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Pension backed loans

Pension backed loans. October 2011. Agenda. Overview of housing finance. Focus pension backed loans. It is useful to clarify what we mean by housing finance. Is housing finance for housing, or secured by housing? Do we care what kind of housing?. Housing finance products in South Africa.

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Pension backed loans

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  1. Pension backed loans October 2011

  2. Agenda Overview of housing finance Focus pension backed loans

  3. It is useful to clarify what we mean by housing finance. Is housing finance for housing, or secured by housing? Do we care what kind of housing? Housing finance products in South Africa Mortgage finance Fully secured or pension backed loans Unsecured housing loans Savings • Can be finance for housing or finance secured by housing (and used for another purpose) • The value of the residential mortgage book at June 2011 was R773.37 billion (63% of all consumer credit) • There are 1.81 million residential mortgages • Between10-14% of households have a mortgage • Of the 25.449 billion mortgage credit extended in Q2 2011, 93% by value (83% of accounts) went to borrowers who earn more than R15,000 a month • Housing loans guaranteed by pension fund • No accurate estimates of the size of the market • Various studies indicate the value of the book could be between R5-17 billion • No accurate estimates of the size of the market • Researchers estimate that between 10% and 30% of unsecured loans are used for housing • According to the NCR as at June 2011 the total value of the unsecured loans book was R87.98 billion (between R8.7-R26.3 billion for housing?). • Of the R18.954 billion granted in Q2 2011, 35% by value (20% of accounts) went to borrowers who earn more than R15,000 per month • No supply-side data on extent of savings for housing • Can be critical for access to mortgages or to finance incremental housing investment Facilitate incremental housing investment Increase / improve stock of housing units

  4. Mortgages account for 63% of all consumer credit by value, but only 5% of the number of active accounts Consumer credit: Gross debtors book Q2 2011 (R Millions) Consumer credit: Gross debtors book Q2 2011 (Number of accounts, 000’s) Source: NCR Consumer Credit Market report *Note: Credit facility includesall credit cards, store cards and overdraft accounts

  5. 83% of mortgage accounts went to borrowers who earn more than R15 000 per month. Secured and unsecured loans are more popular with lower income individuals Number of credit agreements 2011 Q2 (Loans granted, R Million) (20%) (31%) (16%) (11%) (83%) (64%) (58%) (12%) (5%) Source: NCR Consumer Credit Market report

  6. 6 We can use survey data to explore various household characteristics Households with no wage income Households in inadequate accommodation* Households with a mortgage Households with other formal credit** % of Households Source: IES 2005/6 *Inadequate housing includes: Informal dwellings/shacks and Traditional dwelling/hut/structure made of traditional material, as well as formal dwellings which are over crowded (over 2 people per room) and formal dwellings with inadequate sanitation (no flush toilet in dwelling or on site) **Formal credit includes: Vehicle finance, credit from retail stores, bank overdraft, other bank loans, and other loans

  7. Agenda Overview of housing finance Focus pension backed loans

  8. Pension Backed loans Section 19 (5) of the Pension Funds Act (No. 24 of 1956), permits a retirement fund to grant a direct loan to its members or to furnish a guarantee for a member’s loan from a third party (e.g. from a bank or another home loan provider). • The loan must be used for housing related purposes • To purchase a house • To buy land and to build a dwelling on it • To make additions or alterations to, or to maintain or repair an existing dwelling • To repay a third-party loan which is secured by mortgage bond over a property • Financial assistance is conditional on • The property actually belonging to the member of the pension fund (or to his or her spouse) • The house must be occupied by the member (or dependants of the member) • The retirement fund cannot grant (or secure) a loan for more than one property Poorer householdsmake less use of mortgage finance. This can be attributed to the fact that lower income households generally cannot afford repayments on the larger mortgage loan but can afford to take up the smaller pension-secured loan (or unsecured loan) to finance their housing requirements

