29th November 2023

Chancellor seeks pension reforms to save the UK’s economy

Following on from Chancellor Jeremy Hunt’s Autumn Statement, two British insurers, Legal & General and Rothesay, have now secured deals totalling £8.8bn($11bn) to assume company pension liabilities, marking the largest UK deal to date and providing a significant boost to the UK’s pensions sector. Legal & General completed a £4.8bn full buy-in for the Boots Pension Scheme, while Rothesay finalised a £4bn buy-in with a Co-operative group pension scheme section. These bulk annuity deals involve pension scheme trustees paying insurers premiums to take on some liabilities, reflecting a growing trend in the market. The move is driven by pension schemes seeking to mitigate risks in volatile markets, with 2023 expected to be a record year for such transactions. High interest rates in the UK and increased funding ratios for pension schemes have contributed to the heightened demand however, regulators such as the Bank of England's Prudential Regulation Authority(PRA), have expressed concerns about insurers' exposure to reinsurers.
In light of worries of the exposure to reinsurers, Rudy Khaitan, managing partner of later-life lending specialist, Senior Capital, advocates for the embracing of fixed-income allocations, particularly through residential mortgage-backed securities(RMBS) and the pooling of contribution schemes. Khaitan argues 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. This could allow pension funds to mitigate risk with alternative asset allocations.
The UK equity release market has grown by 100% in the last five years as consumers continue to feel the financial impacts of inflationary pressures and rising interest rates. RMBS, therefore, in a period of economic uncertainty, can generate steady cash flow for pension funds. Khaitan explains that allocating capital towards equity release products could provide diversification benefits alongside a different risk-return profile than traditional financial assets.
Britain’s pension sector has historically underperformed against its rivals, with the nation’s pension funds’ average annual returns sitting at just 9.5% as of 2021, according to Moneyfacts, which is in stark contrast to a 20.4% increase by the Canada Pension Plan Investment Board, as well as a 22.3% 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, 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.”

Legal & General Trends(308 articles)
Rothesay Life Trends(8 articles)