nottheaverageactuary

Actuarial news and views from Cape Town and beyond

More on pensions: Equity Release alternatives

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In many developed nations including the UK and Australia, increasing longevity has become a risk to pensioners in that they may outlive their benefits. Advances in medical technology and a general lack of appreciation of the importance of long-term saving mean that very few are able to maintain their desired standard of living after retirement.

Equity Release products allow the pensioner to sell a percentage of their home to a provider in exchange for a lumpsum/annuity (whilst retaining the right to live in the home). After death or transfer to long-term care, the property is sold and the proceeds split accordingly. Currently, many Equity Release providers have a traditional mortgage background. However, the nature of the risks require the use of stochastic (rather than deterministic) methods for pricing these products. There is a potential role for Actuaries to play in this market in order to make the products more appealing to the large potential market. As it stands, the deterministic methods of pricing mean that a high risk premium is loaded into the price, making this option unattractive for potential customers. It is also worth pointing out that in developed countries, many senior citizens own their own homes, particularly in Australia where over 85% of those aged 75+ own their own home. This meaning that there is a higher potential equity portion to buy out.

See the articles below:

http://www.theactuary.com/archive/old-articles/part-3/equity-release-schemes/

http://actuaries.asn.au/Library/Events/FSF/2014/BrownfieldFourthPillarPaper140505.pdf

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