  9. 9 Basic product overview Value proposition How and where? Who? What? Target market Core product features Marketing and education Distribution Servicing • Through employer/ retirement fund • Active retirement fund members • Retirement benefits as collateral for a housing loan to purchase, build or upgrade a home Retirement funds will either grant loans directly to borrowers or issue guarantees to third party lenders • ?? • Depends on the provider, but likely to focus on the workplace • Instalments typically collected directly off payroll

  10. It is possible to accumulate a meaningfully large amount against which to borrow Potential value of pension-backed loan (By current income and number of years contributing to fund) Value at end of year Number of years contributing Based on the following assumptions: pension fund grows at 7% pa, personal monthly income grows at 6% pa, tax on withdrawal benefit is 18%, and borrower can borrow 80% of after-tax withdrawal benefit, employer and employee contribute 7.5% each into employees pension fund

  11. PBL’s are cheaper than mortgages Comparison between Mortgage and PBL Total cost to client Loan amount and term Interest rate Initial costs Monthly fees Cost to client Source: telephonic conversation with Standard bank

  12. PBL’s are cheaper than micro loans Comparison between a PBL and unsecured micro loan Total cost to client Loan amount and term Interest rate Initial costs Monthly fees Total cost to client

  13. 13 Access is not the same as usage – there may be more people who have access to a product than the number who choose to use the product. Conceptually access is the point of intersection between supply and demand Value proposition How and where? Who? What? Target market Core product features Marketing and education Distribution Servicing • Retirement benefits as collateral for a housing loan to purchase, build or upgrade a home Retirement funds will either grant loans directly to borrowers or issue guarantees to third party lenders • Through employer/ retirement fund • Active retirement fund members • ?? • Depends on the provider, but likely to focus on the workplace • Instalments typically collected directly off payrol Supply Access • Must be over the age of 21 and under 64 • Must have a retirement fund that allows PBL’s • Must use the loan for housing purposes • How is this verified? • There is evidence of low levels of awareness in the target market around credit in general • Employers and fund administrators must agree to facilitate payroll deduction Demand

  14. 14 Does not have access to the product Has access to the product but does not use it Given supply and demand-side data the Access Frontier Methodology developed by David Porteous enables an identification and quantification of access barriers. It segments those who do not yet use a product into various market zones Currently has / uses the product Too poor Market redistribution zone Excluded by design Total market Market development zone Excluded by default Does not have / use the product Does not want the product Market enablement zone Potential users Source: Based on a paper entitled “The Access Frontier as an Approach and Tool in Making Markets Work for the Poor” by David Porteous

  15. 15 Does not have access to the product Has access to the product but does not use it Given supply and demand-side data the Access Frontier Methodology developed by David Porteous enables an identification and quantification of access barriers. It segments those who do not yet use a product into various market zones Currently has / uses the product Too poor Market redistribution zone Excluded by design Total market Market development zone Excluded by default Does not have / use the product Does not want the product Market enablement zone Potential users Source: Based on a paper entitled “The Access Frontier as an Approach and Tool in Making Markets Work for the Poor” by David Porteous

  16. BASA published some data for pension-backed loans granted to the FSC target market by the big four banks between 2004 and 2008. The impact of the NCA is clearly visible FSC PBL Origination: 2004 – 2008 Rand value Number of loans Average value R Millions Number of loans Rands Source: Banking Association of South Africa

  17. There is no good data on the size of the PBL book. The NCR publishes origination data for the large lenders (primary banks). In 2010, just under 1.7bn was originated Value of loans secured through retirement benefits (R Milliona) R Millions Source: National Credit Regulator

  18. According to the NCR, just 1% of secured lending is secured by retirement benefits. Note however that NCR data does not cover all lenders Breakdown of secured loans 2011 Q1-Q2 (Loans granted, R Million) Source: National Credit Regulator

