Young people are increasingly less likely to favour equity based pensions according to research from Stanford Graduate School of Business. Their recent research found that 'depression babies' whose formative years have spanned major macro-economic events such as double dip recessions and banking crises tend to be more risk averse throughout their lifetime. In addition, Gregg McClymont, Labour’s pensions spokesman, recently confirmed what a lot of us already knew - that providers had lost much of their former reputation as a safe and prudent industry. “There is a lack of confidence, after the mis-selling scandal, and the lack of disclosure on costs and charges is also an issue for people’s trust,” he said.
Although pension investment has fallen across all age groups, declines in savers are steepest among those aged 22-29, falling from 43 per cent in 1997 to 24 per cent today, according to research by the Department for Work and Pensions. UK workers will soon be automatically enrolled into a workplace pension under a government plan to improve saving levels, but the DWP believes that up to 40 per cent of people may opt out of the scheme.
Some of the biggest pension funds, such as Fidelity Worldwide Investments and Standard Life Investments, are beefing up their property funds, while other groups are switching out of equities into bonds. “We are now weighted about 60 per cent equities, 30 per cent bonds and 10 per cent alternative investments such as real estate,” said one head of equity at a big UK asset manager. “Ten years ago, it would be almost entirely equity.”
This is the background to why more young people are looking for alternatives to stocks as they fear they will be left with lower incomes in retirement as returns from equities have dwindled in recent years. However, it also presents an opportunity for the property industry as low mortgage rates, rising rents and continued belief in the forward momentum of property prices are behind more agents reporting an upturn in buy-to-let investor activity. Yields on residential properties in the south-east average about 5 to 6 per cent, much higher than low yielding bonds and higher than the dividend yields on many stocks.
Although young people traditionally have less disposable income to invest in equities, there are many examples of financial services and IT workers, particularly those based in London, Bristol, Leeds and Manchester, who are investing annual bonuses in the deposit for a buy-to-let mortgage. One young investor is quoted as saying 'I don’t know anyone who would take a lump sum and give it to a pension manager. You read stories about pension funds collapsing and volatile equities and high fees and it isn’t appealing.'
With ARLA reporting increasing landlord confidence, and the Council of Mortgage Lenders confirming an 8% jump in the value of buy-to-let mortgages in the final quarter of 2012, it would appear the statistics are at last bearing out some fragile optimism for the buy-to-let sector.
Andrew Goldthorpe MRICS