ILS FOR PENSIONS

DEFINED BENEFITS WITH DEFINED COSTS - AMONG OTHER OPTIONS

When you learned about equity investment you may have been told about the Siegel Constant. This states that the long term trendline rate of return on equities is around 6.6% p.a.in real terms, maybe more depending on when the measurements were made. 

http://en.wikipedia.org/wiki/Stocks_for_the_Long_Run

Whether this is true or not, it is expected that equities will give a return that is greater than the rate at which average incomes are growing (AEG% p.a.), because as incomes grow, so company turnover grows and profits and dividends are also taken higher. That is the average expectation, all other things being equal, and with no unexpected disturbances or floods of rights issues which can disturb some markets when funds are easy to raise.

The difference between average incomes / earnings Growth (AEG% p.a.) and the RPI or the CPI inflation index is about the same as the rate of real economic growth. As you all know, it is this difference, incomes growing faster than prices, which makes us feel better off and allows us to buy more with our bucks.

According to an essay by Bill Gross, recently published, that 6.6% p.a. real return for USA equities since the 1920s  is nearer to 3.6% p.a. above AEG% p.a. or in his words, above the rate of growth of GDP over the same period. Similar figures emerge over 200 years for USA Equities, with figures showing a 7% p.a. real rate of return over that period, according to a report on Fidelity’s website. www.fidelity.com

Fidelity also gives figures for other things including UK property over 65 years. They all tell a similar story – returns are highest from equities followed by property and all are above AEG% p.a.

Likewise, when I examined the figures for mortgage interest rates in the UK from 1970 to 2002, after which they were held down for too long and too low for the health of the economy, the average marginal (true) rate of interest above AEG% p.a. was 3%. That is just 0.6% less than the return from Equities in the USA.

There are figures on all that kind of data on this page (which I may move or duplicate shortly). Sorry - it appears I have not don that yet.

So may I suggest that a lot of volatility might be taken out of your investment funds if you were to consider lending for housing and to businesses using my fixed cost ILS Mortgage. You might also do well using similar methods to lend to businesses but that comes later. Let's try Mortgages first.

HOW IT WORKS

What you do is you offer to buy 5, 10, 15, 20 or 25 year fixed cost (fixed true return) bonds for lenders to lend on a secured loan basis. The wealth that you have lent comes back to you in monthly instalments and you can use that cash inflow to invest elsewhere or to buy more bonds. See the earlier pages of this Blog.

Whether you decide to lend yourselves and collect the payments or whether you hire or partner a lender to do that for you, is your decision.

If you want to know how the mathematics works, ask me to come and explain.

SALES AND MARKETING
What is in it for you? Safety and defined costs and defined benefits sell very well. Your marketing people will know this and they will make haste to create new and more saleable products, now that you can tell them how much volatility your funds will experience. How much volatility? That depends on your fund's asset allocation mix. You and your sales people can confer and decide what mix will sell best.

You can have a range of investment funds, some with no lending content, some with a little, some with plenty, and some that is all 100% lent. As clients get older they will want more safety and more guarantees. They can move up towards the safer managed funds as they age.