Should pension schemes allow members to use funds to help get them on the property ladder? And are there more innovative ways the pension funds could be used to address the housing crisis in the UK — with schemes investing in the property market directly, for example, helping to build more affordable housing, both to buy and to rent?
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These were the main issues debated at a Corporate Adviser round table event on housing and pensions. Delegates noted a clear intersection between the housing crisis and financial resilience of members in retirement, with some noting there was also the potential for pension schemes to generate positive returns for members by investing in affordable housing. But opinions differed on whether pension schemes should focus on supporting social factors such as affordable housing, or aim solely to maximise returns.
The housing market has seen significant changes in recent decades, with the private rented sector doubling in size over the past 20 years. There is also a disparity between average property prices and mortgage affordability, with average property prices now standing at eight to 10 times the average incomes, whereas the average mortgage is still typically 4 to 4.5 times income.
Demographic change
Pension Policy Institute Anna Brain said there can be very different retirement outcomes between renters and homeowners, and said that the industry and policymakers need to look carefully at this data and assumptions around retirement adequacy for each of these groups, not least because of the significant projected increases in those set to retire into the private rented sector.
“The interaction between housing and pensions is inseparable. If you reach retirement as a homeowner, largely the planning that you put in place 20, 30, 40 years ago is likely to deliver what you expected. All other things being equal, if you reach retirement as a renter, you’ll have a shortfall in income,” she said.
Brain also noted the strong cohort effect, notably among current retirees who benefited from policies such as ‘Right to Buy’ — which enabled those in social housing in the 1980s to buy their property at a discounted price — and questioned whether future homeownership rates will equal those of current retirees.
She said: “The question that needs to be asked is, could homeownership rates reach such highs again? And should they? There’s no consensus target, but the cohorts that follow have differing needs. Income stratification, age cohorts and the economic environments they grow through all play into this. There’s a clear and close link here, yet it’s not adequately built into pensions policy.”
Delegates noted that the pensions sector needed to properly reflect the reality faced by those on course to rent in retirement, who could see their pension savings wiped out by rental costs, which would have been paid by Housing Benefit had they not saved. For this group, the question of saving for a home or a pension is becoming increasingly pertinent.
Capital Cranfield professional trustee Andy Cheseldine said there was an unavoidable intersection of pensions and savings. He categorised demographics into three cohorts: those on benefits and not working, individuals at the top end who are financially secure, and those in the middle striving to secure their financial future.
He emphasised the importance of tackling the difficulty faced by renters who are automatically enrolled in pensions, predicting future difficulties for pensioners without property ownership. He said: “15 to 20 years is a really short time period to organise demographic change and ensure financial stability in retirement.”
Regulatory challenge
Representing NatWest Cushon at the event, Coutts head of workplace pensions and savings proposition Janine Menasakanian said the bank focuses on helping people onto the housing ladder earlier by extending mortgage terms. This reflects people’s longer working lives, and may make mortgages more affordable, in terms of monthly repayments and potentially reducing ‘excessive’ deposits, via a higher loan to value.
But despite efforts by lenders to be more flexible, stringent regulatory stress tests for mortgage approval are still preventing many people from qualifying for home loans. These require lenders to check that a home loan remains affordable should interest rates rise. She said: ”The regulation is really tough. The stress rate that we have to apply from a regulatory perspective is really important. So even if you can afford your rent today, it doesn’t mean you will necessarily get approved for a mortgage, [with a similar monthly repayment], which I find crazy.”
Nest Insight executive director Will Sandbrook highlighted the financial challenges younger generations face due to high house prices and student debt, stressing that simply saving more money won’t solve the problem retirement renters will face.
He noted: “I think it’s a logical fallacy to assume that all of this can simply be solved by people saving more money, unless we believe that people can realistically get to a place where they’re saving 50 per cent of their income. Some of the solutions here are going to have to involve something other than just talking ourselves into a belief about individuals saving more out of individual income.”
Housing security
Brain predicted that the 45+ age group will experience tough challenges. Homeownership among retirees now stands at a record level of 78 per cent. But due to a lack of movement into homeownership after the age of 50 and a shortage of social housing, this figure is expected to shrink to 63 per cent by 2041, forcing many people into the private rental market.
