Claire Singleton - CEO, L&G Home Finance
Growth of UK equity release
Shelley Wettenhall: I'm delighted to introduce Claire Singleton to our forum. Claire is the CEO of Legal & General Home Finance and Claire has got up very early for us, she's over in the UK. And Claire's been the CEO of the Mature Savings business since July of 2018, having joined in 2011 from US law firm Jones Day. She has worked in a variety of legal roles within the Group, most notably as General Counsel for Retirement and then Group and Legal & General Capital. Welcome Claire and thank you very much for getting up so early for us.
Claire Singleton: No problem and thanks Shelley. I'm really pleased to be with you today. And thank you to everyone who's making the conference work so smoothly. So just a little bit about Legal & General Home Finance. So Legal & General Home Finance was a small startup company that was acquired by Legal & General in 2015. And we're now the number one provider of lifetime mortgages in the UK. We've got a team of about 200 people, a portfolio of four and a half billion and we lend about one billion per annum. And so the UK market, the UK lifetime mortgage market, has grown from 1.6 billion pounds per year when we entered in 2015, to four billion last year. And I'm going to come on and talk about some of the opportunity for further growth. We've seen the lifetime mortgage market rapidly evolve in those five years, with an increase of 75% in the number of brands entering the market. And there's now 200 product variations available. So this evolution has been a great customer choice offering in the UK.
The development of the lifetime mortgage market in the UK speaks of a really big and growing change within our society and our economy. The demographics have flipped between previously a large workforce and smaller retired population, to a much smaller working generation and larger retired generation. So these big generational changes have manifested in the UK in a number of ways. So over the last decade there's been the abolition of the default retirement age, the state pension has moved towards seven day. For many women that's a 10-year addition to their working life. Pension freedom reforms in the UK have changed the landscape and now far more people are retiring carrying debt. This is forecast in the UK to grow to 549 billion by 2029 for the over 55s.
So the ageing society is a challenge and an opportunity. Every society is grappling with the funding of retirement income. The Australian Treasury's Retirement Income Review is a really great case in point. The remit of that review covers many of the issues that the UK also faces. The review covers how to consider incentives for people to self-fund their retirement, discusses sustainability of the system and the role of the three pillars of retirement income and the level of support offered to different cohorts across time.
We'll see how that plays out in Australia and the UK as the UK plans its next steps. But in the UK certainly we're seeing responsibility for retirement income shifting from the old employer plus government to a new consumer-led personalised package of providers. In the UK there's some renewed speculation around what we call our triple lock state pension. The triple lock state pension system means that the state pension increases by the highest of either the growth in wages, inflation or 2.5%. But many people in the UK believe this is not sustainable, especially given fiscal measures that are going to be necessary post-pandemic.
The old model of the one job, one career, one employer is tapering away in the face of portfolio careers in the gig economy. And the portfolio career means that there's then a portfolio retirement. People arrive at later-life in the UK with a collection of different pension pots, so complex state benefit entitlements, and their home if they're a homeowner, and then other savings and assets. But increasingly people don't start their retirement with clean balance sheet on the liability side. They might have children that need help on the property ladder, grandchildren where they need to pay for education. And half of the 55s in the UK don't have enough savings to cover an unexpected bill of £5000. They might even have their own ambitions to do other things in retirement. We've already seen that the tools that the government are using, so partnerships between public and private sectors such as older enrollment.
We've definitely moved away from the old defined benefit pension plus government retirement income model to a more fragmented and tailored model. And this is where lifetime mortgages can play a real role. A lifetime mortgage might be taken to be part of later-life income as well as a contribution to long-term care, or to help a grandchild get on the property ladder. And the important point is that as retirement planning becomes more complex we need to respond with new kinds of services and products. The housing market is an important source of potential funding. In 1960 the UK's national average house price was 2500. By 1998 it was 55,000. And today in England it's 254,000. That's 460,000 Australian dollars.
