Equity release products an untapped opportunity for UK pension funds, expert reveals

Following Chancellor Jeremy Hunt’s plans to channel pension funds into private equity, experts are now warning that scheme members could receive smaller retirement incomes as a result. Despite some of the UK’s leading pension managers including Aviva and Legal & General committing to allocating 5% of their clients’ pension savings to the asset class by 2030, questions have been raised around its certainties and returns over the long term. Alongside the “lack of empirical evidence” in the differences between public and private equity allocations, pension fund members are also set to be charged higher fees due to the Treasury’s move. In light of this, Rudy Khaitan, Managing Partner of Senior Capital – the nation’s leading later-life lending specialist – discusses the alternative routes the pensions industry can take in order to boost ‘safer’ returns amidst the current economic landscape.

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. 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. 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 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.”