# Actuarial report on integration of housing and pensions



## Brendan Burgess (10 Aug 2022)

There is an excellent paper here on the integration of pensions and housing



			https://www.actuaries.org/IAA/Documents/Publications/Papers/Interaction_Pension_Housing.pdf
		


It says what I have been saying for some years.

It has two main points:

Many  current retirees  have  high home  equity  but at the same time  are income-poor. *A reverse mortgage on the family home can  in some cases provide a valuable means of supplementing an inadequate post-retirement income*. While reverse mortgages have  not been popular  in the past, there is a combination of factors that  may lead  to greater uptake:  inadequate post-retirement income from other sources, high rates of home ownership among retirees and recent significant surges in property prices  in many areas. There are, however, many barriers to the use of reverse mortgages, some of which are explored in this paper.

At the other end of the age spectrum, many  young people  are experiencing difficulty in raising a deposit to purchase a home, because of recent house price increases and low wage  increases. *If using pension funds can  make the difference between  a person  being  able  to purchase a home rather than missing out, then the application of the balance in this way may improve the person’s retirement outcome,*  compared to retaining the balance in the fund  to accumulate to retirement. The advantages of gaining access to housing in this way must be balanced by the disadvantage of
a reduced pension balance at retirement.

In respect  of using pension balances for assisting people  to buy houses, there are a number  of issues to consider.

1.   As stated earlier, one of the core aims of Retirement Income Systems is to provide retirees with  an  adequate income in  retirement.   *Outright  home   ownership,  which   generally significantly reduces housing costs, is consistent with  this objective[providing retirees with an adequate income in retirement]*. In  a number  of countries, home ownership also enhances dignity in retirement.

2.   Financially, outright home ownership is an income stream in retirement, in the sense that it
reduces expenditure  that is otherwise payable by people renting or paying off a mortgage. In this sense it [home ownership]  is a mitigant against

longevity risk (lasting through life),
investment risk (the savings are less volatile;  the value  of residential property has traditionally been  relatively stable compared to many financial assets) and
inflation risk (i.e., protection against rents rising, although inflation risk still exists through property taxes, insurance, utilities  and cost of maintenance).

3.   Potential participants need  to be provided  with relevant education/financial advice. Any financial plan developed needs to consider important  expected financial factors, including tax and social security of the relevant jurisdiction.

4.   An assessment needs to be made  as to whether the implied rate of return of using pension monies for housing is satisfactory. This assessment will need to take into account financial and  economic conditions,  and  the tax and  social security environment, as well  as the individual’s job situation.

5.   Generally, young people have not been engaged with pension funding. However, most young people do have an interest in obtaining a home. Hence, allowing pension monies to be used for a housing deposit is likely to achieve interest  in pension funding throughout working lifetimes.

6.   Investment in a house enables leverage to be obtained (i.e., people borrow a high proportion of the purchase price of a home), whereas this is generally not possible in a pension fund. This leveraging is likely to increase both investment return and the member’s overall level of saving. However, as always, leveraging increases investment risk.

7.   Restrictions should be applied to any arrangement where pension fund  balances can  be used for housing purposes. The aim of such a feature is to help people enter into the home ownership  market,  and  hence   eligibility should generally be  restricted   to  first-home buyers/occupiers. Also, the amount that  can  be utilized  should be capped, so that  end retirement balances are not overly reduced.

8.   *It is sometimes argued that *allowing members to use pension balances for housing will not benefit  members; rather, it *will increase house prices  and  hence  benefit  existing home owners and developers. Counter-arguments include: *
(1) this is a relatively minor impact, as there have been many housing booms and busts that have  occurred independently of any housing  grant  schemes;
 (2)  the  class that  the  proposal  will  apply   to  – first-time owners/occupiers – is less likely  to precipitate a material increase in  housing prices compared to other groups such as investors and owners upsizing and downsizing;
 (3) in the view of the Productivity Commission (2004)  there are not only benefits to members in the short term, but also in the longer term – the price impact will be reduced as higher demand will lead to more production that will lead to a stabilization of prices; and
(4) housing will be needed, whether for rent or for purchase.

9.   Another  argument often  put  forward  by  those  opposed to the  idea of using pension accounts for housing purposes is that  there will be  pressure for other purposes (e.g., repayment of education debts). The counter-argument  is that  housing has a particular niche,  in that  it becomes part  of a person’s assets that  can  be  used in his/her  post- retirement framework.

10. Policymakers considering the introduction  or amendment of a scheme to allow  pension accounts to be used for housing need to take into account the above  factors. In addition, extensive modelling of different structures should be undertaken before  determining the preferred approach. The modelling needs to take into account a range of issues, including:
•   The macro effects on pension cash flows and funds under management;
•   The micro effects for a range  of individuals’ retirement outcomes;
•   The effect on government revenue (including taxes and social security);
•   The macro effects on the housing market;
•   The micro effects for individuals in respect  of their housing, income and  savings outcomes; and
•   Any other economic flow-on effects.

*There is full integration of pensions and housing in Singapore *

3) In particular, it documents how *Singapore *has fully integrated  pensions and home ownership as a core part of their housing strategy. I have extracted this piece and attached it to this post.


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