Our panel of industry experts debate the key issues the equity release industry has had to get to grips with over the past year as well as giving their predictions on how it will develop
What do you think were the key issues equity release providers and IFAs grappled with over the past twelve months?
Haggart: Last year (2008) was a year of significant change on a number of fronts.
Andrea Rozario's appointment as director general of SHIP was a significant step forward and the support all the SHIP members gave to enable this appointment to come to pass is already paying dividends. Having a stronger trade body has served us well in a year when the full impact of the credit crunch came home to roost. For the industry the issue of funding lifetime mortgage business came sharply into focus. Three providers, including Prudential, are now using their annuity business to fund lifetime mortgages.
At times, operating in the market in 2008 felt like walking the high-wire and balancing between the cost of delivering a value based product to satisfy the changing needs of customers. To do so in a profitable and value driven way became an even greater challenge.
House price deflation affected the cost of the negative equity risk and this put added pressures on providers who sought to reduce this risk by lowering the maximum loan to values. This in turn has created some problems in the advice marketplace with regard to meeting customer expectations i.e. customers not being able to release the amount of money they require or had expected would be available. Fluctuating property valuations have also created challenges in terms of managing consumer expectations.
For advisers the subject of education was never far from the top of the agenda. In addition to the traditional product related information we increased our focus on helping advisers develop a more sophisticated understanding of the market and in turn improving the effectiveness of how they engaged with the market in 2008.
Owen: The challenges created by the credit crunch have meant providers who may have been considering entering the equity release market have had their attention diverted elsewhere. Even for existing providers funding challenges, including changes to capital requirements and default risk margins, combined with implausibly high credit spread, have undoubtedly meant a shift of focus.
And, equity release still has its detractors. There remains an amount of ignorance about equity release among certain consumer groups and some parts of the media. This means that some consumers are completely put off from exploring this avenue as an appropriate solution, despite equity release potentially offering them a complete lifestyle change.
Finally we should also not lose sight of the fact that all providers and financial advisers have been grappling with the final delivery phase of Treating Customers Fairly (TCF). With the product safeguards inherent in the SHIP rules supporting us this has perhaps been easier than other areas of the market.
However, the challenge of producing the management information to prove customers are being treated fairly has been one challenge both advisers and providers have had to address.
Young: The credit crunch has had an impact on both funding and customers' perception of entering major transactions. By and large though, the impact has been somewhat muted. Another important area has been managing customer expectations over property valuations.
How do you think the equity release sector will develop over the coming twelve months?
Haggart: The marketplace will definitely toughen and there may well be a reduction in the number of lenders who continue to participate due to the on-going restrictions in the credit market. As the traditional mortgage market continues to contract and traditional income streams fall away we also expect more mortgage brokers/advisers to look to equity release. There may also be an influx of other professions such as solicitors entering the market.
Other social and economic influencing factors will also play their part in reshaping the market. We expect more customers will consider equity release as their expected career/financial plans change through factors such as redundancy, resulting in early retirement; falling investments resulting in lower pension incomes and reduced consumer credit.
Owen: The current economic climate, with the attendant falling house prices, appears to be influencing more and more people to stay in their homes rather than downsizing. These factors have led to a well-documented increase in consumer interest in equity release across all UK regions. Interest is coming both from those who are looking to release equity to meet their own lifestyle choices and those who wish to support family through these difficult times. This includes those who might otherwise have downsized but are finding that challenging given the state of the residential housing market. The turmoil in the residential mortgage market has also led advisers to look again at equity release as an area of the market that is proving relatively immune.
Young: One reason that the equity release market has not developed with the speed some pundits had forecast has been the increase in the participation rate as the average retirement age has risen. It seems unlikely that this will be replicated in a harsh economic environment and so sales of equity release products could rise significantly.
Do you see the balance of business between home reversions and lifetime mortgages changing any time soon?
Haggart: Generally we would expect in a falling property market that home reversions become less attractive to your typical equity release client.
However, circumstance may actually be a catalyst in driving some people to home reversion plans as they may be the only option for them in a tightening market. In the round though, we don't see there being a significant upheaval next year.
Owen: Reversions can offer the opportunity for consumers to release a higher amount of the value of their home than a lifetime mortgage. Also they give the opportunity to surrender only a proportion of a property, which can be appealing to those looking to guarantee an inheritance. We should anticipate the proportion of reversions increasing as they become more mainstream. However, as reversion involves a sale of all or part of the property, falling house prices might prove a constraining factor in the short term.
