There has been a substantial change in the UK pensions
landscape in the last decade. Membership of UK private sector occupational Defined
Benefit (DB) schemes has fallen from 2.8m people in 2008 to 1.1m people now, as
these schemes close and mature. Meanwhile, UK Defined Contribution (DC) pension
scheme membership has soared, from 1m people in 2013 to over 10m people in
2018. This increase is driven primarily by the Government’s decision to force
companies to ‘auto-enrol’
workers in a pension scheme if they do not otherwise have one.
Figure 1 Membership
(millions) in private sector pension schemes
So, the amount of money flowing into UK pension funds (mostly
DC schemes) is increasing rapidly. While the assets held by DB schemes still
outstrip those of DC schemes (one IPF estimate for 2015 suggests £1.3trn and
£300bn respectively), growth in DC schemes assets is outstripping growth in DB scheme
As DB schemes mature, they become more risk-averse,
reflecting the need to reliably pay out pensions month after month, rather than
investing contributions for the long term and not worrying too much about short
term cashflow. This risk aversion tends to involve selling (riskier) equities
and buying (safer) bonds.
The received wisdom is that DB pension schemes are also
incentivised to sell real estate, given its illiquid nature and the income risk
associated with void periods. But in fact ONS data shows that, over the last 10
years, pension fund real estate allocations have stayed broadly stable at
However, within that real estate allocation, pension funds appear
to be selling real estate that behaves like equities and buying real estate
that behaves like bonds. It is difficult to pin down, but there is strong
circumstantial evidence that pension fund decisions are one driver of strong
recent inflows of cash into so-called ‘long income’ real estate funds, which
hold assets such as 25-year leases. CBRE now values £15bn of long income assets;
our quarterly Long
Income Index tracks their performance. Long income is attractive
because it provides long-term, steady, contracted income, often directly
indexed to inflation. Thus it is ideal to match to pension liabilities. By
contrast, since 2015, traditional real estate funds have seen net outflows.
Figure 2 Cumulative net new investment in
property funds (£m, LHS) and Long Income’s share of that investment (%, RHS),
Source: CBRE Research, MSCI
This move away from traditional funds to cashflow-driven,
liability-matching long income funds is not, however, driven entirely by
pensions reform. There are other reasons why pension funds are selling real
estate right now – not least the uncertainty created by Brexit.
In any case, the behaviour of DB schemes is arguably the
less important bit of the picture. DC schemes probably allocate around 2% of
their funds to real estate compared with 5% for DB schemes.
There are good reasons why DC schemes might always allocate
less. But the sheer growth in DC scheme assets and the relative youth of their
membership suggest that DC will be a fresh and growing source of real estate
investment from now on.
Get in touch if you’d like to know more about our research
on pensions and real estate.