Pension schemes are increasingly looking at alternative inflation-linked assets to match their liabilities, in order to meet their Flight Plan to full funding. I have previously mentioned opportunities in infrastructure (Social Housing, Cambridge Water, Veolia Water
) and it is great to see Government encouraging pension schemes to invest in infrastructure.
Imagine if you had the opportunity to invest not only for current pensioners but potentially for yourself and future generations...
Imagine if your scheme could access attractive long-dated, inflation-linked cashflows whilst reducing risk and also investing with a social benefit...
Imagine if you required access to one of these facilities, later in life, but none were available due to lack of investment today...
The opportunity involves securing the growing needs of our ageing population. The investment involves providing a suitable place for elderly citizens to reside and receive the care they may require.
There are two principal drivers for this investment opportunity – rising longevity with associated deterioration in health, and falling central government funding as a result of fiscal austerity:
born in 2010 are projected to live 90.2 years
while those born in 2035 are expected to reach 94.2. For females, the numbers are 93.7 and 97.2 years respectively. Within 20 years, the population of over 80s in the UK is set to double from 3 million to 6 million. Related to this, the number of dementia sufferers is also expected to double in the next twenty years, from 750,000 today. Alzheimer’s Society reports
that one-third of people over 95 have dementia and that almost two-thirds of people in care homes have some form of dementia.
2. Government Funding:
60% of gross social care is currently set against older people and is likely to rise dramatically. The financial cost of dementia stands at over £20 billion
per year and is set to treble. Offsetting this, sufferers who are able to be cared for by family saves the public purse over £6 billion a year. The Government acknowledges that every person admitted to a nursing home increases costs by £26,000
per person per year. This is unsustainable in today’s ‘Age of Austerity’
and is a key reason why the Government is so keen on keeping older people within their own homes, as outlined in their New Deal for Older People
In short, our Government and its citizens face a ticking social/financial time bomb.
We are essentially talking about apartments and homes for older people. These can either be extra care or specialised homes for people who suffer from dementia to live with their carers.
units, are arranged in blocks of between 40 and 120 units – mostly 2 bedroom apartments with communal facilities which extend to lounges, dining rooms/cafeterias, hairdressers, chiropodists, libraries and the like. The units are designed to make life easier for older people to remain independent and stay within their own homes for longer, thus responding to the Government’s agenda. Even more importantly, they allow the dignity of remaining independent, a network of support and a community to get round issues of isolation.
tend to be smaller at up to 30 units. Again, these can be individual apartments made bespoke to respond to the needs of dementia sufferers. It may even be possible for their partners to take up residence which allows life partners to stay together following the onset of dementia, providing not only independence but critical on-site support and in-built respite care for the partner.
This model represents a bit of a halfway house between traditional homes and nursing homes – they give residents continued independence but with support from Care and Support organisations which is paid for from a separate budget. This budget forms part of their personal care allowance as assessed by Adult and Social Services.
Currently, there are only 40,000 Extra Care units available
which means the majority of dementia sufferers end up in nursing homes if their family/friends are unable to provide the support needed. Given the costs involved, it is little wonder that Government and Local Authorities are keen to support people within their own homes.
In order to meet deficit recovery plans, pension schemes require access to long-dated, inflation-linked cashflows to meet the structure of their liabilities. As outlined previously, Social Housing is one asset which throws off these cashflows, generating real yields of between 3-5% (index-linked to RPI).
Based on current rents being agreed with Local Authorities, Extra Care units can generate real yields of between 5% and 6% with indexation to RPI.
Specialist dementia schemes can command higher real yields, circa 6% to 7.5%.
These returns would be predicated upon rents falling within Housing Benefit Allowances and with a Registered Provider collecting the rent.
The Bottom Line
Extra Care and Specialist units offer a financially attractive asset class with real-life, tangible benefits – a Win-Win-Win-Win situation for Pensioners, Carers , Government and Investors. As with Social Housing, the financial industry needs to provide innovative solutions to ensure sufficient funding to meet requirements in a structure suitable for institutional investors.
If you would like to discuss this opportunity further or have some comments, please contact me at firstname.lastname@example.org or my colleague at david.dent @elliottdent.co.uk
[Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice. Click here for full disclaimer]