Brokers expect lenders to slash rates in race to meet targets

Lenders will look to slash mortgage rates again in the fourth quarter as they struggle to hit their year-end lending targets, brokers say.

Over the past month, a number of lenders have increased mortgage rates but, equally, a number have cut their rates.

It has been suggested the lenders that have increased rates have done so to stem the flow of business during the summer months when it is more likely staff will be on holiday.

However, brokers feel this trend will reverse come September as lenders look to hit their lending targets.

With the exception of Nationwide, the major high street lenders have lent significantly less in the first six months of this year than during the same period of 2014. Half-year results show Royal Bank of Scotland’s lending was down 7.1 per cent, Santander’s was down 7 per cent and Lloyds’ was down 19.1 per cent.

Further, as swap rates are still relatively low and have not moved significantly over the past two months, it will allow lenders to price their fixed rate products more keenly.

John Charcol senior technical manager Ray Boulger says: “I have seen a lot of comment that mortgage rates are going up because the cost of funds is going up. Actually, if you look at Gilt yields and swap rates over the past two months, they haven’t actually changed that much. They have moved within a 20 basis point range but over the past two months, they haven’t moved that much.

“I think a lot of the increase [to rates] is down to the fact that lenders are keen not to have too much business coming in in August when their staffing levels are lower.

“Come September, when most people will be back from holidays, lenders’ minds will be focused on meeting their lending targets, as a lot of them are behind. I suspect come September we will see a bit more competitiveness in the market.”

Capital Fortune managing director Rob Killeen says: “I think we’ve probably seen the lowest rates. However, later in the year lenders who have not hit their targets could come in quite aggressively. Lenders are missing targets by some distance and they are clambering for business.”

He adds: “We do not think risk will give; it will be margin – they will just chase it down [to attract business].”

Andrew Tyrie: Govt reforms do not protect OTS independence

Treasury select committee chairman Andrew Tyrie has hit out at planned reforms to the Office of Tax Simplification, which he says do not go far enough in protecting its independence.

Tyrie wrote to Chancellor George Osborne in late June to call for a stronger OTS, with the Treasury then publishing a framework for reform in mid-July.

Under these plans, which will be enacted as part of the Finance Bill 2016, the Government will be formally required to respond to OTS recommendations, while the office will also be able to respond to Treasury and HMRC consultations on its recommendations.

However, in a letter published today, Tyrie says these moves still fall short of giving the OTS full independence by failing to guarantee a clear line of reporting to Parliament, rather than just the Government, and a “double lock” on the appointment and dismissal of Office for Budget Responsibility committee members.

A double lock would effectively give the TSC the power to veto the appointment or dismissal of any committee members as proposed by the Chancellor, a power it can only currently exercise over the chairman of the Office for Budget Responsibility.

Tyrie says: “This also establishes a clear line of accountability to Parliament.

“Your suggestion that the Treasury committee may wish to hold post-appointment hearings with the [OTS] chair and tax director is not sufficient to establish this clear line of accountability.”

Gross lending forecast to grow 39% to £287bn by 2019

Gross lending is forecast to reach almost £287bn by the end of 2019 due to an improving economy and growing wages.

Timetric, a firm that provides business information services to financial services companies, predicts average growth of around 7 per cent each year until the end of 2019.

It forecasts gross lending to reach £218.6bn this year, from around £205bn last year, and then £241.6bn of lending in 2016. By the end of 2019 it says lending will have reached £286.8bn.

Timetric analyst Ben Carey-Evans says: “Rising interest rates, combined with reduced growth in the UK housing market, is set to stunt increases somewhat from the 15 and 22 per cent rates seen in 2014 and 2013 respectively.

“Improving economic conditions, however, particularly the continuation of improving real wages – due to extremely low inflation – should see gross lending rising at a steady rate up to 2019.”

Boris Johnson appoints Ed Truell as pensions adviser

Mayor of London Boris Johnson has recruited Edmund Truell as an adviser on pensions and investments.

Truell, who founded the Pension Insurance Contribution, will work to drive collaboration between public sector pensions funds, and increase infrastructure investments.

He will resign his current position as chair of the London Pension Fund Authority to take on the unpaid role, and will also be responsible for the creation of an advisory board for the Lancashire and London Pensions Partnership, the tie-up between the LPFA and the Lancashire County Pension Fund.

Johnson says: “If we now use this new partnership as a blueprint for further pooling of pension funds, we could have a war chest worth hundreds of billions of pounds and access to the kind of investment opportunities which have until now been the preserve of foreign sovereign wealth funds.

“I am therefore delighted that Edi has offered to maintain his links with City Hall and support the cause of further collaboration across public sector pension schemes.”

BAML recognises unstoppable globalisation of credit market in landmark decision

Hermes Credit has welcomed the decision from Bank of America Merrill Lynch to retain emerging market issuers in BAML’s benchmark Global High Yield Index. Fraser Lundie and Mitch Reznick, co-heads of Hermes Credit, believe emerging markets play a fundamental role in global high yield investing and keeping this area of the asset class in the benchmark is beneficial for both investors and the corporate issuers.

