Pension funds should consider funding student loans, a new paper by the UK Institute for Economic Affairs (IEA) has suggested.

In a paper by Peter Ainsworth, the free-market think tank suggested that the UK’s system of advance tuition fees should be replaced with students paying universities a pre-agreed amount of future earnings.

Under the proposed model, students would agree to grant higher education institutions a fixed percentage of income for a limited number of years, with the potential for the contracts to be bundled into a securitised product that could then be acquired by pension investors.

“When graduates start earning, assuming the university sold their equity contract when the student started their studies, the university simply passes the money received from the student directly to the pension investors,” the paper said.

It went on to suggest that the default risk on any outstanding payments would be low, as former students would not wish to see their personal credit rating impaired.

“The securities would therefore provide reasonably stable returns but also diversify risk within pension funds from bonds and conventional equity investments,” it added.

Ainsworth noted that some funds for students in Chile and the US were already successfully employing the model he proposed.

He said that the contract underlying the security would not need to be linked to a rate of inflation, as earnings often went up in line with inflation - although this has not been the case in the UK recently.

“There cannot be a long-term de-linking of the two,” Ainsworth said. “If wages rise much faster, that’s going to force up inflation, and if wages don’t increase at all that’ll cause a revolution.”

Institutions have in the past invested in student loan books.

The Versorgungswerk for chartered accountants in the German province of Northrhine-Westphalia (WPV) funded student fees for a private university in Koblenz.

WPV’s managing director Hans-Wilhelm Korfmacher has referred to the asset class as offering “a reverse inter-generational contract”.

He told IPE in 2010: “For me it is important to offer young people in Germany, whose families do not have the necessary means, the chance to study at a renowned private university.

“This is a sustainable investment,” he added.