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Final Report “Integrating Residential Property with Private Pensions in the EU”1 FINAL REPORT in cooperation with Rostock University (UROS), Andrássy University (AUB), Waterford Institute of Technology (WIT), Technical University of Delft (TUD), The Libera Università Maria Ss. Assunta (LUMSA) and Queens University Belfast (QUB) Acknowledgements This report and its Annex present the results of the research project “Promoting the contribution of private savings to pension adequacy: Integrating residential property with private pensions in the EU” led by iff, institute for financial services, Hamburg. Financial support by the European Commission, DG Employment, Social Affairs and Inclusion is gratefully acknowledged. We also thank the many participants and stakeholders involved in our work over the course of 2016 and 2017. This project has received funding from the European Union’s EaSi Grant Programme under grant agreement No VS/2015/0218. This publication reflects only the authors’ views and the Commission is not responsible for any use that may be made of the information it contains. Co-funded by the European Union 1 Authors in alphabetical order: Kerim Al-Umaray, Richard Burke, WIT, Sean Byrne, WIT, Sebastien Clerc-Renaud, iff, Kess Dol, TU Delft, Jörg Dötsch, AUB, Martina Eckardt, AUB, Marja Elsinga, TUD, Michael Feigl, iff, Giovanni Ferri, LUMSA, Declan French, QUB, Marietta Haffner, TU Delft, Peter Hennecke, UROS, Joris Hoekstra, TU Delft, Yogesh Jaiyawala, WIT, Francesca Lipari, LUMSA, John Maher, WIT, Donal McKillop, QUB, Pierluigi Murro, LUMSA, Doris Neuberger, UROS, Stefan Okruch, AUB, Flaviana Palmisano, LUMSA, Felix Piazolo, AUB, Udo Reifner, iff, Tripti Sharma, QUB, Dirk Ulbricht, iff I Integrating Residential Property with Private Pensions in the EU – Final Report 2017 Executive summary Purpose and methodology This report addresses the topic of integrating residential with private pensions in the European Union. It is looking at asset conversion linked to household residential property, such as Equity Release Schemes (ERS), in a context of ageing Europe and housing wealth divergences across it. Currently consumers have mortgages and they have pensions. Both are long term products, requiring advice, involving income and capital, with independent set up costs and competing priorities in terms of their commencement. The potential for integration of these now independent offerings is what was considered in this project. While examining this issue in detail in six Member States - Germany, Hungary, Ireland, Italy, Netherlands, and UK - it has regard also to the profile of other Member States and of countries outside the European Union. The project was undertaken over a two year period covering 2015 to 2017 and involved detailed compilation, analysis and interpretation of secondary data relating to individual countries. It also required the generation of original qualitative and quantitative evidence consisting of focus groups, interviews and surveys, drawing on the opinions, experiences and perspectives of consumers, suppliers, regulators, non governmental organisations representing the elderly and government departments. The research has allowed for empirical experience, theoretical analysis, frameworks, models and international policy reports. The project was commissioned and undertaken because of the impact of an ageing population in Europe, the sustainability of existing retirement income frameworks, the materiality and illiquidity of housing assets in portfolios held by segments of the population, and a hypothesis that such housing wealth could play a role in retirement income augmentation. The perspective adopted by the consortium has regard to economic, fiscal, behavioural and legal dimensions in the first instance. Overall principal findings Scope for ERS: There is scope for deployment of property to augment retirement income though such scope is unevenly spread across EU Member States. This scenario is principally a function of the age profile of the population, the extant housing patterns, the cultural approach to savings and housing, and the degree of state involvement in housing and pensions both in direct provision and also by way of incentives. ERS can only be part of the solution as they are only of interest to a rather small part of the population, i.e. the cash poor but house rich with no bequest motive. Unfortunately, for those in most need of additional income, i.e. low income households with subsequently even lower pensions, ERS is usually not applicable as these households generally do not possess high real estate equity that could be released. Lenders see a future market in housing equity release products since the population is ageing, pensions are under pressure and housing equity is an underestimated resource. However, finding a good balance between risks and returns is not easy, both for households and for providers. In only a few European countries, such as the UK, a market for housing equity release products has really emerged. In most other countries, such a market is still in an embryonic state or non-existent. Providers of housing equity release products often suffer from a bad image. Indeed, households in serious need can be an easy victim for unscrupulous providers that want to sell untrustworthy (too expensive, bad conditions) products. Main stakeholders: Generally the form of property deployment involves variations in ownership, the exchange of cash in different time periods, the degree of risk with respect to property values, mortality, morbidity and interest rates, the availability of capital, and the legal form of contract. Six key stakeholders are involved: households, the State as the default supplier of retirement income and the maker of fiscal rules, the regulatory authorities who supervise I Integrating Residential Property with Private Pensions in the EU – Final Report 2017 financial markets, financial institutions and their financial intermediaries, and lastly legal actors who devise, advise on, interpret and enforce contracts. ERS serving different consumption preferences: The use of ERS differs considerably across EU member states. As an example of the most developed ERS market across the EU, the equity release market in UK is dominated by the loan model (lifetime mortgages). Homeowners demand such products primarily to finance home or garden improvements (63%), followed by to pay debts (31%) and go on holidays (29%). Only 13% of customers need the funds to help with regular bills. This suggests that ERS may serve different purposes from one country to the next. In the UK, the industry has organized itself through a trade association and today, the products are sold with a mandatory ‘No Negative Equity Guarantee’ that reduces the loan-to-value ratio or the liquidity released. Consumer awareness: Even in the most developed market, not many people in the UK understand equity release completely or are aware of this financial product. Equity release schemes can become a regular source of income for people in retirement if there is more transparency about the mechanisms and tax implications of taking out ERS. Fair propositions, quality standards and multiple providers: If designed appropriately, priced fairly and sold responsibly, ERS products are able to provide substantial social and economic benefits to individuals in retirement that seek financial solutions adapted to their needs. ERS can support consumers at the peak of their life experience in releasing capital from their homes to meet their daily needs as well as to greatly improve their quality of life. The market will only be considered consumer friendly however, when there are more providers competing to offer competitively priced products offering greater choice and flexibility to the over 65 year olds. The US experience, where a sizeable number of providers have been present on the market, also emphasises the need for real competition by ensuring there is a buyer’s market where shopping around is possible. Possible solutions: The process for ERS deployment could involve a range of solutions for different age cohorts. Younger cohorts may have possibilities not available to their older counterparts already committed to wealth accumulation in housing and other tradional pension fund assets. The project has sought to develop a hybrid system of old age pensions offering a permanent choice between the conversion of homes into liquid pensions and the conversion of pension savings into homes. This product should be adapted to different legal orders and implemented in a fairly standardised way so that retail markets can offer it at reasonable cost. Among the solutions that have been put forward to remove barriers to development of market solutions, are a list of minimum quality features, consumer information leaflets to raise awareness of advantages and risks, and a suggestion on how risk sharing mechanisms and product construction could encourage the providers to enter the market. There could be merit in piloting an urban initiative in a number of Member States, which would examine the effectiveness of one or more product proposals. A joint approach beween European and national funding sources could provide the necessary impetus, social cover, commercial cachet, financial oversight and political support that would make this possible. Sharing good practice, robust stakeholder governance, and community participation would be counted among the prerequisites. One way of doing this would be to invite applications from collaborating stakeholders
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