Young: The home reversion slice of the equity release market has been in a steady decline for a while, notwithstanding the anticipated boost from regulation in April 2007. One reason for this may be due to a lack of supply of product rather than a shortage of demand. This situation will change once the bottom has been called in the housing market and I anticipate strong home reversion sales towards the end of 2009.
What do you see as being the main challenges and how can the industry meet them?
Haggart: The main challenge for the industry is funding. One of the issues of the internal funding model through an annuity business is that the long-term cost of such financing is not linked to movements in base rate/LIBOR, though the public have an expectation that lifetime mortgages are similarly linked. These current funding costs remain high but customer expectation is that mortgage interest rates will fall. There is a disconnect and providers will need to manage customer expectation regarding any future falling mortgage interest rates in the traditional marketplace.
For providers the on-going issue of how to successfully grow the market will not diminish but rather intensify. Though we have worked to move the perception of equity release from a product of last resort to a key part of retirement planning, the credit crunch has the potential to undo this work.
We expect the Regulator will continue to keep a very close eye on the industry and SHIP's role in supporting members will never be more vital.
All providers need to work more closely with SHIP to further educate a broad range of opinion formers on why equity release is a valid and valuable solution to people's income needs in retirement.
Owen: While we know that pre-retirees are concerned about their financial situation in retirement, just one in ten people approaching retirement who have sought financial advice have discussed equity release. Yet it could prove a real, appropriate solution for many. We have started to witness the perception of equity release changing throughout 2008, which is great news for the industry, but there is still a long way to go before the market becomes a mainstream part of retirement planning. Continuing the work to bring equity release into the mainstream retirement advice process is the key to success.
Young: The credit crunch has raised many concerns with customers and so trust and confidence are important ingredients for the marketing mix in 2009. Individual companies need to do their bit but there is also a role for SHIP. SHIP's core product requirements are as important as ever.
What do you think should be the equity release industry's New Year resolution for 2009?
Haggart: Fundamentally we like to see more providers price the product directly in accordance with the long-term risks as opposed to trying to secure market share. If we could unify providers and distributors in a common goal to deliver value for money products, that are easy to access through quality advice, then our industry would stand up against all comers. This would allow us to drive the positives and tackle the negatives in a more constructive way.
Owen: This New Year and into 2009 I would like to see more advisers consider equity release as an integral component of the retirement planning process. Advisers should be actively considering whether equity release is appropriate for a consumer. And if they are not advising in this space they should be personally referring clients to a specialist advisory service. It is imperative that consumers have access to specialist financial advice. Ongoing adviser training, support and development remain fundamental to ensuring the market sector reaches its full potential. Let's hope many advisers put this on their Christmas lists!
Young: To be competitive, support brokers and provide value for money products.
What factors need to be in place for equity release to become a mainstream part of the retirement planning process?
Haggart: For over 30,000 customers a year, lifetime mortgages are already part of the retirement planning process. To help grow this number we need to make information more readily accessible, ensure that quality of advice is uniformly high and that all forms of communication, whether from Regulator, Government, consumer bodies or the industry itself delivers the same set of messages.
Owen: A number of sources are showing that equity release is the biggest growth area for financial advice, and financial advisers expect to be doing more and more business in this area over the next three years. A variety of firms and networks are taking on board that, at the very least, they should have a referral facility for consumers, even if they don't have the necessary infrastructure to offer a full advice service. While the referral option does give more customers a route to advice, more advisers qualified and prepared to offer quality advice are needed. It is essential that consumers are well-informed and treated fairly when releasing equity from their homes. When giving advice advisers need to ensure they are considering all product features when making their recommendations not just the rate and the loan to value on offer. Product innovation means there is greater opportunity to tailor the product recommendation specifically to the client's needs. Ongoing adviser support, training and development are fundamental to ensuring the market sector reaches its full potential.
Young: There needs to be a sympathetic approach from government and the state benefits system needs to be clarified, so that entering into an equity release contract does not adversely affect entitlement to state benefits. The retirement process is dominated by the pension and annuity markets and equity release is seen as a small and often irrelevant player. This needs to change - with the major brokers looking at residential property as an asset class rather than a home.
