Katja Hanewald - UNSW, Centre of Excellence in Population Aging Research
Bank of Mum and Dad
Josh Funder: It's a real pleasure to introduce Katja Hanewald to the Third Pillar Forum 2020. Katja is a senior lecturer at the School of Risk and Actuarial Studies at the University of New South Wales in Sydney, and she's also Director of Research at the Ageing Asia Research Hub. What Katja brings is really deep expertise in the actuarial risk pricing of reverse mortgages through our history. But much more importantly, she brings a deep insight into understanding how home equity access can complement superannuation and retirement funding, meet the challenges of aging, and how people can understand their options around home equity access. Today, Katja is going to talk about bequests and the Bank of Mum and Dad, but also understanding the international context for what we're doing here in Australia and what research has been undertaken overseas on this big issue. Katja Hanewald.
Katja Hanewald: Yes. Hello, Josh. And thank you so much for giving me the opportunity to speak here and including me in the program. I'm so excited. The topic of my talk is Home Equity Release for Families, An International Perspective. So this is an important topic because population aging is a mega phenomenon. It's happening in developed and developing countries alike. And this is an area which has seen a huge growth in academic interest. And why is that? Because home equity release can really help families and individuals as they get older to provide, have... To access additional retirement funding, to allow individuals to age in place, which is what we know from a lot of previous research that individuals just want to stay in their own home as they get older, but it very importantly, also home equity release allows families to better time that intergenerational wealth transfer that typically happened at the end of life of someone, in form of a bequest. But with home equity release, families have the opportunity to bring forward that wealth transfer and help the next generation at a point in time when they need it most. And it also helps to reduce the uncertainty around when that is happening because it allows family to plan this. So academics around the world have been very busy studying this. And so there is a lot of research on the product design and pricing and risk management of different home equity release products, including reverse mortgages, but also other approaches. There's also some research on optimal retirement planning strategies around home equity release and using reverse mortgages and other products. And recently there is a large interest in the factors that impact demand for these products. And there have been numerous studies conducted in Australia and Italy, in the Netherlands and the US. And so a lot of studies trying to understand which people and at what point in their life do they need to access home equity and how it can be beneficial for them and their families, and what are the characteristics of these potential consumers. So I have done extensive research in this area since about 2014. And Josh, you reached out to me very early and we had very interesting conversations. And so I have looked at pricing and product design, as you know, and collaborated with Michael Sherris and Hazel Bateman, two professors in UNSW and in CEPAR, and we are very excited that just a few years ago, we really started working with Household Capital, and to inform each other's research in this area, really. So today, I wanted to talk a bit more about some research that we've done in China. I want to talk about the Chinese market, because when you look about... Look at the global elderly population, you realize that about a quarter of the elderly worldwide live in China and that population is rapidly growing and population aging is very fast in China. And so there is a huge interest in China on how to fund longer retirement periods, and there was a reverse mortgage pilot program started by the government in 2014 allowing a life insurance company to offer reverse mortgages, and it was a very complex product and it was difficult to understand, and it wasn't very popular. So what we did was, what we did with several colleagues and with Hazel Bateman, we designed a more flexible product which has many different options for customers which we see being popular in the Australian market. And we trialed this product in China. We survey individuals and see whether they would be interested in this. And when we started to do research on this, we often came across one argument, which is like, "Oh, that will not work in China because of expectations by families around intergenerational wealth transfers about that the home needs to be kept in the family and that it is basically, you shouldn't touch it." And so we were very interested whether these family barriers, or perceived barriers, play a role. So we interviewed two groups of people, older homeowners age 45-69, who could be potential clients, but also younger adults who have parents who own a home. And so this is what I think very insightful when you not just survey the clients themselves, but also their children, because often that is a family discussion, and that could be a barrier. So that's exactly what we did in our study. And we were... We conducted the survey in... These two surveys in 2017. We made sure that they had a very representative mix of people across different cities and different socio-economic groups. And basically the design of this surveys was very straightforward. We had some screening questions asking them about their background to make sure we have a good mix of the population. And then we gave individuals a description of a equity release product, we called it product ABC, and just a neutral term, and we gave them a numerical example. And then we group people into different groups. So we randomise the participants into different survey treatments, and we asked... We gave them a bit of additional information about how they could use the payments because we were interested whether the way you present the product, whether it's a product that helps you to have a more comfortable lifestyle, or it is a product to help you afford aged-care or medical cost in retirement, or perhaps you want to use the payments to support your grandchildren and children would impact demand. And so there were these basically three components. Everybody saw a description of a reverse mortgage contract, but it was called product ABC. Everybody saw a numerical example of how it would work for a couple who have a daughter and own an apartment and consider using the product. And then some people saw different additional information about how they could use the payments. And we collect a lot of characteristics of the individuals. And so we did a lot of pre-testing. And we asked focus groups and friends and families about the product description, and because it was developed in English but then translated into Chinese, and we found over and over again that individuals had so many questions. So we ended up with a very detailed description, in fact, because individuals were very curious. They wanted to know a lot of details. So previous research used very short descriptions. And we moved away from that because we found individuals really want to make informed decisions and really have a very clear understanding. And we knew from our pre-research that they really valued seeing case studies and numerical examples. So with all of this and people who're working with these products in real life, they know that it's so important to ensure the people involved understand what's going on. And so we made... We developed a very clear product description and translated it into Chinese and we found when we surveyed the people that they had a very good understanding of what was going on. And that perhaps helped