Guy Stephens considers how long-term trends affect asset prices and how changes in government policy - from Miras to pension freedom - can have profound effects on investor behaviour
Mortgage Interest Relief at Source or ‘Miras, which was introduced by Geoffrey Howe, the Chancellor of the Exchequer under Margaret Thatcher, was part of a government initiative at the time to encourage home ownership.
It was accompanied by Thatcher's policy of allowing council house tenants to buy their home. MIRAS provided tax relief on interest on the first £30,000 of a mortgage for an individual or for unmarried couples, allowed pooling up to £60,000.
These policy initiatives led to an explosion in home ownership in the UK and also a cultural change where unmarried couples were motivated through the tax system to cohabit - a practice hitherto frowned upon by previous generations.
In the 1988 Budget, the then Chancellor Nigel Lawson decided to remove Miras - though not immediately - and this led to the housing boom of that year and its subsequent bust, as there was a stampede for youngsters to get on the housing ladder in shared ownership before the tax break was removed. Gordon Brown eventually removed Miras entirely in April 2000 as he considered it to be a perk for the middle classes.
In addition, MIRAS fuelled demand for endowment rather than repayment mortgages, as the interest payments were higher for longer and so, therefore, was the tax break. Many of these endowment mortgages had hidden PPI insurance attached and many of the endowments failed to repay their loans, the effects of which are still being felt today.
Housing has continued to be the biggest investment that most UK individuals make and yet, arguably, these initiatives started by the Thatcher government in the 1980s are the cause of the ongoing housing shortage and the inability for the under-30s to afford to buy their first home today.
Another seismic shift and influence of the time was the adoption of monetary policy and a worldwide acceptance the control of inflation was the key to economic stability. This enabled businesses to borrow and invest for the longer term via low interest rates, in the knowledge their markets would have a stable pricing environment.
A similar influence has been the baby-boomers - those individuals born in the 1950s, following the end of the Second World War, when birth rates rose dramatically.
As this populous generation entered adulthood, their requirement to house for their own expanding families heavily influenced the aforementioned housing policies of the 1980s. What is more, the baby-boomer generation has also had a profound influence on demand for products all through their lives and many are now approaching retirement.
Fast forward to the launch of pension freedom in George Osborn's March 2014 Budget. For most, the pension fund they have access to in retirement now forms the second biggest investment most UK individuals make, after their home.
Pension freedom has led to an explosion in defined benefit (DB) transfers into self-invested personal pensions (SIPPs) with the rule changes allowing retirees flexible access to their pension funds, and to pass them on to their heirs.
Previously, the DB scheme usually only paid a pension at the predetermined retirement date, which could be at age 65 and, following death, there was no residual value outside of a proportionate widow's pension, which then also ceased on last death.
It has now been reported that DB transfers are causing a boom in demand for financial advice from holders and has boosted new business flows into asset managers, who are picking up the assets for investment management. There is no great surprise in this and most will be aware of this trend from reading the financial media.
There is, however, an indirect feature to this wave of asset migration away from DB schemes and into SIPPs, which is having a profound and long lasting influence on asset prices - and there is a lot more to come.
A typical DB pension scheme has a substantial number of paid-up members and very few, if any, new contributions. This is because most are closed to new members, as many companies realised some time ago they are too expensive to fund as interest rates have fallen and liabilities have risen over the last 20 years or so. This means the typical asset allocation of a pooled DB pension scheme has as little as 30% in equities and will seek to pay pension benefits that rise with inflation.
On transferral to a SIPP, however, most future retirees will invest for growth initially and then on retirement enter a flexible drawdown arrangement with income being a priority. The investor then needs an investment strategy that ensures they do not run out of money and perhaps can preserve an element of the fund for future generations.
This means investing a lot more of the fund in real assets with a growing income than would have occurred had the assets remained in the DB scheme, either for growth or for income. This also means clients of financial advisers are increasingly seeking out as much natural income as they can when investing their SIPP.
This results in a robust demand for equity income, commercial property and infrastructure with the last of these being a key plank of incremental government spending as we shift from economic monetary stimulus to economic fiscal stimulus.
The converse is that private investor demand for lower-yielding but safer investments such as fixed interest and gilts is likely to remain subdued as UK interest rates look likely to stay low for the foreseeable future. While the volume of DB transfers remains high, it is unlikely the newly enriched SIPP investor will refrain from buying real income-paying assets for long - no matter how concerned they may be about current market levels.
We would therefore advocate investors and their advisers bear this in mind when selecting their asset allocation as the influencing dynamic shifts to the needs of retiring baby-boomers who are now enjoying pension freedom - potentially from the age of 55.
Guy Stephens is technical investment director at Rowan Dartington
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