How would you like to see SHIP's role evolve throughout 2009?
Haggart: Firstly SHIP must build on the excellent start made by the appointment of Andrea Rozario as director general by driving customer knowledge and understanding of equity release propositions even harder in 2009. As an industry we need to be on the front foot more and SHIP can help deliver this goal.
We'd like the industry to showcase itself prominently and this can be achieved by adopting a more high-profile consumer strategy.
Owen: Product providers, our industry trade body SHIP, and specialist advisory firms have been working hard to improve the image of equity release and, at last, efforts are starting to pay off.
There are powerful forces at work - consumer awareness and attitudes towards equity release plans are improving, simultaneously with the need being at its greatest for some years. SHIP should continue to focus on influencing media, consumer groups and particularly the government to recognise equity release as a core part of the strategy for addressing the retirement funding challenges we face. SHIP should also continue to champion the consumer keeping the pressure on regulators to address issues such sale and rentback. SHIP, and in particular Andrea Rozario, has made huge strides in improving the visibility and perception of equity release in 2008. It is down to us all, SHIP, providers, and advisers to continue this momentum into 2009 and beyond.
Young: SHIP has to decide whether it is solely a product providers' trade body, with a series of important policing functions and clear and accurate reporting or whether it wants to extend its role to actively work with other groups in the equity release market, such as SAFER. There needs to be a clarity of purpose otherwise people will think that it is something that it does not actually espouse to be. And this will cause dissatisfaction.
Keith Haggart is director of retirement income at Prudential
Keith has twenty years experience in the financial services market and has worked for a number of high street banks and insurance companies.
Over the last eight years, Keith has specialised in developing new propositions for the retirement income market. He is business director, retirement income at Prudential and he has led the team that designed and delivered the innovative flexible lifetime mortgage.
Keith is a Fellow of the Chartered Insurance Institute and a SHIP board member.
Prudential is a leading lifetime mortage Provider. In just over four years the company has built a reputation for innovation, developing the first lifetime mortgage drawdown product in the UK. It has been instrumental in growing the market and has captured a leading share during 2008.
Vanessa Owen is head of equity release and technical services at LV=
Vanessa joined LV= in 1997 where she has held senior management positions in compliance, IFA support and latterly in the life and pensions product development function.
Vanessa joined LV= from Woolwich Independent Financial Advisory Service where she qualified as an IFA in the City of London and went on to join the panel research team. Before that she was branch manager for Woolwich Building Society.
Vanessa is a qualified member of the Personal Finance Society, and member of the ABI Consumer Strategy Committee.
The LV= Flexible Retirement Solutions business, part of the LV= group, launched in January 2008 and offers a range of capital and income retirement planning products. Our products and solutions offer a brighter future for those who are planning, or already in, retirement. LV= serves more than 2.5 million customers and members, and manages around £8 billion on their behalf. We are also the UK's largest friendly society (According to the Association of Friendly Societies Key Statistics 2008 based on total net assets) and a leading mutual financial services provider.
Duncan Young is CEO at Retirement Plus
Duncan has a wide range of financial services and property experience, including setting up both the Household Mortgage Corporation and Savills Private Finance. In addition, he has acted as CEO and consultant for a broad range of companies and organisations - from large financial conglomerates through to small entrepreneurial organisations. The work has included strategy, especially with regard to distribution and third party contracts; execution of acquisitions and disposals of businesses and asset portfolios; new ventures including equity raising; application of securitisation and insurance; and trade body liaison and regulation. He has twice been deputy chairman of the CML and chairman of IMLA.
About Retirement Plus
Retirement Plus is a Milton Homes company. The Retirement Plus Property Plan is a home reversion plan which allows UK residents aged 65 or older to receive full market value for a share of their property at the start of the plan, in return for which they grant Retirement Plus an option to acquire an increasing beneficial share in the property over the life of the plan. Significantly, this product means the owner can release their share of the property over time, rather than giving up the full amount at inception (as is the case with a standard home reversion). The homeowner can also elect to retain a 'protected share' of the property.
Retirement Plus is authorised and regulated by the FSA and is a member of SHIP, the body which is dedicated entirely to the protection of planholders and to the promotion of safe home income and equity release plans. Retirement Plus will only accept business from customers who have received advice from brokers registered with the Financial Services Authority. Website:
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