Defined Benefit

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?


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