On December 15, the Law on Reverse mortgages comes into force, which will introduce a new
instrument providing consumers access to the financial funds locked in their real estate. A reverse mortgage loan will be accessible to the owners of real estate (including undeveloped real estate) as well as the perpetual usufructuaries of the real estate or the owners of the cooperative title to the premises. The feature that distinguishes the reverse mortgage from other similar instruments is the possibility of acquiring new funds without the obligation to pay them off until the death of the debtor. (through the transfer of the real estate to the creditor).
The European Commission has today published a report that recommends granting pension funds a two-year exemption from central clearing requirements for their over-the-counter (OTC) derivative transactions. The report, which is based on an extensive study requested by the European Commission, concludes that central counterparties (CCPs) need this time to find solutions for pension funds.
At the same time, the report encourages CCPs to continue working on finding technical solutions in this important matter. Ultimately, the objective is that pension scheme arrangements (PSAs) should use central clearing for their derivatives transactions, as is the case for other financial institutions. This is also imperative for financial stability.
Under current arrangements, PSAs – which encompass all categories of pension funds – would have to source cash for central clearing. Given that PSAs hold neither significant amounts of cash nor highly liquid assets, imposing such a requirement on them would require very far-reaching and costly changes to their business model which could ultimately affect pensioners’ income.
EU Commissioner for Financial Stability, Financial Services and Capital Markets Union, Jonathan Hill says: “Today's report sets out a number of potential ways to facilitate central clearing for pension funds. But none of them is straightforward and it is sensible to take more time to develop a solution which is proportionate.”
CCPs collect collateral, or ‘margin’, from their participants to cover the potential losses in the event of a counterparty default. CCPs accept only highly liquid assets, generally cash, to meet these margin calls. This allows rapid liquidation in case of a default so that the CCP can maintain business as usual.
PSAs across Europe tend to use OTC derivative transactions to hedge long-term interest rate and inflation risks. However, PSAs generally do not hold cash and instead invest in higher yielding and longer term assets such as bonds to enhance returns for pensioners. A requirement to source cash for central clearing could therefore ultimately reduce pensioners’ retirement income, the report concludes. Recent estimates show that the costs for obliging pensions funds to clear their OTC derivative portfolios would range from € 2.3bn to € 2.9bn annually and the expected impact could be up to 3.66% over 20-40 years on retirement incomes across the EU.
In line with the Commission’s legal mandate under the European Market Infrastructure Regulation(EMIR) (Article 85(2)), the report also assesses possible alternative solutions for the posting of non-cash assets by PSAs. EMIR which entered into force on 16 August 2012, is designed to improve the stability of the OTC markets across the union. The regulation requires standard derivative contracts to be cleared through central counterparties (CCPs) and establishes stringent organisational, business conduct and prudential requirements for these CCPs. It has also introduced an obligation to report derivative contracts to trade repositories. However, a specific exemption in EMIR states that ‘pension scheme arrangements’ are exempt from the clearing obligation of certain derivatives until August 2015.
The EU pension’s landscape is in need of reforms as the percentage of the EU population covered by decent pension systems is too low, European Insurance and Occupational Pensions Authority chairman Gabriel Bernardino told the 9th European Pension Funds Congress, held in Frankfurt.
Bernardino pointed out the diverse nature of pension systems available in Europe with “pay-as-you-go, occupational and personal pension vehicles playing a very different role in the 28 member states. Irrespective of their differences, all these systems face the same challenges to their ability to deliver on their financial promises, which include longevity growth, a sluggish economic environment, low employment, budget deficits and debt burdens, low interest rates and volatility of asset values”.
“Changes to ensure the future sustainability of public pay-as-you-go, pension systems need to be accompanied by reforms incentivising the creation of funded complementary private schemes, be it second pillar occupational pensions or third pillar personal pensions,” he said.
“What is needed is a robust and proportionate EU regulatory framework capable of regaining the trust of EU citizens in private complementary pension savings. To achieve this, the regulatory framework must offer enhanced sustainability, strong governance and full transparency.
“Creating sustainable and adequate pension systems will be one of the major challenges for Europe,” he said, adding that, at the EU level, EIOPA would work to make sure EU citizens were well informed about their private pension schemes, get a fair deal and trust that promises made to them will be fulfilled.
Record sums of money were released in 2014 by people seeking to cash in on the value of their homes. Lending in the booming equity release industry rose to £1.4bn last year — the highest figure since records began in 1992.
Equity release schemes allow homeowners, often older people with dwindling sources of income, to raise money on the capital value of their property. Interest is charged on the loan, which is paid back on death or when the home is sold.
Schemes have grown in popularity as house prices in many parts of the country have soared; lenders placed tighter restrictions on older people remortgaging; and low savings rates left pensioners eating into their savings. But critics say they equity release is a high-cost form of borrowing.
The latest figures from the Equity Release Council, an industry body, show lending has surpassed its pre-recession peak of £1.2bn in 2007. Lending fell away after the crisis, dropping to just under £800m in 2010.
The number of people using equity release has risen 13 per cent to 21,300, the largest figure since 2008 and the fourth consecutive annual rise. The average amount raised has risen to £64,787, up 14 per cent on 2013.
Nigel Waterson, chairman of the Equity Release Council, said: “Equity release is proving to be a crucial tool for financial planning in retirement and is allowing retirees to improve their standard of living and give them more flexibility to support themselves or family members.”
The figures come before pensions reforms in April, which the government says will help people plan for their retirement by giving them extra flexibility in accessing cash in their retirement pots.
Mr Waterson said the new pension freedoms would not alter the fact that many had not saved enough for their retirement. “There is a danger that people’s pension pots will be ‘here today, gone tomorrow’ — but housing wealth is the one constant that many in this generation can rely on for support.”
Some advocate downsizing as an alternative to specialist equity release schemes, as any uplift in property value will go to the seller, rather than being shared with, or captured by, the lender and in some cases might allow the home to be handed to relatives as an inheritance.
Justin Modray, founder of financial advice firm Candid Money, said lifetime mortgages, the most common form of equity release, made sense provided that borrowers “understand both the cost and that interest owed can never exceed the value of the property”.
But he added that home reversion plans, where the owner surrenders a percentage of the property in return for the right to live there, could lead them to miss out financially. “You could lose out significantly if property prices continue to rise,” he said.