Mar
2024
UK’s Largest Pension Scheme Warns Against Overreaching Government Reforms
DIY Investor
4 March 2024
Chancellor Jeremy Hunt is set to announce pension reforms aimed at stimulating the economy by leveraging retirement savings for domestic investment; Rudy Khaitan explains why UK pension funds should look to alternative assets for fixed-income returns
As the UK government embarks on its reforms of the UK pensions industry, the leader of the largest private sector pension scheme cautioning against excessive government intervention. Carol Young, CEO of the £73 billion Universities Superannuation Scheme (USS), supports new disclosure requirements but expresses concern over potential government directives on fund allocation. These remarks coincide with Treasury plans for pension reforms aimed at stimulating the economy by leveraging retirement savings for domestic investment.
With Chancellor Jeremy Hunt intending to announce measures in the Budget to improve returns for savers and promote investment in British businesses, including barring underperforming pension funds from acquiring new business and facilitating fundraising for unlisted firms, Rudy Khaitan, Managing Partner of the UK’s leading later-life lending specialist, Senior Capital, argues that by adopting alternative schemes such as fixed income allocations, pension funds’ risks can be reduced by providing a source of long-term income that can decrease the reliance on debt. The Chancellor’s proposed reforms plan to reinstate previous income thresholds for high net-worth individuals to boost entrepreneurship, whilst also overhauling primarily targets defined contribution schemes, aiming for greater disclosure of British investments by 2027. The UK urgently requires this action as it falls behind its counterparts in delivering returns.
Senior Capital believes that this can be reversed by pooling both schemes together, with private equity funds mitigating risk with alternative asset allocations, opting for fixed-income allocations such as residential mortgage-backed securities (RMBS). Khaitan explains that bonds formed from equity release loans could not only diversify the portfolio of pension funds but also offer attractive risk-adjusted yields and more importantly, align any liabilities and regulatory requirements these schemes are subject to.
Managing Partner of Senior Capital, Rudy Khaitan, comments: “Chancellor Jeremy Hunt’s plan to consolidate workplace pension schemes and allocate up to £75bn 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. “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 can 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.”
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