Advertisement

Ways to pep up your pension returns

“Alternative” investments can be risky, but are worth considering if you want to increase your pension returns.

Savers whose retirement funds are invested only in "conventional" assets could be missing out, according to a new study by pension specialist JLT Employee Benefits. The research suggests that allocating 20% of portfolios to illiquid alternative investments could boost the value at retirement of the typical fund by up to 12%.

Advertisement - Article continues below

Investments in this category include private equity, private debt, infrastructure and real estate. Many occupational pension funds routinely ignore these asset classes, notes JLT, focusing instead on listed equities and bonds. Savers with private pensions also rarely invest in alternative assets.

The argument for investing more in alternatives lies in the diversification benefits they provide in other words, history suggests they do not move in the same direction as more traditional assets.

So by adding these assets to the mix, pension-fund managers should be able to reduce the total risk of the portfolio while boosting expected returns.

Over time, the impact of such a shift could be very significant. JLT's models suggest that a pension fund invested 80% in listed equities and 20% in a mix of alternatives would deliver

8% more over 35 years thanan equity-only portfolio.If the alternatives portion was entirely invested in private equity, that outperformance would increase to 12%.

Watch your timing

Remember too that this is historic analysis. Pension funds have a tendency to start paying attention to asset classes when they are expensive, rather than cheap, and many would argue that private equity, for example, is in something of a bubble right now. The government not known for its good market timing is also keen to encourage increased investment in illiquid assets, partly to boost the capital available to privately owned companies in need of funding. Last month it issued plans that would allow small occupational pension funds to co-invest in alternative assets.

With all this in mind, illiquid assets can be worth a look our story on timber this week (see page 24) offers one good example of the potential benefits on offer.

Advertisement
Advertisement

Recommended

Companies cut back on their pensions bills
Personal finance

Companies cut back on their pensions bills

Britvic is the latest firm hoping a cheaper inflation index will cut pension costs. David Prosser reports.
28 Aug 2019
This landmark pension case could mean big payouts
Pensions

This landmark pension case could mean big payouts

Defined-benefit members in bankrupt firms’ pension schemes could be due a payout after a landmark High Court judgment.
10 Jul 2020
Bank of England sceptical about pension superfunds
Pensions

Bank of England sceptical about pension superfunds

Plans for “pension superfunds”, cleared by industry regulators in recent weeks, could pose a threat to financial stability.
10 Jul 2020
How the pandemic has affected your pension scheme
Pensions

How the pandemic has affected your pension scheme

It’s time to review the effect of Covid-19 on your retirement savings and take any necessary action.
30 Jun 2020

Most Popular

An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Can Rishi Sunak save the economy with stamp duty cuts and half-price meal deals?
UK Economy

Can Rishi Sunak save the economy with stamp duty cuts and half-price meal deals?

John Stepek runs his eye over the chancellor's £30bn stimulus package and asks if it's enough to get the economy back on its feet after months of lock…
9 Jul 2020
A first-half home run for investment trusts
Sponsored

A first-half home run for investment trusts

The investment trust sector has seen some extraordinary performance in the first half of this year. Max King looks at what's behind it, and asks: is i…
7 Jul 2020