"Only those who will risk going too far can possibly find out how far one can go," is a quote attributed to the sublime T.S. Eliot, but could that kind of boldness be utilised in reframing the way we look at institutional grade asset classes in the UK, and could that be the key to unlocking the looming pensions crisis?
Donald Trump would perhaps think so, as this week the United States changed the face of investing forever and took a landmark step in retirement planning. Through the "Democratising Access to Alternative Assets for 401(k) Investors" executive order, President Trump instructed the US Department of Labor and the SEC to clear the way for alternative investments, including private credit, private equity, and real estate, to be included within tax-advantaged retirement plans. Could this be a route the UK takes? Are the rails already in place with LTAF funds to manoeuvre private credit, including our asset class, into pensions, unlocking a requirement for billions? If structured well, this could deliver diversification, inflation protection, and enhanced retirement outcomes for millions. Or would it expose the market to intolerable levels of risk? We have a look at the upside and the downside in this week's thought exercise.
UK pension funds face an enormous challenge of delivering adequate retirement outcomes against a backdrop of low gilt yields and volatile equities. Traditional balanced funds might provide 4–6% long-term returns, so there is an evident and immediate point to be made that higher yields in private credit will increase the income component, albeit increasing an element of risk. Which, simplistically put, is where the property-backed element kicks in, reducing the correlation with listed equities and bonds, offering a valuable diversification benefit. As loan valuations often indirectly track property prices, they also provide partial inflation protection, aiming to preserve purchasing power.
The core issue is that without purchasing power, pensions don't work; therefore, if not this, it may have to be something else. The argument from a cautious perspective, (and whether this will be the UKs perspective or not remains to be seen), is that the pensions train is on the tracks, and everything is moving fine, the projections may show that in a few decades we will run out of track and reach the ravine, but if we try and alter course now, we will end up like Wallace from "Wallace and Gromit" frantically building a new track infront of a moving train, with perilous ravines and obstacles all around, it just doesn't fit our national sensibilities, aside from the occasional chuckle at the exploits of a bemused plasticine dog. The American perspective is a complete counter narrative to this, it's as ambitious and bullish as you would expect from the current administration, it's more akin the scene in "Hondo" where John Wayne helps the child learn to swim by casually throwing him into a lake, it's "jump in and see" economics, rooted in a machismo of a different political culture.
Historically, access to property-backed private credit has been the preserve of banks, private funds, and ultra-high-net-worth investors, so fully opening pension schemes to P2P lending could mirror the US's democratisation drive, allowing ordinary savers to participate in an asset class that institutions already prize for its stability and yield. Theoretically, the FCA-approved LTAF structure could be tailor-made for integrating illiquid assets into pensions, with provisions for liquidity management, valuation standards, and investor protections. Coupled with the Pensions Policy Institute's finding that UK funds aim to commit 5% of assets to unlisted equities by 2030, unlocking £50 bn in potential investment, the P2P real-estate lending could be a natural fit.
There are substantial pitfalls to consider here, and this will be the debate economists and the government will be having when looking at risk, private credit is not instantly redeemable, posing challenges for pension funds needing daily liquidity. This could be addressed by pooling loans within an LTAF, using cashflow modelling to match redemption windows, and blending with more liquid fixed income, essentially fund managing a pool of funds, but it would be a complex process. Also, unlike listed securities, property-backed loans require independent valuations and regular performance updates to ensure accuracy. FCA-mandated audit and reporting standards within LTAFs could address this concern.
While liquidity, valuation, and regulatory hurdles must be addressed, the prize is significant, because the pension problem will be significant, 1 in 4 people are on course in the UK to hit what "Pensions UK" have dubbed a "comfortable" level of retirement income, so enhancing retirement outcomes for investors, increasing capital flow into productive property markets, and creating a pension system more resilient to low-yield pressures is all up for grabs. In short, we are not quite there yet. Although our sector remains a powerful portfolio diversifier, significant structuring and governance would be required to achieve all the above. Nevertheless, at some point, we must start building the new track and brace ourselves for a swim in the lake.
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