Private Pensions Are at A Crossroads

Can private pensions ever compete with public sector funded pensions? Probably not is the brutal answer, as taxpayers cash is always easier to spend on pensions than cash generated from profit margins earned by private companies, plus the theoretical value of stocks and shares at any given point in a pensions/savings cycle.

According to the latest data from the Office for National Statistics (ONS), the value of private sector-defined benefit plans has fallen by £626bn in 2023. The big question long term is whether a gradually shrinking private sector (in terms of employee numbers) can find ways to invest their pension deductions into asset classes that generate a huge return over 30-40 years. Any private fund needs to do this to combat the effects of inflation of course; a pension pot valued at say £250K today will seem miniscule in 2060. The fund also needs to pay commission each year to the managers of that pension pot. 

Here’s some optimistic comment;

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.”

For financial advisors trying to sell pension plans the outlook is still challenging.

No future government in the UK can legislate to create any sort of regulatory structure which can match the generous terms offered to public sector workers, especially those on 45K a year or more. The allocation of pension funds into green, or Net Zero tech and infrastructure will almost certainly fail to generate a profit in the majority of cases, since the end goal is to fundamentally change lifestyles, restrict individual consumption, travel, ownership of assets etc. rather than make profits. These green goals will also shrink the number of private companies making, distributing and retailing consumer goods, which will again shrink the private pension contributor pool.

Politically, there is a consensus that private pension funds should be invested in Net Zero goals. That may offer a social good, but it’s unlikely to generate decent profits. In any event, the roll-out of Universal Basic Income may well make pensions seem like an irrelevance – why save for retirement when the government gives you free money for life?