Mortgages could become the new asset class for annuity liabilities when the shortfall in long-term gilts becomes more apparent, suggests the Actuarial Profession.
According to the Profession, the government is not issuing sufficient new stock to match the demand arising from annuity sales.
Currently, most insurers back their annuity liabilities with a portfolio consisting of around 50% gilts and 50% UK corporate bonds.
However, there are only five British government stocks left with maturity dates of 15 or more years. Reducing liquidity further, these stocks are also very popular with other investors such as pension funds. This has left their availability limited and their price high, the Actuarial Profession says.
The lack of long-term gilts means insurance companies have to look at alternative asset classes such as corporate bonds to make up the shortfall.
One idea could be to look towards the UK mortgage market, deems the Profession.
It says: "A fresh potential source of backing assets for annuities may be the long term mortgage market.
The outcome of this study [the Miles report], and future developments in the mortgage market, might result in mortgages being packaged as suitable backing assets for annuity liabilities."IFAonline
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