Best fixed-income investments for pension and insurance funds in 2023

Later-life lending specialist highlights Residential Mortgage-backed Securities (RMBS) and European equity release as leading asset class for institutional investors.

Best fixed-income investments for pension and insurance funds in 2023

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,” explains Rudy Khaitan, Managing Partner of the UK’s leading later-life lending specialist, Senior Capital.

As inflation hit a peak of 11.1% in October of 2022, with the Bank of England announcing their 14th consecutive interest rate rise, people across the country have been left wondering what all this turbulence means for their pension savings, whilst for the institutional investors, this has brought increased pressure to deliver. In light of this, Rudy Khaitan, Managing Partner of Senior Capital – the nation’s leading later-life lending specialist – discusses the alternative fixed-income investments which the pension and insurance industries can pursue amidst the current economic landscape.

Challenging economic conditions mean the UK’s £5 trillion pension and insurance markets need for long-term, stable returns has increased with a number of new options now available to them. Fixed income investments are chosen by institutional investors due to their regular income streams and the ability to match long-term liabilities. Fixed income investments for institutional investors typically range from UK Government Bonds (Gilts) – typically considered low-risk because they are backed by the government – to Corporate Bonds – slightly riskier but deliver higher yields than Gilts. Asset-backed securities (ABS) are another go-to fixed-income asset class for investors, these are bonds whose income payments and principal repayments are derived from and collateralised (or “backed”) by a specified pool of underlying assets, like mortgages or credit card debt.

Mortgage-backed securities (MBS) are common examples, however, equity release securitisations or residential mortgage-backed securities (RMBS), in particular, have caught the attention of major financial players due to their alignment with the specific needs of these institutional investors. According to the UK’s Equity Release Council, the lowest Equity Release interest rate is currently 6.22% fixed for life. The highest interest rate in the market is 9.24%.

Khaitan further highlights that bonds formed from equity release loans could not only diversify the portfolio of pension funds, but also offer 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 be seen as a safer 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.

Managing Partner of Senior Capital, Rudy Khaitan, comments:

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 are able to 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.

Equity release is more than a financial tool; it’s a lifeline for pensioners who find themselves caught in the grip of a cost of living crisis. It’s about giving them the freedom to unlock the wealth they’ve built up in their homes, and providing them with the means to live with dignity and security in their golden years. In a world where the costs of everyday essentials are soaring and traditional forms of retirement income can’t keep up, equity release can be a vital support, ensuring that the senior members of our society can enjoy the quality of life they’ve worked so hard to achieve.”