explain our results, which were that there was quite a solid interest in this hypothetical product. And what was very interesting when we compared across groups that both groups were interested in this product. So we asked these older homeowners, "Would you be interested in such a product if it was available in your city?" And the majority said, "Yes, I would be interested." And the younger homeowner, the younger adults, we asked them like, "Would you recommend this to your parents?" And the majority said, "Yes. I would." What we were a bit surprised was, that it didn't differ much by how we described the payments could be used. So it didn't matter whether we said, "Oh for example, you could use the payments to live more comfortably, or you could use the payments to support your grandchildren." So that didn't have a big impact on the initial level of demand, but when we looked at how they then actually, in a second step, used the payment, that did play a role. And so because after we had basically taken toll of the general interest in the product, we asked them, "So now, consider you would get payments from this product. How would you use these payments?" And what came out was that in both of these groups, there was a wide mix of needs. So some people said, "I want to live more comfortably in retirement," some people said, "I want to pay for better medical treatments or aged-care services," and some people said, "Supporting children and grandchildren." And what is important, some wanted more financial flexibility. And so I guess the most... The top two uses that were very popular in both of these survey groups were to live more comfortably in retirement, not having to worry, and to pay for better medical treatment and aged-care services. And supporting children and grandchildren was important too. So about 20% of the people we surveyed wanted to do just that. And the number was higher among the older sample. So they were like, "Yes, I want to support my children and grandchildren." Among the younger folks, they said, only 17.8% said, "Yes, I would recommend my parents to do that." Perhaps they felt a bit uncomfortable being so straightforward. Yeah. Josh Funder: And Katja, if I can interrupt there. Some of the things you've identified there are truly universal. Your research in China is very consistent with what other people at the forum are saying. Firstly, we have to take out the complexity of retirees understanding their options. And that's an absolute driver. We need to agree on that and find ways to do that. We've had other presenters say that they were faced with a 78-page product disclosure statement for a term deposit. So that needs to go. But the other thing we can hear very clearly from your research in China is that people need to understand and have information that is useful to them to make an informed choice with confidence. And then, in the third part of what that research could be seen to show is that people have a variety of needs, and the purposes for them to access home equity will be different to each person, and they'll change over time. So it's not one thing, and one-size-fits-all. Tell us, what do you learn about that intergenerational story in China? Parents saying they want to use it, but they want to make sure the kids have got some. Kids saying they want to make sure the parents are in good shape, but they'd use it as well if they could. What do we learn about that in terms of helping people be the Bank of Mum and Dad in Australia? Katja Hanewald: Yes, so definitely. So there are several lessons here. So one thing is that there are misperceptions by... If you survey these groups separately and you ask them about... So because we also, in a third step, we asked them, "Why would you hesitate not to recommend this product to your parents? Or why would you be hesitating yourself to take up that product?" And some people would say, "Well, I'm not sure my children would approve." Or some of the children group would say, "I'm not sure my mum and dad would be interested." But in fact... Josh Funder: You gotta find a way to have the conversation. Katja Hanewald: They were interested. And so there was a bit of misconception about what each other was thinking. And so we would strongly, strongly, strongly advise that that is a family conversation and that any provider should market this to the both groups, and make clear that this is a product that can help families, and that they should have an open discussion about it. So definitely. And then yeah, in the... When we did... I told you that we collected a lot of variables and we did very... Yeah, state of art, statistical modeling, and then we try to get at really what are the factors that drive people's decisions? And we couldn't pick up any very strong factors about them having children and... Or them having grandchildren or the incomes of the children. So this, I guess, there is so much variety, so there wasn't... It might be effective for some people, but it didn't came out as a strong across all groups. So it wasn't actually very significant at all. And so we would say what we find is people are very different in their needs. Katja Hanewald: But there is an underlying concern about how to finance retirement, and also... And a concern about the parents to be well, and health is a factor. So we have follow-up research, because we sort of said, so many in our group of survey participants would like to use the payments for better medical and aged care services. So we have more research exploring this, looking at this need, but at the same time we know from our research that people often take... Like when we ask them, which uses would you like to use the... Or what do you need to use the payments for? They chose so many different needs, and so... But it, I think it helps them to understand the many different ways you can use the products potentially and have a very open conversation within the family. And we know from other related research that the same is true about care and aged care and how to fund this and how to organize this. And it's similarly an important discussion, and that discussion can be done in the same stage or over several discussions perhaps. Josh Funder: And Katja, I think we can take some sort of universal conclusions from this. Firstly, the world's population is aging in China, in Australia, and around the world. Secondly, that property, and in particular for families, the family home is by far the largest asset that they have, and that that aging population needs a lot of services and a lot of funding to meet those services in health care, in home care, and also in intergenerational transfers. So it's interesting to see just how much we've got in common with a global aging population, but also your research has highlighted we need to strip out the complexity, we need to make information available so people can understand that it has to be a family conversation, and that people's needs are diverse, many, and changing over time. And we can never presume that they always need the choice and flexibility to be able to adjust their situation and fund their own retirement. In the interest of time, we've [15:58] ____ got to go... Katja Hanewald: That's a very nice summary, yeah. That's a very nice summary. Thank you. Josh Funder: Katja, thank you on a number of fronts. Your ongoing and very high quality research that leads the world in this space, your passion to make sure this is part of a solution for Australia, and your collaboration with us to try and understand how this can actually work for real retirees has really led the way. So thank you for that contribution as well as to the contribution to the Third Pillar Forum here today. Katja Hanewald: Thank you so much. And all the best for this forum which is... Which has such an exciting program and it's... I think it will be huge success. Josh Funder: Thank you.