Chancellor Jeremy Hunt’s proposed reforms, outlined in the Spring Budget, signal a potential surge in pension fund investment, particularly in UK-listed equities.
The focus on compelling pension funds to disclose the geographical breakdown of their assets aims to address the industry’s reluctance to support domestic companies. With the Treasury’s plan to require defined-contribution pension funds to disclose this information publicly, there is anticipation that this mandate could significantly increase investment in London-listed equities.
Broker Panmure Gordon suggests that this measure could have a greater impact than the proposed British ISA, which allows tax-free investment in UK assets. While the British ISA is expected to bring in £1-2 billion of inflows, the market has seen £13.5 billion of net outflows in the past year. Rudy Khaitan, Managing Partner of Senior Capital, emphasizes the importance of diversifying pension funds’ investments and reducing risks through alternative schemes such as fixed income allocations.
The proposed reforms also aim to reinstate previous income thresholds for high net-worth individuals to boost entrepreneurship and primarily target defined contribution schemes for greater disclosure of British investments by 2027. Khaitan suggests pooling different schemes together, with private equity funds helping to mitigate risks through alternative asset allocations, such as residential mortgage-backed securities (RMBS).
The UK equity release market has seen significant growth in recent years, with record activity driven by consumers feeling the financial impacts of inflationary pressures and rising interest rates. Equity release products are emerging as a vital lifeline for cash-strapped individuals, particularly in later life, offering financial stability amidst the cost-of-living crisis.
Khaitan emphasizes the potential benefits of equity release products for pension funds, highlighting their ability to cover liabilities and provide attractive risk-adjusted yields. With the average UK pension pot standing at £107,300, according to the Office of National Statistics (ONS), there has been a significant increase in people turning to equity release, indicating its importance in bolstering retirement incomes.
In summary, the proposed reforms present opportunities for pension funds to enhance returns and support economic growth. By diversifying investments and exploring alternative asset allocations such as equity release products, pension funds can align with their long-term objectives and navigate the evolving financial landscape more effectively.