  19. 19 Does not have access to the product Has access to the product but does not use it Given supply and demand-side data the Access Frontier Methodology developed by David Porteous enables an identification and quantification of access barriers. It segments those who do not yet use a product into various market zones Currently has / uses the product Too poor Market redistribution zone Excluded by design Total market Market development zone Excluded by default Does not have / use the product Does not want the product Market enablement zone Potential users Source: Based on a paper entitled “The Access Frontier as an Approach and Tool in Making Markets Work for the Poor” by David Porteous

  20. The labour force comprises almost 20 million people including those who have lost hope of finding a job 3.5 million unemployed under the age of 30 2.4 million unemployed under the age of 30 1 m 9.8 m 2.2 m 4.4 m 2.3 m 19.8M FORMAL INFORMAL DISCOURAGED DOMESTIC UNEMPLOYED Source: LFS 2010 Q3

  21. Around 5 million employed individuals say their employer contributes to their pension fund Employer contributes to pension 4.9 m 36 000 9.8 m 1 m 9.8 m 2.2 m 4.4 m 2.3 m FORMAL INFORMAL DISCOURAGED DOMESTIC UNEMPLOYED Source: LFS 2010 Q3

  22. Privately administered and underwritten funds have the most members South African retirement fund industry Total Net Assets (R Billions) Total active members (000’s) Total assets = R2 trillion Total active members* = 8.8 million Source: Financial Services Board, Registrar of Pension Funds annual report 2007/08 *Note that there will be some double counting as some individuals belong to more than one retirement fund

  23. Relatively few lower income workers would be able to access this product. In addition, the fund needs to allow access – Government’s pension fund does not Number of employees by employment sector (Formally employed individuals) National/ provincial and local government Government controlled business Private Enterprise % employer contributes to pension: 39% 62% 69% 70% 70% 61% 85% 91% 96% 96% 71% 88% 93% 97% 96% 3 321 3 500 Total with pension: 3.2 m Total with pension: 1.5 m Total with pension: 203 000 000’s of employees Source: LFS 2010 Q 3

  24. Market redistribution zone Unemployed/ not economically active Currently have/use product 15.3 million 54% of the market Informal employment ? 4.2 million Total market Adults 21+ Does not have access to the product Government employee 1.8 million Market development zone 28.2 million 24.8 million Employer does not contribute to pension fund 7.9 million 9.5 m 34% of the market Currently do not have/use product Earns less than R1500 4.0 million 28.2 million Too old (64 or more) 217 000 Has access to the product but does not use it Market enablement zone 3.4 million 12% of the market Source data: LFS 2010 Q 3 Based on a paper entitled “The Access Frontier as an Approach and Tool in Making Markets Work for the Poor” by David Porteous

  25. Market enablement zone Market development zone Market redistribution zone Current market ? ≈ 12% ? ≈ 34% ≈ 54% Number of adults 3.4 million 9.5 million 15.3 million Current market Has access Does not want Does not have access Too poor Based on a paper entitled “The Access Frontier as an Approach and Tool in Making Markets Work for the Poor” by David Porteous Source data: LFS 2010 Q 3

  26. Some hypotheses: Access problems and PBLs Meso layer Support infrastructure • Pension fund administrators / lenders and payroll administrators need to work together • Difficult to monitor use of funds (Service providers, information, macro environment) • Captive markets (typically lender is the fund or is associated with the fund administrator) Micro layer Organisational infrastructure (diversity, capacity, innovation, competition) • No requirement in terms of asset protection • No requirements relating to housing as a financial asset • Weak verification required for loan purpose Macro layer Institutional infrastructure (policies, laws, regulations) • Moral hazard - PBLs are significantly cheaper than mortgages or unsecured housing loans. Borrowers have an incentive to misstate the purpose of the loan • Consequences of default cushioned by means-tested state old age pension The consumer

  27. Thank you Questions claire@eighty20.co.za 021 460 0440 illana@eighty20.co.za

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