UK demands further reform across pension funds to drive growth 

Chancellor urges consolidation of funds to reduce ‘risk’ and boost long-term returns for pensioners amidst deteriorating quality of retirement – by Rudy Khaitan

 
Chancellor Jeremy Hunt announced yesterday that he will not be forcing pension funds into consolidating or investing in high-growth companies, instead asking insurance companies and those signed up to the Mansion House Compact to invest in UK infrastructure, startups and green technology.

Ten funds have already volunteered by committing 5% or £50bn in unlisted companies by 2030. The Chancellor is, however, encouraging the consolidation of pension funds after stating the UK has too many of them.

Explaining that a merge could allow companies to share knowledge around investing in growth companies, Hunt argues that this could reduce further exposure to any risky investments. In light of this, Rudy Khaitan, Managing Partner of Senior Capital argues that pension funds should also direct a number of allocations to equity release products in tandem with productive finance assets to mitigate any associated risks while boosting long-term returns for pensioners.

The UK equity release market, having grown by 100% in the last five years, is now seeing record activity as consumers continue to feel the financial impacts of inflationary pressures and rising interest rates. Khaitan explains that first and foremost, equity release products can be appealing to pension funds as they can provide a source of long-term income that helps match these liabilities.

On top of that, he argues that in a period of economic uncertainty, these products have the potential to generate steady cash flow for pension funds whereby they can be used to meet ongoing obligations.

Catalysed by rising interest rates and a global pandemic, interest in alternative investments has steadily increased in the past few years, with demand expected to reach $17.2tn by 2025. Hedge funds and real estate are two of the key assets that have been growing at a healthy clip, meaning that allocating funds towards equity release products could offer diversification benefits which may have a different risk-return profile than traditional financial assets.

British pension funds have long underperformed rivals, with average annual returns sitting at just 9.5% in 2021, according to Moneyfacts. This is compared to a 20.4% increase by the Canada Pension Plan Investment Board, while AustralianSuper delivered a 22.3% gain.

However, Hunt’s ambition to ramp up risker pension allocations is set to assist the UK compete with countries such as Australia, Canada and the US, all of which are currently enjoying the largest pension returns. In comparison to the earlier products offered almost 30 years ago, Britain’s pensions industry has evolved with greater underpinnings in its highly regulated origination and sales process, making it an ideal asset class for pension funds.
 
Managing Partner of Senior Capital, Rudy Khaitan, comments: 
 
“Chancellor Jeremy Hunt’s plan to consolidate workplace pension schemes and allocate up to £75 billion of retirement funds for investment in high growth segments represents a strategic effort to stimulate the UK economy and generate better returns for pensioners. These reforms are expected to not only enhance retirement incomes by over £1,000 a year for typical earners but also drive substantial growth in the UK’s most promising companies.

“Equity release mortgage-backed notes, when structured appropriately, not only offer attractive risk adjusted yields but crucially, much coveted long duration cash flows that align with insurers’ liabilities and regulatory requirements. Our clients, primarily pension funds and insurers, require long-dated stable cash flows to match their liabilities which often extend to 15-20 years or more. The universe of assets that provide this duration but also meet the required risk-return thresholds, is very limited.

“Our clients, primarily pension funds and insurers, require long-dated stable cash flows to match their liabilities which often extend to 15-20 years or more. The universe of assets that provide this duration but also meet the required risk-return thresholds, is very limited.

“Senior Capital is in the business of producing rated notes backed by attractive equity release mortgage assets that are structured specifically for insurers’ and pension funds’ exact use cases. These assets not only offer attractive risk adjusted yields but crucially, much coveted 17+ year duration cash flows that align with our clients’ liabilities and (often narrow) regulatory requirements. By incorporating our assets into their portfolios, our clients are able to access profitability more efficiently and sustainably than their competitors, thus providing them with a significant edge in the increasingly competitive markets that they operate in.”