According to Sandbrook the retirement system should prioritise housing security in retirement rather than solely focusing on getting people onto the housing ladder. He highlighted that 22 per cent of retirees currently rent, indicating a need for solutions that support affordable rental options.
He reformulated the question: “I don’t think the question should be how can the retirement system help people get on the housing ladder? I think the question should be how can the retirement system, the pension system, help people have housing security in retirement? It has to include solutions for secure, affordable
rent in retirement.”
Sandbrook also warned against the over-reliance on demand-side solutions that could inflate house prices and advocated for leveraging institutional investments.
He said: “We have to be careful about focusing only on demand-side solutions, as this can push homeownership out of reach for others. There’s a huge role for institutional investors like pension funds, supplying affordable homes, both to own and to rent. Innovative ways of using institutional money to support housing supply are still relatively untapped.”
Additionally, he recognised the growing number of retirees with outstanding mortgages and the need for strategies to address their financial issues. He suggested investment strategies that hedge against rental price increases for those who will rent in retirement. Sandbrook pointed out: “If you know that a subset of your members are going to be renters in retirement, there’s a strong argument that the default asset mix should include assets that track rental prices.”
Employer involvement
According to Menasakanian there is potential for employers to provide more help to their employees by addressing the wider issue of financial resilience and wellbeing.
She said: “I think the role of employers in housing solutions, alongside government support for housebuilding and infrastructure, is worth exploring. Leveraging institutional funds, like through Nest’s sidecar savings, can diversify savings beyond pensions, including vehicles like the Lifetime Isa, which helps younger generations save for homeownership amidst pension concerns.”
Sandbrook spotlighted US firm Abbott Labs’ approach, where they offered a 1-to-1 match into their retirement plan, contingent on employees either joining the pension or committing to payroll repayment of student loans. He said such models aim to avoid the binary choice people face between pension enrolment and debt repayment, promoting financial security without paying off loans directly.
Barnett Waddingham senior client relationship manager Katy Hayes voiced support for employer-sponsored initiatives allowing employees to allocate contributions to different savings alongside pensions. This she said offers flexibility in savings strategies, acknowledging members have a range of financial goals.
Hayes suggested that employers could implement measures that would see pension ‘matching’ contributions maintained if employees chose to redirect payments into alternative investments. These flexible savings strategies could benefit young people looking to clear their student debt and become homeowners, she added.
She said: “I think there’s potential in employer-sponsored initiatives where employees could divert contributions into different savings alongside pensions. We can’t just ask people to put a minimum into a pension; they face significant barriers like student debt and the desire to buy homes.”
Cheseldine said that instead of granting tax breaks the government could offer National Insurance relief on employer contributions, which would result in similar cost savings.
Nigel Purves, CEO and founder of Wayhome, a gradual homeownership provider, said: “We have identified that there is an intersection between the housing crisis in the UK, the consumer finance angle, and the investment opportunity for pension schemes.”
Wayhome offers a new method for buying homes in the UK, helping families to move into homes they can already afford to rent through a part-rent, part-own model, but cannot afford to buy through traditional channels. Under the Wayhome model, the individual buys as much of the property as they can afford and then pays a market rent on the balance. They then have the opportunity to buy more tranches of the property whenever they have more cash available, thereby reducing their rent and increasing their equity. They benefit from security of tenure not available under traditional assured shorthold tenancies, and the mental wellbeing positives that come from that.
Wayhome’s interest in the pensions sector is twofold – firstly it seeks capital from pension funds to help it invest – it has pulled in £75 million in pension fund investments using this model and currently has a portfolio of 222 properties – and secondly its part-ownership model could be used in conjunction with early pension access structures currently being discussed in the sector.
Purves said the current return on the portfolio is between 6 and 8 per cent, and added that Wayhome is in conversation with some master trusts with regard to investing. He added: “We are able to deploy all the time because we buy existing stock. So you don’t have the problem of investing in a fund and seeing sit there for two years tracking income. Last August we bought a home every single day of the month – we can match the cash inflow profile of a master trust quite nicely. “Generally speaking a 6 to 8 per cent return is fairly standard for a residential property type investment. It’s sometimes lower for social and affordable housing. I have some concerns about some of the new build focused investments for the long term, because we don’t know what discount you’re going to end up getting if you need to sell out of those, whereas our portfolio is diversified existing stock.”
