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Ground rents and the fiction of “pensioner as victim”.

henry tapper

 

Yesterday I railed about the capture of the pensioner to justify the shocking abuse of the ground rent system. It seems there are many of the same mind, not least Charles Payne

I’m not – in this blog – going to focus on the political lobbying of the Freeholders Association. Instead, with the help of experts in pensions and insurance, I’m going to explain that it’s not vulnerable pensioners that are going to suffer, not even their pension funds. The big losers from the Gove reform that would see ground rents slashed to peppercorn levels, would be speculators.

Let’s cast our minds back to a blog I wrote leading up to the PLSA investment conference in February

James Tuttiett    owns 40,000 of them through various companies. Tuttiett owns E&J Estates whose website boasts

E&J Estates administers over 40,000, primarily residential leases, and manages the freeholds of over 1,600 buildings across the UK.

Andrew Henderson bought his house outside Blackburn from Taylor Wimpey six years ago, but found that the developer then sold the freehold on his house to E&J.

“We are currently paying around £145 every six months. This doubles every 10 years, so in 45 years, whilst enjoying retirement, I’ll be paying E&J £10,000 per year to live in my own home that will be fully bought and paid for.”

Linda Barnes’ home in Heywood, Manchester is typical of developments where E&J acquired the freeholds soon after the site was completed. Her ground rent doubled in January 2016 and will keep doubling every 10 years. She says residents are in “sheer panic” as the ground rent has made their homes unsaleable.

The financing of Tuttiett’s property empire is helped by low-interest loans totalling £336m made by an insurance company, Rothesay Life, spun out of Goldman Sachs, in which the US investment bank remains the largest shareholder. Among the Rothesay Life loans made to E&J is one at £128m with a stated interest rate of just 0.95% a year, although it is understood the real rate paid is likely to be higher.

The existence of the Rothesay loans opens a back door into Tuttiett’s interests, as Companies House lists all the properties over which Rothesay has a charge.

So the Pension Company (Rothesay) does not own the freehold, it gets an income stream from lending to Tuttiett. There appears to be a flexible financing arrangement which suggests some kind of profit share, but there is no direct investment.

Steve Groves, one-time CEO of a company , which like Rothesay, specialised in paying annuities from income streams sourced from the  private market,  was on twitter commenting yesterday.

There are three important points here

  1. Pension Schemes (rather than insurers who buy-out pension schemes) aren’t big owners of freeholds .
  2. Pension companies like Rothesay do not own freeholds, they “own” interest payments on those loans.
  3. The interest payments due to the Pension Companies are not likely to be much impacted by the Gove reform.

So why are the PLSA and pensioners cited as the victims of leasehold reforms? It’s a question that has been puzzling Norma Cohen and Harry Scoffin and it’s all the more pertinent today, as the  BBC and others pick up the fiction of the pensioner as victim.

They are right to call for the PLSA to say, as I said yesterday, “not in our name“.

Railpen, the pension scheme behind hundreds of thousands of rail worker pensions divested itself of its small holding in funds benefiting from ground rents earlier in the year. John Chilman, CEO of Railpen and a leading light in the PLSA had good reason.

Sadly, despite a partial retraction of overt support for the Freeholders Association, the PLSA is still allowing itself to be cited as a supporter of Ground Rents as a means to improve pensioner security.

Many pensioners are leaseholders, many pay extortionate ground rents, either directly as they hold the head lease or indirectly as they rent from the leaseholder and see the ground rent passed on to them.

This is not of course just a pensioner problem, Generation Rent are the biggest victims and they are close to pensioner’s hearts for obvious reasons!

The fiction of the pensioner as victim

It is hard to get any firm evidence of how much of the 4% allocated to property by Britain’s £2.5bn DB and DC occupational pension schemes is invested in the ownership of residential freeholds. I have been to presentations on the subject but have seen very little evidence of purchasing. Pension funds who do own these noxious assets are probably keeping quiet so as not to blot their ESG copybook.

There is considerable evidence that insurance companies use income from lending to private owners of ground rents (see above) , some anecdotal, some documented. But a pensioner is immunised from bad debts to insurance companies, unless they bring the insurer down and there is little evidence that insurance companies are going to suffer much if the Gove reforms proceed.

It is infuriating to see my child paying over-size rents , partly justified by the cost of servicing the needs of the freeholder. It is infuriating my being demanded a doubling of my ground rent, for no reason at all.

But that is nothing compared with my indignation that pension schemes are being blamed for this blatant rip-off. If we cannot get transparency out of the PLSA, let’s get transparency out of pension schemes. Perhaps it’s time for some clear statements both from our DB and DC pension schemes, about their holdings of ground rents and what they are doing to ensure they are managed to the benefit of their pensioners.  Ground rents  have no place in any pension portfolio; ground rents have no sustainable economic value.

 

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