UK's Largest Pension Scheme Warns Against Overreaching Government Reforms

4th March 2024

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.

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.

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.

British pension funds have also 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.

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."

About Senior Capital:

Established in August 2022, Senior Capital has mobilised in excess of $150m for the UK economy via an origination and securitisation platform which simultaneously unlocks wealth for the UK’s retiree generation and allows for the easier transmission of wealth towards younger generations. With a vast majority of millennials unable to access the housing ladder – and a 40% standard Inheritance Tax rate - Britain’s wealth is currently held within the remits of those who are now desperate to release this capital – with 1-in-5 of those aged 65+ classified as millionaires, according to asset manager Netwealth. With the typical homeowner now having five years’ worth of retirement income tied up in their property, there is a dire need for new lending structures that can transform this into cash to help both pensioners in need and the economy.

In April 2023, Senior Capital closed its second round in a series of securitisations of equity release through mortgage assets. This success allowed Senior Capital to secure permanent funding in excess of $150m from UK and US re(insurers) in the form of structured, externally rated notes. On close, Senior Capital was able to realise a positive liquidity event, with the proceeds from the sale of these rated notes being in excess of the total acquisition cost of the underlying assets.

www.seniorcapitalsolutions.com/