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Pension schemes versus real estate

Author

Listed:
  • V. D’Amato

    (University of Salerno)

  • E. Lorenzo

    (University of Naples Federico II)

  • S. Haberman

    (City, University of London)

  • M. Sibillo

    (University of Salerno)

  • R. Tizzano

    (University of Naples Federico II)

Abstract

The demographic, economic and social changes that have characterized the last decades, and the dramatic financial crisis that has taken place since 2008, have led to a demand for structural changes in the pension sector and a growing interest in individual pension products. Hence the need, for most elderly people, to liquidate their fixed assets, which are usually the homes in which they live. This highlights products such as reverse mortgages and domestic reversibility plans. Within this context, we propose a contractual scheme where an immediate life annuity is obtained by paying a single-premium in the form of real estate rights (RERs), for example by transferring to an insurer the property title of a house or a similar realty, while keeping its usufruct or a restricted bundle of rights. The level of the installments depends on the fair value of the transferred RER at the contract’s issue, the life expectancy of the insured and the expected growth rate of the real estate market value. The contract design is developed by considering the control of the financial risk inherent in the contract itself, because of the prospective changes in the value of the RERs, and the level of the insurer’s leverage. Finally, we provide some numerical evidence of the proposed contractual structure, in order to compare the level of the installments according to the house return forecasts in different European countries.

Suggested Citation

  • V. D’Amato & E. Lorenzo & S. Haberman & M. Sibillo & R. Tizzano, 2021. "Pension schemes versus real estate," Annals of Operations Research, Springer, vol. 299(1), pages 797-809, April.
    • Handle: RePEc:spr:annopr:v:299:y:2021:i:1:d:10.1007_s10479-019-03241-y
    DOI: 10.1007/s10479-019-03241-y
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    References listed on IDEAS

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    Cited by:

    1. Iván de la Fuente & Eliseo Navarro & Gregorio Serna, 2020. "Reverse Mortgage Risks. Time Evolution of VaR in Lump-Sum Solutions," Mathematics, MDPI, vol. 8(11), pages 1-17, November.
    2. de la Fuente, Iván & Navarro, Eliseo & Serna, Gregorio, 2023. "Proposal for calculating regulatory capital requirements for reverse mortgages," Socio-Economic Planning Sciences, Elsevier, vol. 88(C).
    3. Vaskövi, Ágnes & Jászfi, Evelin, 2023. "Az időskori szegénység és az öngondoskodás összefüggései Európában [Old age poverty and financial awareness in Europe]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 898-923.

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