most pernicious lasting effects has been felt by savers.
The tentacles of the Great Financial Crisis spread from the US housing market to multiple sectors across the developed world. They have left a troubling legacy.
One of the most pernicious lasting effects has been felt by savers. The huge amounts of liquidity that central banks have pumped into the system have increased asset prices, as intended. The evidence is seen in the record stock market highs across the world. But ultra-low interest rates have reduced the income of those retirees dependant on savings. Much lower bond yields have also meant annuity rates are now a fraction of their previous levels.
Central banks would argue that their actions staved off a global depression. That might well be right. There are no easy solutions but savers will get no respite until interest rates rise and quantitative easing is unwound. Higher interest rates will make the many pension fund deficits easier to fund and annuity rates more attractive because bond yields will rise.
But these yields have been dropping for 30 years and are unlikely to rise to the previous levels that were regarded as normal following the post-war baby boomer demographic bulge. With fewer younger people looking to borrow and more older people looking to save, there is a structural downward pressure on rates.
One in three of today’s babies in the UK will live to 100 according to the Office for National Statistics. Retirement can now make up over a third of someone’s life and the financing of this needs to be addressed amid a rising dependency ratio.
People need to start saving earlier – which is hard given the multiple demands on disposable income. The UK Government has gradually increased the state pension age and more people have opted to continue working into their seventies.
My own industry also needs to respond. Asset managers need to pay greater attention to what people actually need. Investment companies need to listen and offer solutions that match those needs.
It is still worth considering annuities – in spite of what ultra-low interest rates have done to the rates on offer. But we need to build other products that offer a degree of flexibility. One example is to provide income with the aim of capital preservation so the saver has a pot available to pay nursing home fees if needs be.
Asset managers and investors also need to look outside of the traditional sources of income such as bonds and dividend-paying shares. So-called alternative strategies, such as private equity, infrastructure and loans can also be good sources of income. But they need to be part of a properly diversified portfolio of other investments that balance the risks and returns. Multi-asset funds can play a part in this.
Property is another area that should be considered. In the residential market, long term institutional investors like us are willing to commit much more capital to the rental sector. There is real demand from clients who like the durable incomes that rented residential property can offer. Indeed, we are committing £500 million to the sector. Elsewhere in Europe, for example in Germany, investing in residential property is the norm for pension funds.
But the right opportunities to put our clients’ money to work are limited. The Government’s recent Housing White Paper did not go far enough. If, and when, reform does happen, it will present an opportunity to provide the additional funds that would help solve the UK’s housing shortage and be a source of income for investors.
The Global Financial Crisis and the changing demographics of the UK population will have huge implications for many years. Asset managers and government need to work together to ensure that different sources of income-generating investment can be accessed and are appropriately packaged to meet the needs of big pension funds through to pensioners.
The article above by Aberdeen Assest Management’s CEO, Martin Gilbert, previously appeared on the ‘Thinking Aloud’ blog on 27th February 2017.