Solvency II holding back equity release – Towers Watson

Equity release could boost Europe’s’ retirees’ savings by €20bn a year but Solvency II is stifling insurers’ attempts to supply products to facilitate it, according to a report by Towers Watson. 

The consultancy says immediate action is needed to ensure a ‘sensible treatment’ of equity release products. The report says Solvency II may have the unintended consequence of stifling the market by severely limiting the attractiveness of this product for insurers because the ability of equity release assets to match long-term insurance liabilities is not currently recognised under the proposed regulatory requirements.

The report says the ability for insurers to match their long-term liabilities with these products, together with the natural hedge provided where insurers are exposed to the risk of increased life expectancy, mean that equity release products would help insurers to meet some of the aims of better risk management inherent in the Solvency II regulations.

Equity release providers have recently been lobbying parliamentarians and other stakeholders in Brussels and London to raise awareness of the issue.

Towers Watson director Naren Persad says: “With around two thirds of older Europeans owning their own homes, we believe the market for equity release products will grow significantly and play a substantive role in closing the pensions gap.

It is not too late for policymakers to act in order to support the development of a transparent and competitive market for equity release products, whilst maintaining the prudential objectives of Solvency II.”

European Pensions and Property Asset Release Group (EPPARG) secretary general Steve Kyle says: “The Towers Watson analysis shows the huge potential for equity release schemes across Europe – we expect the market to grow to meet this demand. Traditional pension mechanisms are unable to cope with the combined impact of the challenges which we are now experiencing in Europe, namely a rapidly ageing population, growing youth unemployment and sluggish economies, and equity release can be an innovative and timely solution. However the equity release schemes may be stifled as an unintended consequence of the Solvency II regulations. We are engaging with stakeholders across Europe to resolve this and thus far the dialogue has been constructive.”

EPPARG member Angel Cominges Rodriguez-Carreño of Óptima Mayores in Spain says: “Equity release markets are only at a nascent stage in a number of countries and in Spain we expect a rapid growth, given that the current public pension system is unsustainable, people have no mentality of saving through private pension plans, and home ownership is over 83 per cent. It is vital that future growth in Europe is not inadvertently hampered by an inappropriate legal framework.”