Click here to read more

Neptune’s Burnett looks beyond Greece

Watch Rob Burnett, manager of the Neptune European Opportunities Fund, discuss the Greek bailout deal and its potential implications for European equities.

In the video Rob discusses:

• Why, with the Greek crisis receding, markets can now focus on Europe’s strong fundamentals
• The resilience of European markets and why the recovery is on a solid footing
• Investment implications for Italian banks and domestic-facing companies

Click here to watch the video

Important information: investment risks

The value of an investment and any income from it can fall as well as rise and you may not get back the amount originally invested. Please remember that forecasts are not a reliable indicator of future performance. The content of this article is formed from Neptune’s views and we do not undertake to advise you as to any change of our views. Neptune does not give investment advice and only provides information on Neptune products. This is not a solicitation or an offer to buy or sell our funds.

John Lawson: Why pensions as Isas won’t work in practice

Proposing the idea to treat pensions like Isas and actually doing it are two very different things. Defined benefit pensions are one of the key stumbling blocks that will prevent this idea becoming reality.

There is no denying tax relief given to pension savers is a large number: £34bn at the latest count, excluding the cost of national insurance relief on employer contributions. It is, therefore, no surprise that the Treasury is looking at this (again) as a potential revenue saver.

Equally revealing is how this number breaks down between DB and defined contribution schemes. An enormous £25bn, or 72 per cent, of the whole amount spent on tax relief goes to DB schemes. DC pensions, meanwhile, account for just £9.5bn of the total, of which £7.3bn is up-front tax relief and £2.2bn is the cost of gross roll-up in DC savings.

With this in mind, even if you completely “Isa-ised” DC pensions the saving would only be £7.3bn. Meanwhile, DC savers will need some encouragement to lock their savings away until age 55, so at least some of that amount would have to be spent on another form of incentive.

That incentive will not be generous. Post-auto-enrolment, there will be 15 million DC savers. The £7.3bn figure shared out among this group would only amount to £486 a year per head. This amount of tax relief would imply a total pension contribution of about £2,400 for a basic rate taxpayer, or about 9 per cent of pay for the average earner.

Therefore, even under the current rules, DC tax incentives can hardly be described as bloated.

On the other hand, the average tax relief per active member of DB schemes today is £3,500. A large part of this may relate to deficit recovery contributions. However, given the generosity of DB schemes where funding rates are now around 30 per cent for most schemes (versus around 9 to 10 per cent for DC), the tax relief cost of new accruals is also substantial.

It has been suggested by some that two different regimes are created: one for DC, in which no up-front tax relief is available, and one for DB, where the existing rules continue. Such an outcome is likely to fail for two reasons.

Firstly, it creates a “them and us” situation, where the lucky minority in DB schemes continue to enjoy tax incentives funded by the majority who do not themselves have access to DB schemes. This is compounded by the fact most of the members of DB schemes are public sector workers where the employer contribution of between 15 per cent and 20 per cent of pay is also funded by all taxpayers.

The taxpayer would be funding pension costs and tax relief for an average earning public sector worker of £7,500 a year, while the vast majority of (non-public sector) taxpayers receive next to nothing themselves.

Secondly, if the cost of tax relief is to be made “sustainable”, DB has to be a key target, since it already accounts for nearly three-quarters of the total tax relief spend.

It would, of course, be possible to Isa-ise DB pensions by simply removing tax relief.

This might rightly cause employers some angst, particularly in the private sector where most of these contributions relate to deficit recovery rather than new accrual. Those deficits were run up during a time when tax relief was available, so having the goalposts moved retrospectively would feel unfair.

Removing employer relief will, therefore, be met with stiff employer resistance.

Another alternative would be to tax only new accruals, with the tax bill for both employer and employee contributions falling on the employee. Under this scenario, employers would continue to receive both corporation tax and national insurance relief on their contributions.

However, with total funding costs of DB accruals around 30 per cent, the tax bill for a basic rate taxpayer would be 6 per cent of pay and for a higher rate taxpayer 12 per cent. Against a backdrop of public sector wage rises pegged at 1 per cent for the next four years, effectively cutting pay by between 6 per cent and 12 per cent would cause uproar among public sector workers and their unions.

For these reasons, the solution that emerges from this consultation is likely to be less radical than the initial sound bites.

But that does not mean the consultation cannot be productive. It can still allow us to address the imbalances in the allocation of tax relief between the better off and the average worker and, as highlighted here, the imbalance between DB and DC.

Tax relief also needs to act as a clear incentive to save, so it must be easily understood and valued. This is why we believe a simple matched contribution “you pay £2, we give you £1” is the best and fairest way to tackle these imbalances.

John Lawson is head of pensions policy at Aviva