EUROPEAN Monetary Union will mean good news for mortgage holders, but bad news for savers, according to Eureko Ireland investment director, Mr Pramit Ghose.
The upside of EMU for the Republic will be that borrowers will enjoy long term low mortgage rates, with rates expected to settle at around 7 per cent for some time, he says. The bad news, however, is that the lower interest rate environment will add to the cost of funding pensions for both employers and employees.
Typically, Mr Ghose says, everyone will be forced to increase pension contributions by between 10 per cent and 15 per cent to achieve the same pension on retirement. "Basically there will be a trade off. What people are saving on their mortgages will have to be paid into their pensions."
When Ireland joins EMU, the gap between Irish and German interest rates will close even further, bringing lower interest rates and bond yields, Mr Ghose says. But, as the cost of funding a pension depends on long term gilt rates, he says pensions will become more expensive to buy.
As a rule of thumb, Mr Ghose says a 1 per cent fall in interest rates translates into a rise of about 10 per cent in the cost of a pension. A bigger drop in rates would push costs up even further, he says.
Against the background of low interest rates, Mr Ghose says pension fund managers will have to look increasingly to invest a higher proportion of their funds in equities, to achieve good investment returns, with European gilt and bond markets offering less attractive yields.
Mr Ghose yesterday announced that he was to head up a new asset management and investment subsidiary of Eureko, Eureko Asset Management (EAM). The new company will allow the group to extend its funds under management and to include segregated funds, he said.
EAM intends to grow its asset base by as much as 25 per cent over the next three years with the addition of £250 million in new assets, according to Mr Ghose.
The Eureko Ireland group includes life and general insurance companies Friends Provident and Celtic International.
