The confluence of an ageing UK population, house price inflation and new pension freedoms all point to the importance of finding solutions to the question of how our industry best lends into retirement. The Office of National Statistics (ONS) indicates that 34% of all retirees between the ages of 65 and 74 have no private pension wealth saved for their later years. Many retirees hold sizeable equity in their property but are not able to access this capital to fund their cost of living.
Some say the answer would be for them to downsize, however many do not want to move house plus, if they do, there is a shortage of suitable accommodation for retirees seeking to downsize. The other dynamic is parents tapping into their housing wealth to help their children get a foot on the housing ladder. Interestingly, the so called ‘Bank of Mum and Dad’ is now one of the largest lenders in the UK with parents giving their offspring over £5bn a year to buy their first property. All these trends are conspiring to make lending in later life a significant growth market. Equity Release Council figures recently showed 21% growth in the second half of 2015, its fastest growth since 2008.
As a result, we are seeing more providers coming to market offering a wider range of product and innovation. It was particularly interesting earlier this month to see Halifax and Nationwide raising their upper age limits on mortgages (to 80 and 85 respectively) to accommodate older borrowers. A competitive market will only help consumers when it comes to choice and so should be welcomed. With the regulatory bar set where it should be, many of these are eyeing the later life lending market and seeking to get involved in what is set to become a central pillar of retirement planning in the future. So for those considering entering, what are the key challenges for providers?
- Product design: Two issues have been key to date. The effect of long-term compounding of interest was previously enormous but has largely gone away in this current era of low interest rates. The other key issue has been the scale of exit penalties, where the typical consumer cannot realistically be expected to understand the connection to the funding model so it rests on product providers to design in an appropriate degree of flexibility.
- Customer service: The typical consumer of these products is older than average and not so used to borrowing. They also have a greater propensity to complain – to the FOS, to their local MP and to the press. This means that providing high quality customer service will be critically important at point of sale and over the life of the product. Whilst the proposition will likely be lighter touch compared to mainstream lending, the quality of interactions with these customers at their moments of truth will be vital.
For those providers already in the market, we increasingly see organisations choosing to focus on where their core skills lie – product design, development, marketing and distribution and they are approaching outsourcing partners to satisfy the need to get to market quickly and compliantly. With increased competition and pressure to innovate on the customer proposition, many are seeking to disaggregate aspects of their offering to outsourcers that can help them get a foothold in the market. As demand in this market increases, our expectation is that this is only set to continue, which is good news for advisers, providers and most importantly the end customer.
All in all, in an era where deleveraging is the trend, lending into retirement is clearly an area of increasing opportunity. However, to maximise this opportunity and capture it our industry needs to ensure that while we are busy addressing the challenges of product design, funding and distribution we put a huge priority on managing reputational risk across the lifecycle of the customer proposition.