JUST GROUP PLC Annual Report and Accounts 2021
MARKET CONTEXT CONTINUED
customer is eligible. This has provided new opportunities for Just Group as we compete in the open market when these customers choose to shop around; this is our addressable market as we do not have an existing base of pension savings customers. The open market share of the total GIfL market, for 2021 was not published at the time of preparing this report. In 2020 it was 50% unchanged from 2019 (source: ABI). Continuing developments are driving growth in our addressable market: • the structural drivers of growth in the retirement income market are strong and assets accumulating in defined contribution (“DC”) pension schemes are projected to increase consistently over the next decade. This growth arises from an increase in the number of people joining workplace pension schemes as a result of the successful state auto-enrolment policy and the increase in contribution rates implemented in 2018; • growth in DC pension assets also arises as companies close down final salary or defined benefit pension schemes and offer their employees DC pensions instead; • some people are transferring out of defined benefit pension schemes into DC pension schemes to take advantage of Pension Freedoms. When transferring, many people are choosing to secure a guaranteed income for life, by using some of the transfer value to purchase an individually underwritten GIfL; and • many life and pension companies are choosing to put in place broking solutions to offer their pension savings customers access to the best individually underwritten GIfL deals in the market. Some are choosing to transfer their obligations to provide a guaranteed GIfL rate to their customers to an alternative product provider or broking solution. This grows our addressable market and provides customers with better outcomes. Our HUB group of companies is providing many of these corporate services. The number of individual retail customers transferring their pension benefits into defined contribution pensions from their final salary (defined benefit) pension has reduced significantly in the last two years. This reduction follows a review and introduction of remediation measures by the FCA into the quality of advice provided to individual retail customers exploring transferring their benefits. A proportion of the proceeds from these transfers are used to secure a guaranteed income by investing in a GIfL. This reduction in activity will be a drag on the positive growth factors above. The FCA previously announced they intend to complete further work on the suitability of advice and associated disclosure (known as “Assessing Suitability Review 2”). The review will focus on initial and on-going advice to consumers on taking an income in retirement. At the time of writing this report the FCA had paused this review and not committed to a future date to start the work. This evolving market has changed significantly following the Pension Freedom reforms and the FCA wants to assess the outcomes consumers are receiving. The Governor of the Bank of England has expressed concerns that people may not have the financial resilience to withstand significant asset price volatility and the FCA has expressed concerns that people may not have sufficient sources of sustainable income. These comments and regulatory reviews shine a spotlight on the importance of securing a guaranteed income for life.
LIFETIME MORTGAGES A lifetime mortgage (“LTM”) allows homeowners to borrowmoney secured against the equity in their home. The amount borrowed is repayable together with accrued interest on the death of the last remaining homeowner or their move into permanent residential care. This product can be used by retirees to supplement savings, top up retirement income or to settle any outstanding indebtedness. The typical lifetime mortgage customer is around 69 years old, has a house valued at around £275,000 and borrows 29% of the property value. People are becoming increasingly positively disposed to accessing some of the equity in their homes to improve the quality of their later lives or to help their family. The compound annual growth rate of the lifetime mortgage market between 2011 and 2021 was 20.1% and this has attracted new providers to enter the market in the last few years. Just Group is a leading product provider of lifetime mortgages. Our HUB Financial Solutions business is a leading distribution business providing consumers with regulated advice on equity release solutions from across the market. CURRENT MARKET AND OUTLOOK Just Group expects Lifetime Mortgages to continue to provide an important, but reducing proportion of the investments it uses to back its Retirement Income new business liabilities. Homeowners aged over 55 are estimated to own property wealth of over £3.5tn (source: ONS). We estimate that the existing industry loan book including interest is just £36bn. Increased competition stemming from the new entrants to the marketplace has increased the availability of product variants, rising from 525 at the end of 2019 to 1,200 at the end of December 2021 (source: Just estimates), in turn resulting in greater product choice and flexibility for customers. The levels of activity in the market during 2021 returned to those observed prior to the pandemic as customers looked to take advantage of the broad range of competitive solutions available. Just Group introduced medical underwriting into a niche segment of the lifetime mortgage market some years ago. This year we have extended it across the Just for You mortgage range. We estimate by collecting medical information and lifestyle factors from applicants, we are able to provide six-in-ten a lower interest rate, or for those who need it, a higher borrowing amount. We believe this will revolutionise how lifetime mortgages are advised. You can read more about our disruptive innovation on page 64. Just is forecasting that the LTMmarket will grow to exceed £6bn per annum by the end of 2024, which is a compound annual growth rate of 7.7% from 2021. The primary drivers of growth are: • households wanting to top up their retirement income to improve their standard of living in later life; • an increase in the number of people with outstanding interest-only mortgages who are entering retirement and require a solution to settle the debt with the existing mortgage company; • strong demographic growth. The number of people aged 65 and over is forecast to increase from around 12 million today to around 17 million by 2040; and • strong investment in advertising which results in people becoming aware of LTMs, combined with people becoming more disposed to using some of their housing equity. In October 2020 the FCA wrote to Chief Executive Officers and board directors of lifetime mortgage lenders and mortgage intermediaries. The FCA set out their view of the key risks these firms pose to their consumers or the markets in which they operate. They outlined their expectations of firms including how firms should be mitigating these key risks. They described their supervisory strategy and programme of work to ensure that firms are meeting the regulators’ expectations and that any harms and risks of harm are being remedied and/or mitigated.
Enabling people to improve their later-life living standards
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