Rudy Khaitan, Managing Partner of the UK’s later-life lending specialist, Senior Capital, believes that in the light of news of pension fund losses and the fact that private sector-defined benefit plans have fallen almost 33 per cent – from more than GBP2 trillion to less than GBP 1.4 trillion – insurance companies should look to alternative asset classes for long-term income that matches liabilities.
Khaitan discusses the benefits of embracing fixed-income allocations through residential mortgage-backed securities (RMBS) alongside a pooling in contribution schemes that could lead to a greater retirement security for UK pensioners.
The UK equity release market has grown by 100 per cent in the last five years as consumers continue to feel the financial impacts of inflationary pressures and rising interest rates, Khaitan says.
“RMBS, therefore, could become increasingly appealing to insurance companies as they have the potential to provide a source of long-term income that helps match their liabilities and, in a period of economic uncertainty, generate steady cash flow for pension funds.”
For instance, Khaitan explains that allocating capital towards equity release products could have diversification benefits alongside a different risk-return profile than traditional financial assets.
Khaitan also states that the UK pensions industry could stand to follow in suit of Canada, the Netherlands and Australia by adopting a strategy that combines the advantages of a defined benefit and defined contribution scheme. By doing so, he says, pension funds can mitigate risk with alternative asset allocations, opting for fixed-income allocations such as residential mortgage-backed securities (RMBS)
Britain’s pension sector has historically underperformed against its rivals, with the nation’s pension funds’ average annual returns sit at just 9.5 per cent as of 2021, according to Moneyfacts, which is in stark contrast to a 20.4 per cent increase by the Canada Pension Plan Investment Board, as well as a 22.3 per cent gain by the AustralianSuper. The adoption of these two strategies is therefore vital in reducing the losses of the UK’s pensions industry while ensuring that pensioners have enough funds for a comfortable retirement, Khaitan says.
“Chancellor Jeremy Hunt’s plan to consolidate workplace pension schemes and allocate up to GBP75 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 GBP1,000 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.”