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

Author

Listed:
  • Dean Buckner

    (The Eumaeus Project)

  • Kevin Dowd

    (Durham University Business School)

  • Hardy Hulley

    (University of Technology Sydney)

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.

Suggested Citation

  • Dean Buckner & Kevin Dowd & Hardy Hulley, 2024. "How suitable are equity release mortgages as investments for pension funds?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 49(2), pages 259-269, April.
    • Handle: RePEc:pal:gpprii:v:49:y:2024:i:2:d:10.1057_s41288-024-00316-1
    DOI: 10.1057/s41288-024-00316-1
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    References listed on IDEAS

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    1. Andrew Cairns & David Blake & Kevin Dowd & Guy Coughlan & David Epstein & Alen Ong & Igor Balevich, 2009. "A Quantitative Comparison of Stochastic Mortality Models Using Data From England and Wales and the United States," North American Actuarial Journal, Taylor & Francis Journals, vol. 13(1), pages 1-35.
    2. Hosty, G. M. & Groves, S. J. & Murray, C. A. & Shah, M., 2008. "Pricing and Risk Capital in the Equity Release Market," British Actuarial Journal, Cambridge University Press, vol. 14(1), pages 41-91, March.
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