Home ownership rates in the UK are around 75% among those who are aged between 55 and 75. So there's a lot of space to continue to grow products that will help them in order to access the equity in their homes. There's 1.8 trillion of UK housing wealth owned by the over 55s. And the lifetime mortgage market, as I said, is about 4 billion. That's about 7.2 billion Australian dollars. So what this means is the fundamentals are there for there to be huge future growth. So just to recap in the UK, over the last decade, we've seen some big changes. Cash-strapped governments grappling with generations of voters, each with their own conflicting issues. In the UK and Australia, a housing market where houses earn more than their occupants. The end of a sort of typical carriage club retirement and growth of portfolio living. And in the UK, especially, as I'm sure you are in Australia, we're trying to figure out how to provide a better level of care for people in later-life.
Shelley Wettenhall: There's a lot of similarities between what's been going on in the UK market and now what's happening here in Australia. We really are in the starting block when it comes to that home equity release product and opportunity for our retirees. In the beginning of... In the UK when it was first an offering to customers was there much push back? How did you get clients over the line and the psychological barrier that we're finding of people taking equity of their home? How did you overcome that in the UK?
Yeah. Yes there has been quite a big psychological barrier. I think prior to us entering the market, so prior to 2015, rates were actually quite high in the market. And there were often some negative perceptions around the product, it was often misunderstood so people didn't understand. So things like the "no negative equity guarantee", that your estate could never pay back more than you had borrowed. Sorry, more than the value of your home. And also because rates were high, people were scared of the accumulating debt. So what's happened when we entered the market is that we saw other brands also enter the market but we also saw lots of product innovation and real pressure on rates. So the rates really came down over the last five years in this space. But also product innovation and education of the market through that product innovation, so things like we launched a product whereby customers can service the interest, which means that their debt doesn't roll up so quickly. And getting that message out there has been really important.
But again, the number of trusted brands entering the market has really helped in the UK. And that piece on customer education. There's been an influx of advice firms and the standards around advice are now pretty high in the UK. So the SEA is always interested in advice in this market. But clearly, as our we, and we do look for oversight of our distributors to make sure the advice they're giving is sufficiently high. And so raising the bar in the industry around advice, new brands entering the market and really positive customer product innovation have been ways that I suppose some of the stigma or some of the negative perception around the product has really moved in the UK.
Claire Singleton: But don't get me wrong, there's still more to do. There's still quite a lot of myth-busting to undertake, where people don't necessarily understand some of the protections around the product. But that's, at "L&G", one of our missions to make this a more mainstream product and a more mainstream consideration in retirement. We always think and try to get the message across as, "Should you be thinking about your home more as an asset?". In the UK, there's this sort of peculiar concept of, "I must live in my home and I must leave my home to my children in retirement". But actually, most people are going to end up selling that home. And so we want to move the dial a little bit to say, "Should you realistically be thinking about this more as an asset when you're planning your retirement and planning how you want to pass on your legacy?".
Josh Funder: And Claire we're seeing I think some of those precursors to the Australian market going on a similar growth trajectory to the one you've experienced and led in the UK. And those are some increasing awareness of the opportunity. Importantly protections that mean people don't have to think about their home, either as a home or an asset. They can think about it as both a place to live and the way to fund their retirement. Guaranteed occupancy and non-recourse are both just absolutely fundamental to thinking about the home in those two ways. But that is still very poorly understood. Here, I think, it's also been a precursor to the product innovation and customer awareness. I wanted to ask you about how we can all best provide information to customers to give them confidence in the future on two different dimensions. One of them is having an adequate income that goes through their retirement. But the second one we're seeing here is people also need to plan around unexpected expenses.
And it's very difficult after the Banking Royal Commission for Australian retirees to get access to credit or to get access to capital. And so that means if they have inheritance impatience, or want to be the bank of Mum and Dad, they're doing that at the expense of the later years of their retirement. If they need a new car, to renovate the home or some of the age care lump costs that they then can't anticipate. We've got to find a way to deliver confidence in both income and capital funding. What's played out in the UK that we can learn from to make sure that 30 years of funding a normal active life, income and capital can be delivered to Australian retirees?
Claire Singleton: Yeah. I mean I don't think we've necessarily really cracked it in the UK either because we come across similar issues. I think some of the things that we've thought about, people really, I don't know, in Australia, whether people really plan and think about their retirement enough. In the UK we have found that people spend more time considering the purchase of a car than they do planning their retirement.
