Thought Leadership (Professional Only)
Where does real estate fit in pension scheme de-risking plans?
De-risking has been a key trend for UK pension schemes over the last 10 years. In an attempt to attain and retain higher funding levels, allocations to growth assets such as equities and real estate (property) have been reduced, whilst holdings of bonds have been on the rise. However, is blanket de-risking across growth assets, or even a move wholly out of real estate, necessarily the best way to reduce risk?
7 March 2016
In this paper we look at the contribution which real estate can make in helping pension funds meet their de-risking objectives. We conclude that:
- On average UK pension scheme deficits have increased, with recovery plans extending accordingly. Long-term growth assets like real estate should therefore still have a place in many pension scheme portfolios as part of their de-risking strategy
- Real estate yields are at relatively attractive levels for schemes seeking an asset to outperform their pension liabilities and close deficits over the long term
- Investors are likely to be rewarded with an illiquidity risk premium
- Real estate offers a sensitivity to inflation that can be useful in matching the inflation-linked cashflows of pension schemes. It has both liability matching and growth characteristics, making it a hybrid somewhere between equities and bonds
- Real estate offers some diversification against other asset classes
- The long-term outlook for real estate remains attractive. Although total returns are likely to vary from year to year, the income return is relatively predictable over time
Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.