- With the number of elderly people growing as a share of the global population, old-age care is facing a rising financing shortfall in many countries, including the UK.
- Elderly care is not a focus area for most investors, although the retirement housing sector is attracting more interest.
- Innovation in Britain’s retirement sector is seen as a big potential opportunity, but size and scalability are issues for such investments.
Old-age care should be a huge and growing investment opportunity. Emphasis on should.
Life expectancy in many developed countries now exceeds 80, and the UN forecasts that the global population of over 60s will rise from 1.05 billion in 2020 to around two billion by 2050 and three billion by 2100. That means it will steadily account for a substantially higher proportion of the overall population, which the UN projects will rise from 7.7 billion today to 9.7 billion in 2050 and nearly 11 billion by 2100.
Of course, the extent to which a longer life will be fulfilling is largely determined by one’s health, wealth and care system. And the elderly care sector is facing a financing crisis as the global population ages, including in developed countries.
The UK is a case in point. Britain suffers from insufficient funding at a central government level, resulting in a squeeze for local authorities responsible for managing social care. What’s more, the UK care home sector has been rocked with scandals of neglect and abuse for several years.
The coronavirus pandemic has made matters worse. At its height, as many as half of deaths related to the virus in Europe took place in care homes, said the World Health Organisation in July 2020.
Rising investment opportunity?
“Covid-19 shone an uncomfortable light on the state of the UK’s retirement living provision, and with the population of over 75s set to increase by 56% over the next 20 years a once nascent sector looks set to explode in the coming years,” says fund house Investec’s ‘Future Living II’ report published in June last year
The paper focuses on retirement housing rather than other ways to gain exposure to the sector, and indeed this remains the main way that investors do so.
Simon Scott, head of living at property services firm JLL, says in the report: “Life expectancy is growing, baby boomers are moving into later-year provision, [and] there is serious undersupply. These are all pretty fundamental drivers for a compelling investment in my view.”
A growing number of allocators agree, according to the Investec survey, which polled 52 institutional investors. One-third of respondents said they were investing in the space as of mid-last year, up from one-fifth in 2019. Looking ahead, six in ten respondents said the asset class was particularly appealing from an investment perspective over the next five years, up from 35% in 2019.
This sector has probably been slow to take off because it needs investors with a longer-term view, says Jamie Bunce, CEO of Inspired Villages, which operates retirement communities across the UK. It counts the likes of Legal & General and Natwest Group Pension Fund as investors. But this market could be at an inflection point as there is a lot of new capital coming in, he tells Capital Monitor.
Elderly housing: niche assets
Retirement housing nonetheless remains a niche area of real estate investment. Meanwhile, other ways to gain exposure to elderly care, such as technology innovations, are typically seen as lacking scale or sufficient track record.
Local Pension Partnership (LPP), a £22.8bn ($28.2bn) UK retirement fund, only has exposure to old-age care via £85m of care home assets in its property portfolio and some healthcare investments, says Chris Rule, London-based chief executive of LPP. The fund is one of eight defined benefit (DB) local government pension scheme (LGPS) pools formed six years ago to manage the assets of 89 local authority retirement funds.
“For us to invest a meaningful amount of money, we need reasonably significant projects to invest in,” Rule tells Capital Monitor. “[Investing in quality older age care] is something that we would probably look to work on with other fund managers and joint venture partners to try and bring to the fore.”
Ultimately, though, elderly care is not a focus for most investors, despite pockets of activity globally for the eagle-eyed. “The current version of capitalism does not value care for elderly people,” says a UK-based pension fund executive on condition of anonymity. “It is not attractive to investors because the output – good care – carries zippo value to the investor.”
Old-age care: raising awareness
Senior executives in the UK pensions industry have recently sought to raise awareness of the issues (and opportunities) of old-age care through the ‘Silver Linings’ competition. The initiative offered a £10,000 top prize for the submission chosen as the best business plan to make care for older generations sustainable. It was launched in January 2021 and the winner was announced in February this year.
Taking the top prize was Companiions Together, a mobile app for booking help and companionship for oneself or loved ones. The two runners-up were Ethel – The Elderly Care Platform, a digital health touchscreen device for the elderly; and Smart Hydration, Wi-Fi-enabled drinking devices that measure hydration, remind users to drink, and alert carers when encouragement to drink is required.
Competition judges include LPP’s Rule; Sarah Bates, chair of Universities Superannuation Scheme Investment Management, the UK’s biggest pension fund; and individuals from the John Lewis Partnership Pensions Trust and BBC Pension Investment. Also involved is Sally Bridgeland, a non-executive director and pension trustee, and the former CEO of the BP Pension Scheme; and Robert Waugh, CEO and co-chief investment officer of NatWest Group Pension Fund.
LGPS funds and defined contribution (DC) pension schemes are seen as good candidates for investing into elderly care. Unlike UK corporate DB schemes, which tend to be largely or fully invested in gilts and just trying to match their liabilities, LGPS funds must invest in projects that they believe will grow and generate income over a long period, so “sustainability is key”.
Meanwhile, the UK’s growing DC sector gives beneficiaries more flexibility over how their money is invested, Bridgeland says. “[Under a DC scheme], if you’re investing in retirement housing you can also be investing in medical advances and technology,” Bridgeland says. “There might be some venture capital and real estate in the same box, and there’s not a problem with that.”
In addition, DC schemes tend to take more risk because they are growing and investing money on behalf of younger policyholders, so tend to have a longer-term horizon.
The UK government appears to be aware of such trends. On 30 March it published draft regulations to make it easier for DC pension schemes to invest in illiquid assets if doing so is in members’ interests. The DC market stood at around £500bn last year and is expected to exceed £1trn by the end of the decade, estimates investment consultancy Willis Towers Watson.
More education and scalability needed?
To channel more capital into improving old-age care, however, more education is ultimately needed about the size of the investment opportunity, says Paul Lester, chairman of UK retirement home operator McCarthy Stone and another Silver Linings judge.
Investors would also welcome greater scalability of assets.
“It is difficult to get something new on the agenda [at pension funds]. It’s really difficult to be innovative in this market,” Bridgeland says. She cites the fragmented nature of the UK retirement plan market, which comprises thousands of small schemes.
There are a few big funds that could lead the way, adds Bridgeland, but it requires the investment consultants and the asset managers to be ready. “Everything's got to kind of move at the same time, because otherwise it's difficult to know where the investments come from.”