This article was published in What Investment magazine: https://bit.ly/2DH9sWS
Institutional investors and pension funds are noteworthy for their cautious approach towards adopting new investment products and dipping their toes with new asset classes. Yet in recent years, their appetite for peer-to-peer (P2P) lending has steadily grown as the product and market have matured and become part of the mainstream financial ecosystem. Yann Murciano, CEO at P2P property lending platform Blend Network explains why P2P property lending has become an increasingly popular investment product with pension and institutional investor and what the future may hold.
According to the Moneyfacts UK Personal Pension Trends Treasury Report, the average annuity income fell by 6% in the first three months of 2020, its lowest level on record. The data shows that in Q1 2020, the average annual standard annuity income for a 65-year old person was 1.7% lower than the previous lowest level recorded in October 2019. Moreover, those saving for retirement will also have seen their pension funds severely hit during the first three months of 2020. The impact of Covid-19 on the global stocks markets has caused the average pension fund value to drop by 15% in this period, its worst quarterly performance on record. Many popular ABI pension fund sectors posted even heavier losses, with UK Smaller Companies (-31%), UK All Companies (-30%) and UK Equity Income (-28%) pension funds hit the hardest. In fact, only 11% of pension funds avoided losses in the first quarter of 2020.
Amid the recent episode of market volatility and the broader cycle of low interest rates witnessed over the past decade, it comes as no surprise that P2P lending has emerged and consolidated its position as an asset class with considerable appeal among pension investors. P2P, highly regulated by the Financial Conduct Authority, is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers. At Blend Network, so far in 2020 we have seen a 40% year-on-year increase in the number of investors looking to lend their SIPP and SSAS in 8-12% return p.a. P2P property-secured loans.
After emerging in the aftermath of the Global Financial Crisis in response to the lack of funding for borrowers and the lack of yield for investors, P2P lending has become increasingly popular as a financial instrument used by investors to do well by doing good. It allows investors to pick and choose pre-vetted and pre-screened loans and lend directly to borrowers who need funding to undertake a wide range of activities such as, in the case of Blend Network, building more affordable homes. The interest earned by P2P lending is usually higher than the interest that can be earned from cash deposits. This makes P2P lending attractive to investors looking to achieve higher returns, and particularly to retirees looking for the security of an annuity.
Although investors have been able to access P2P investments via SIPP and SSAS since 2014, interest in P2P lending by pension potholders has greatly accelerated in recent years as the industry has matured. The emergence of P2P as an asset class in its own right, which has attracted institutional investors to the space along the way, has opened it up to a wider range of investors, combining retail, family offices, institutional investors and pension holders. Furthermore, the high level of regulation that P2P lending is subject to from the FCA has generally enhanced the trust in the sector and made lenders more comfortable about lending through an online platform. The FCA introduced new, more stringent rules in December 2019.
In summary, a crisis doesn’t create new trends, but it has the tendency to accelerate trends already in place, and perhaps move them along faster. In the aftermath of the Covid-19 pandemic, we have seen an increasing appeal for P2P property lending among SIPP and SSAS investors and believe P2P is about to become a key part of every pension portfolio.