LKP trustee and former Bank of England economist Dean Buckner features in Private Eye this week warning of pension exposure to residential property equity release products.
Dr Buckner, who retired from the bank’s Prudential Regulatory Authority last year has been working with Professor Kevin Dowd, of Durham University, to raise concerns whether equity release providers have sufficient capital to absorb falls in property values.
The Eye article concerns the Just Group, which manages around £25 billion of other people’s money.
Since pension “liberalisation” by the coalition government “billions of pounds of pension savings have been thrown into a market controlled by a handful of large but relatively anonymous firms”.
The Eye adds:
“While their bosses make hay, any economic downturn – especially if it hits house prices – could prove disastrous for those who rely on such investments for retirement income.”
Similar concerns have also been raised with the Prudential Regulatory Authority about pension exposure to overvalued ground rent investments.
With the Just Group. concerns over the prospect of a return to negative equity have resulted in almost a halved share price and cancelled dividends.
A depressing aside in the Eye article reads:
“The PRA’s recognition of the problem was itself delayed by years of lobbying from firms including accountants KPMG and EY, and by the Institute of Actuaries.”
Worse, a review of the accountants’ and actuaries’ regulator the Financial Reporting Council, suggested that actuaries – who measure things like likely future losses – be excluded from a new enhanced regulator.
That review was headed by former Treasury mandarin Sir John Kingman, who is chairman of Legal and General, “which has a sizeable share of the equity release pie and may have its own financial reckoning”.
Equity release, with its deferment calculations of a property’s future value, is an area of concern to leasehold reformers in addressing a fairer enfranchisement regime.
More broadly, the City interest in equity release is echoed by the desperate efforts by retirement developers to get their hands on highly valuable freehold properties.
Pure luck has given ageing baby boomers extraordinary wealth in their homes, no matter how unexceptional their careers may have been, and clever people want a cut of it.
Hence the marketing efforts by retirement house builders that pensioners trade in their blameless and valuable freehold homes for small but highly priced leasehold flats, whose dismal resale values can be seen on the Land Registry.
Abysmal retirement housing values revealed on the Land Registry – Better Retirement Housing
Campaign against retirement leasehold exploitation examines official re-sale prices for McCarthy and Stone, Churchill Retirement Living, Audley Retirement, Retirement Villages, Retirement Security, Anchor and Pegasus A dismal picture of retirement housing values on re-sales is revealed by Campaign against retirement leasehold exploitation from figures in the Land Registry.
The Ogden rate which at be time of Sportelli in 2006/7 stood at 2.5% and was lowered in 2017 to MINUS 0.75%
This of course when feed into the deferment rate would result in a explosion in the cost of a lease extension as the deferment rate from Sportelli was 5% would be lowered to possibly 2.5% . On a 75 year lease the value of the reversion used in the calculation would jump by a factor of six
This lowering of the Offical risk free rate by the government arises from the collapse in long term interest rates fuelled by annuity providers desperately trying to acquire indexed linked gilts. To back the business they are writing
Whilst this will be unwelcome news to lessees seeking lease extensions they must recognise that the collapse in interest rates caused house prices to rise significantly it also caused those who wanted to cash in their final salary scheme pension to receive greatly enhanced payments .. it also resulted in the substantial fall in mortgage payments – but is is so typical of the whining blame seeking culture we now live in – all the advantages which have resulted from the crash in interest rates will be overlooked and arguments of foul play corruption and lack of morals will be hurled at those who want a greater premium for a lease extentsion because of the fall in interest rates .