Headline growth figures impress, but changing capital requirements raise questions
With every quarter that passes, new records are broken in the equity release sector and yet more optimistic growth projections are made by those hoping to see the market thrive.
The start of this year was the busiest on record, according to the Equity Release Council, with £936m of cash unlocked by homeowners, up 8 per cent on the same time last year. The number of new plans was up 6 per cent year-on-year, to 10,854.
Standard Life returned to the sector in March, after an absence of a decade – albeit by dipping its toes into the advice space rather than offering loans. The insurer launched a tie-up with Age Partnership to provide equity release advice to existing customers who express an interest in the products.
Brand and marketing director Susie Logan says: “Since we have been through pension freedoms and the changes on regulation around retirement, we have seen changes in the way customers are accessing their money. We have been thinking about how we can help customers have more choice around accessing their life savings, which for many, are tied up in their homes.”
Logan says equity release is still a “big choice to make”, hence the decision to re-enter the market through an advice relationship.
Pundits have suggested the firm is likely to come forward with its own lifetime mortgage proposition in time. When questioned by Mortgage Strategy, Logan did not rule out a return to equity release lending, but insisted that the insurer has “no immediate plans” to do so.
Last year, Standard Life’s insurance arm was sold to Phoenix Group, while the rest of the business remained part of Standard Life Aberdeen, so “the focus of our business has changed quite a lot”, Logan explains.
Reflecting on the future direction of equity release, she adds: “At the moment, it is early days. There is the potential to expand our presence in the market by working with other partners in the future but, at the moment, we are just focused on making the most of this opportunity with Age Partnership.”
Other big insurance names are also thought to be eyeing a return to the sector following their retreat from the market in the wake of the global financial crisis. It is not difficult to see why they might want to come back. The market reached nearly £4bn last year and Legal & General predicts it will grow to £6bn next year.
ERC chief executive Jim Boyd believes that annuities and lifetime mortgages are the perfect pairing, from a funding perspective. He says: “Equity release offers a marvellous opportunity to match liabilities to back books. The duration of these contracts tends to be around 17-20 years and that is roughly the life expectancy for certain categories of annuities. Over the duration of an annuity, the provider is looking for safe, secure assets to support the income payments.”
Canada Life head of marketing Alice Watson predicts that annuity books will remain the primary source of funding for lifetime lending in the future, even though pension freedoms may mean more people opt for drawdown instead of a guaranteed retirement income for life.
Watson’s own career path is a potted history of consolidation and the quest for long-term funding in the equity release sector since the crisis.
She originally worked for Stonehaven, which was funded by Santander until 2010, when the bank decided to move away from equity release.
Stonehaven merged with MGM Advantage to become Retirement Advantage in 2015. The latter company was acquired by Canada Life in 2018 and all the legacy brands were scrapped.
Watson says: “Quite a lot of equity release funders are actually bulk annuity providers. That will always continue – the use of company pensions, rather than individual people’s pensions.”
Mainstream mortgage lenders certainly have access to a huge pool of potential equity release borrowers and many are targeting this age group with retirement interest-only products. However, providing long-term funding is much more challenging without an annuity book.
Nationwide Building Society became the first high street mortgage lender to venture into equity release lending in 2017 – with servicing support from Age Partnership. It is now offering a suite of retirement lending products to existing borrowers and may look at widening distribution channels in the future.
The past few months have not all been plain sailing for those currently active in the space. The ramifications of the Prudential Regulation Authority’s plans to make equity release lenders hold more capital have hit investor confidence in some players.
There have been warnings that tougher capital tests will lead to costs being passed on to borrowers in the form of higher equity release rates.
Even amid concerns over the impact of PRA rules, the untapped demand from an asset-rich and cash-poor ageing population with inadequate pension provisions has huge appeal for those with the capacity to lend. For life companies with annuity books and insurers with ties to large company pension schemes, equity release seems like an obvious long-term fit.