Supporting employees
Purves added that offering more comprehensive employee benefits can give a competitive edge in attracting and keeping talent by supporting employees’ key financial objectives such as buying their first home.
He said: “It’s an opportunity for the organisation to do right. It’s a way to support your recruitment and retention of talent, if you have something unique that means ‘if you work, we will support your savings journey, we’ll support your home ownership journey’.”
Menasakanian added: “We’re changing the narrative, almost creating within the bank an ecosystem of products that we can deliver to businesses through HR services as well as now through NatWest Cushon too. We’re talking about talent retention and how they can help employees with the cost-of-living crisis, so they don’t see this as just a tick box exercise.”
Pension access?
Experts at the event discussed three possible models for using pension assets to support home ownership – these could be summarised as pension pledging, withdrawal and co-purchasing.
Under the pension pledge model, which already exists in South Africa, mortgage lenders are persuaded, or forced, to agree to accept an individual’s pension pot as a secure deposit for their property purchase.
This model was floated in the UK some time ago, with mortgage lenders pushing back on the basis that DC pots are volatile assets and are not the sort of things they are used to using to secure big loans like mortgages. One way to address this would be to require any pledged segment of a fund to be put into a more secure asset class such as gilts.
A second model is a simple withdrawal approach, effectively similar to the 401k approach of loans from the pot. Here money would be withdrawn from the pot and sent to the conveyancer as a deposit. This reduces the size of the pension, but would see the investor owning outright the portion of the property purchased with the deposit.
Under the co-purchasing model, the pension itself becomes a co-owner of the property, buying, say, 10 per cent of the property, and then receiving a 10 per cent rent from the individual. This model would see the individual retain the full value of their pot, and the individual could potentially buy back the portion owned by their pension pot at a later date, at a market rate.
Menasakanian expressed concern that members are mis-using the Lifetime Lisa (Lisa), the current support for homeownership, and are being penalised as a result. She said there is a danger this would also happen if access to pensions for home purchase was made easier.
She points out: “People are accessing Lisa funds and not realising they’re being penalised. They get their 25 per cent bonus from the government, but end up with less because they pay it back. That’s happening to our members, and I worry about making pensions accessible because I think people will do the same. Lisas are for home purchase and then retirement and yet people are dipping into these funds for other reasons and being penalised for it.”
Hayes recommended that any access to pensions should be subject to constraints, similar to 401K loans, which have limits on the amount that can be withdrawn as well as the timeline for repayments.
She said: “I think if there’s no requirement that makes somebody pay it back, you’re not necessarily going to put it back in again.”
Sandbrook emphasised the importance of empirical evidence and thorough analysis of potential risks before implementing any change to pension legislation around access.
He also questioned the practicality of using pension funds for mortgage pledges, citing concerns such as defaults and liquidity implications for pension funds. But he recommended an in-depth and evidence-based approach before integrating housing efforts with auto-enrolment pension systems to achieve a cohesive financial resilience strategy.
He said: “I think my challenge would be that it’s an intuitively attractive idea. The one I think is really interesting is maybe you make the Lisa match available to people after the fact, if they use their money to buy a house. There are all sorts of interesting little ways you can tweak the system, but they need work. Someone needs to sit down and actually model out in a UK context.”
Meanwhile, Brain underlined the necessity of targeted policies when integrating housing and pensions, citing worries about regressive benefits and the need to ensure that programmes benefit those who need them the most.
Brain discussed the conclusions of a PPI report, stating that she found strong backing for a wider debate about enhancing the interaction between housing and pensions.
“But the risks that come with that were quite clearly articulated, and they revolve specifically around making sure that any policy is properly targeted. There were concerns raised that sometimes these policies around incentivising home ownership can be quite regressive, and they benefit people who don’t necessarily need the help the most whilst not always necessarily being adequately designed to target those who do need the greatest amount of help.”