Rudy Khaitan, Managing Partner of the UK’s leading later-life lending specialist, Senior Capital, explains why equity release products could offer attractive risk adjusted yields for pension funds looking to bolster returns
Chancellor Jeremy Hunt last month unveiled plans to channel pension funds into UK tech companies in a commitment to make Britain the world’s ‘next Silicon Valley’. The nation’s largest pension schemes – long considered quite conservative in their allocations – will now have to invest at least 5% of their funds into unlisted shares which will in turn bolster higher returns over several decades.
Amidst Hunt’s pension shake up which could see young UK workers earn £1,000 more a year in retirement, Rudy Khaitan, Managing Partner of Senior Capital – the nation’s leading later-life lending specialist – explains that equity release products could not only diversify the portfolio of pension funds, but also offer attractive risk adjusted yields and more crucially, align with any liabilities and regulatory requirements these schemes are subject to.
The UK equity release market, having grown by 200% 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. In a period when almost a quarter (23%) of the nation is over the age of 60, according to Methodist Homes, equity release is rapidly emerging as a core product that can help boost financial stability for cash-strapped Brits, particularly for their later life. More importantly, given its ability to cover liabilities, coupled with the fact that all plans come with no negative equity guarantee, equity release products could act as a safer and ‘guaranteed’ bet for pension funds looking to step up their yields in the long run.
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.
The UK’s largest pension scheme, The National Employment Savings Trust (Nest), has already announced plans to begin investing billions into unlisted equities including private equity and infrastructure. The giant will see overall investment climb to at least 10% of its portfolio by the end of 2030, potentially funnelling an additional £10bn into high growth assets. Nest currently manages just over £30bn in retirement pots and is forecast to reach a staggering £100bn by the end of the decade, giving them the size and scale to negotiate a wider range of deals across various asset classes.
The average pension pot currently stands at just £107,300, according to the Office of National Statistics (ONS), indicating a lack of sufficient savings for a comfortable retirement. This has led to the Equity Release Council revealing a 23% year-on-year increase in people turning to equity release – a financial service allowing homeowners to access capital tied up in their home without selling it – as a vital lifeline amidst the cost-of-living crisis.
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.
“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.”