Josh Funder: Ah that's sobering.
Claire Singleton: Which is a really surprising...
Josh Funder: That's sobering.
Claire Singleton: I mean it is a really sobering fact. One campaign we've launched at the minute is just a... It's a campaign, it's called, "Spend a day on your retirement". And it sort of takes people through a guided question set on I suppose, "What do you feel your retirement looks like? How are you planning for your retirement? What do you think your income is going to be?". And sort of a number of factors of, "How long are you going to work? Do you understand your state pension? Do you understand the pension pots that you have? And do you understand any other sources of funds and assets and how they can be used?".
Claire Singleton: I think there is just a real lack of education out there, even in the UK market. And I suppose I said there's a real lack of education, it's really that there's a real inertia and so it's how you slowly shift the dial on that inertia because it becomes more and more important as we go down the generations for people to plan more on their retirement, given the points I was talking about. There's no longer such a reliance on the state, actually things are more flexible and need to be self-funded and come from various different sources of funding. So actually planning and considering your retirement earlier is much more important. And so how do we do that? At Legal & General we do a number of customer-facing campaigns but we also work really closely with advisors. Lifetime mortgages are a solely advised product but clearly there is, in other areas, a real advice gap. We've set up our own advice business that focuses on lifetime mortgages, but we recognise that there's an advice gap as a whole in the UK in terms of people providing advice, wider retirement advice. So to answer your question, more educated material for customers to sort of self-help, but also there is a real need for more advice in the market and more holistic advice. I don't know if that rings true with Australia as well?
Shelley Wettenhall: It does.
Josh Funder: Australia faces not an asset gap, most retirees here they're among the richest in the world, they've got over a million dollars in assets. We face an information and advice gap and we face an income gap, turning those assets into an income. So there are two clear gaps but it's not actually on the savings of Australians. They've been diligent throughout their lives in saving significant resources in their super, also in their home.
Josh Funder: The final question, if time allows is really... It's very difficult for the Australian superannuation system and retirement funding system, when it focuses only on accumulation during working lives, and trying to engage people about super, which is only a small part. At retirement, retirees have already done the saving and current Baby Boomers have their pension entitlements, they're too complex but they have them. They have their superannuation and they have their home equity. So we need to embark on a national conversation which is "Here is what you've got. Here is the wealth that you have saved and here's the wealth that you can access. But we don't know what the next 30 years holds". How do we set people up to have ongoing flexibility and choice but drawing on all three pillars of their retirement? Has the UK brought in the three pillars, but given the flexibility and choice over time in an unknown journey into retirement?
Claire Singleton: Yeah. I think that's looking at a range of products, so making sure that people understand the range of products that are out there. If I look at how the lifetime mortgage market has evolved, it's been really important that there's flexibility in that market. When people are coming through an advice journey they can now, on a lifetime mortgage, take a certain amount upfront but also have a drawdown facility whereby they have flexibility to drawdown on future pools of money from their house. And that's quite important in terms of having more flexibility there to drawdown on further funds from their home.
But in terms of just ensuring there's further flexibility actually I think it comes back to really planning at the start to understand what some of the potential needs could be and some of those unforeseen needs. One of the key issues is around care cost, and clearly that's something that's very hard to predict. But we've always said that as people are considering their retirement and their retirement planning, they've got to plan for some of that unforeseen expenditure that could be there. And cracking how you fund care in the UK is very difficult, but clearly in my area people understanding that part of that unforeseen cost around care, and some of the flexibility that they may need could come from their home equity and how you work on that in the future is a really key area where we could see that there is definitely an opportunity to make sure that people can cover those costs.
Josh Funder: Claire, we're out of time here in Australia, it's Friday night. You're just starting your long day at the end of the week. Thank you so much for joining us at what Australians would call "sparrow's fart" in the UK. But also for illustrating to us where we might be headed. Some of the learnings from the UK market that in this respect is well in advance and more mature than Australia, but also from which we can learn how to get it right for Australians to draw on all three pillars of their retirement savings, including their home equity. Claire Singleton from L&G, thank you very much.
Claire Singleton: Thank you. Thank you.