Peter Welch is head of sales and distribution at Bridgewater Equity Release
The recent report from McKinsey & Company entitled, ‘From austerity to prosperity: Seven priorities for the long term’ garnered a fair amount of media coverage as it outlined seven opportunities where it felt the UK could ‘achieve and sustain robust growth over the long term’.
It was perhaps of particular interest to those in the equity release sector as one of the priorities was to ‘Address generational imbalances’ with the emphasis on the growing problem of the UK’s ageing population and how we would deal with the issues this generates. The report outlines that by the time England can next host the World Cup in 2030 22% of the UK population will be over 65 years old (Source: Office of National Statistics). This means that the UK has to set in place a plan to address pension and long-term care provision and, rather importantly, how this is going to be funded.
We should all be well aware that we are unable to carry on as in the past; the Coalition Government has already raised the State pension age to 66 by 2020. One suspects that this particular age will need to continue to rise in line with increased life expectancy; indeed one of the recommendations of the report is that a more structured procedure for raising the State pension age is put in place.
The report focuses particularly on equity release when discussing how the Government and individuals can fund their long-term care needs going forward. It suggests that compulsory long-term care insurance could be one possible solution but focuses more intently on how equity release could be a more relevant problem-solver given that firstly, the majority of the UK’s personal wealth is now held by the over-55s and most of this wealth, £1 trillion, is in the form of unmortgaged home equity.
So far you might be thinking, ‘Tell us something we don’t already know’ and I would probably agree with you. Reading further into the report it brings up the usual arguments around why equity release products are not taken up in bigger numbers, namely consumers lack of understanding of the products, consumer misconceptions of the sector, the damage that the mis-selling scandals of the late 80s/early 90s did, relatively low number of providers and so on.
It therefore suggests a variety of measures which it says would ‘relaunch’ the equity release market which mostly take the form of considerable Government intervention in order to address reputational concerns, reduce costs, introduce guarantees for a secondary market, and removing the disincentives to release equity created by the tax and benefit system. All laudable aims and ones which we as a sector have been lobbying extensively for for some time. Unfortunately, up until now no Government has wanted to become this actively involved, and given the above requests would cost a considerable amount of money in what are frugal times to say the least, it looks unlikely that any administration will be providing these anytime soon.
That said, they are aims worth pursuing and we should continue to press for them. However, the report does seem to have missed if not a trick, then a considerable factor in the equity release market, namely home reversions. For a start, the report follows the all too easily made mistake that ‘Equity release = lifetime mortgages’ or as it prefers to call the products, ‘reverse mortgages’. I will digress at this point because this is a bug bear of mine – ‘lifetime mortgage’ was a term invented by the FSA when it introduced regulation for the sector; there was much argument about its use at the time but it has stuck and we work towards educating everyone now about ‘lifetime mortgages’. There is absolutely no point in introducing the term ‘reverse mortgages’ when it will only create even more confusion; McKinsey should have stuck to the terms already in place. The equity release market is not the place for needless invention.
McKinsey should also have recognised and acknowledged the home reversion sector particularly when it says that ‘equity release’ products need refinement to help customers leave some portion of their housing wealth to their children. We are back in education mode here given that a Bridgewater home reversion plan will allow the customer to do just that. They can choose to access as little as 25% of their property’s equity via a reversion and have total certainty that if they do not sell any further percentage then the 75% remaining can be provided to their beneficiaries. It is also a point worth making that we absolutely guarantee they can sell further percentages of their property to Bridgewater at any time.
It is frustrating that a report which is so supportive of the equity release solution should miss out on detailing one of the two product methods by which equity can be released. The other recommendations made in the report all seem worthy enough, namely encouraging new providers into the sector, simplifying and standardising product comparisons, encouraging the development of more flexible schemes and introducing regulator-led consumer education. However, if it had taken into account the reversion market and also looked at some of the work being undertaken by SHIP and others, it would have seen that this type of work has been going on for some time. Indeed, we are fully aware of what benefits this would bring to the equity release sector but it continues to be a full-time job to convince the Government to put its weight and muscle behind such action.
The final point should be that it is pleasing to see the equity release sector being acknowledged as a potential solution for some of the major problems the UK is going to face in the years ahead. We are all working towards the ambitions outlined in the report and it is to be hoped that more independent bodies and the equity release market itself can continue to put pressure on the powers that be to allow this solution to be much more widely accepted and utilised.
