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How suitable are equity release mortgages as investments for pension funds?

Buckner, Dean; Dowd, Kevin; Hulley, Hardy

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Authors

Dean Buckner

Hardy Hulley



Abstract

This article examines the claim that equity release mortgages, the U.K. equivalent of reverse mortgages in the U.S., are suitable investments for pension funds. We present valuation, stress test and scenario analysis results that suggest that equity release mortgages are unsuitable for pension funds because: (i) they bear returns that are typically below the risk-free rate; (ii) they are not hedges for annuity books, let alone good hedges; and (iii) they are heavily exposed to house price risk, which annuity books are not. Our results suggest that equity release mortgages meet none of these criteria to be suitable for pension funds and are almost entirely dominated by risk-free government bonds. We offer an explanation for why investors appear to be unaware of the low returns on equity release mortgages.

Citation

Buckner, D., Dowd, K., & Hulley, H. (2024). How suitable are equity release mortgages as investments for pension funds?. Geneva Papers on Risk and Insurance - Issues and Practice, 49(2), 259-269. https://doi.org/10.1057/s41288-024-00316-1

Journal Article Type Article
Acceptance Date Mar 12, 2024
Online Publication Date Mar 24, 2024
Publication Date Apr 1, 2024
Deposit Date Mar 25, 2024
Publicly Available Date Mar 25, 2024
Journal The Geneva Papers on Risk and Insurance - Issues and Practice
Print ISSN 1018-5895
Electronic ISSN 1468-0440
Publisher Palgrave Macmillan
Peer Reviewed Peer Reviewed
Volume 49
Issue 2
Pages 259-269
DOI https://doi.org/10.1057/s41288-024-00316-1
Keywords Equity release, Equity release mortgages, No negative equity guarantee
Public URL https://durham-repository.worktribe.com/output/2346345

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