The market for equity release products, which enable homeowners to access some of the wealth tied-up in their property, is expected to grow across Europe–with the potential for over E20bn to be released each year. However, the current Solvency II requirements may stifle the supply of these products from insurers. Action needs to be taken immediately to ensure a sensible treatment of equity release products in the new regulation, a new report by Towers Watson has concluded.
Across Europe, there is growing concern that the costs of providing for the ageing population will be prohibitive. The number of people aged 65 and over in Europe is estimated to exceed 120 million by 2030 and the proportion of the younger population supporting them is expected to decline. Given the changing demographic profile across Europe, public finances in European countries will struggle to support current, or future, levels of pensioner needs.
For most people, their house is the most significant investment they will make over their lifetime. Many elderly people now hold a large amount of wealth in their property, making them asset rich, but cash poor. Equity release products are a viable option to access this wealth, the report states.
Naren Persad, a director at Towers Watson comments “Most people are not saving enough, either in private pensions or other products, to make up for future reductions or delays in state pensions. Individuals will need to think more widely to be able to provide themselves with the lifestyle they expect in retirement. With around two thirds of older Europeans owning their own homes, we believe the market for equity release products will grow significantly and play a substantive role in closing the pensions gap.”
Although equity release products are most common in the UK and Ireland, the report forecasts significant potential demand in the medium-term across Europe, particularly in countries such as Germany and France where the population aged over 65, the majority of whom own their own homes, will rise dramatically.
A major sticking point, however, to future growth of the equity release market is the proposed treatment of such products under the European Solvency II insurance regulation. The report notes that insurers are a natural supplier of these products given their long-term nature and link to life expectancy. Solvency II may have the unintended consequence of stifling the market by severely limiting the attractiveness of this product for insurers. The main reason is that the ability of equity release assets to match long-term insurance liabilities is not currently recognised under the proposed regulatory requirements.
Naren Persad added “It is not too late for policymakers to act in order to support the development of a transparent and competitive market for equity release products, whilst maintaining the prudential objectives of Solvency II.”
In recent weeks, equity release providers have been lobbying parliamentarians and other stakeholders in Brussels and London to raise awareness of the issue and to increase knowledge of how the products work.
Steve Kyle, Secretary General of the European Pensions and Property Asset Release Group (EPPARG) said "The Towers Watson analysis shows the huge potential for equity release schemes across Europe-we expect the market to grow to meet this demand. Traditional pension mechanisms are unable to cope with the combined impact of the challenges which we are now experiencing in Europe, namely a rapidly ageing population, growing youth unemployment and sluggish economies, and equity release can be an innovative and timely solution. However the equity release schemes may be stifled as an unintended consequence of the Solvency II regulations. We are engaging with stakeholders across Europe to resolve this and thus far the dialogue has been constructive."
EPPARG member Angel Cominges Rodriguez-Carreño of Óptima Mayores in Spain, added “Equity release markets are only at a nascent stage in a number of countries and in Spain we expect a rapid growth, given that the current public pension system is unsustainable, people have no mentality of saving through private pension plans, and home ownership is over 83%. It is vital that future growth in Europe is not inadvertently hampered by an inappropriate legal framework.”
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