How Futureproof is addressing the two big issues of our time
The following is the statement made by John Innes, CEO and Director of Futureproof, to the Senate Inquiry on 12 March 2024.
I would like to express my thanks to the Committee for the opportunity to appear representing Futureproof in this Senate Inquiry into Improving Consumer Experiences, Choice, and Outcomes in Australia’s retirement system.
Our team is drawn to addressing two of the big issues of our time:
- The growing retirement funding gap; and
- The inter-generational unfairness that prevents the next generation from entering the housing market.
Founded by Allianz alumni. Futureproof is led by four expert teams of 30-40 year industry veterans from insurance, banking, financial technologies and financial services based in Sydney, Hong Kong and London. The founders, executives and advisory teams include former senior executives of Lloyds of London, Westpac, Bendigo Bank, Macquarie Bank, Accenture, Allianz, Aviva, MunichRe and SwissRe.
Futureproof is a Fintech and Insurtech company focused on retirement and aged care funding that is backed and supported by IMS Digital Ventures of Hong Kong and London.
We are in global collaboration with Accenture to deliver new product innovation to better meet the financial needs of retirees at every life stage – from pre-retirement, active retirement, ageing in the home through to residential aged care.
Futureproof is a disrupter of the US$20Bn per annum traditional equity release mortgage market in Australia, UK and USA. Australia is our test market and this is where our product and technical team is based.
Equity Preservation Mortgage®
By the end of this year, we will have invested nearly $10Mn in R&D developing our Equity Preservation Mortgage® and its Product and Funding Platform. This is a breakthrough new type of mortgage that finally overcomes the inherent product defects of reverse mortgages, shared appreciation mortgages and shared equity mortgages.
It delivers long term tax-free annuity income or funding for products and services in retirement and aged care – with no depletion of home equity and no sharing of capital appreciation.
We make the Equity Preservation Mortgage® available only to banks, insurers and regulated lenders through our Product and Funding Platform.
The idea that retirement and aged care can be funded through the monetisation of home capital with no equity depletion so as to enable the full inter-generational transfer of home wealth upon death, is an absolute game-changer for Government, for Australia’s retirees and for the next generation.
This is true transformative fintech innovation and well demonstrates that the Committee’s decision to widen the net in its quest, through this Senate Inquiry, for thought leadership, innovation and new solutions, was correct.
This Senate Inquiry follows a number of earlier forums tasked with looking into retirement funding over the last 3 years commencing with the Retirement Incomes Review, The Aged Care Royal Commission, the Minister’s Task Force and now this Senate Economics References Committee Inquiry.
The number and scope of these inquiries reflects the fiscal hurdles, difficulties of policy making and the necessary improvements to the existing retirement system with its many inter-connected parts needed to address the funding challenges of retirement and aged care in Australia against the backdrop of population aging to 2045, a rapidly deteriorating dependency ratio, meeting the financial needs of current retirees and growing inter-generational unfairness. By any measure this is a wicked problem that has no simple solution.
Government has long-been challenged through these processes, by the lack of real retirement funding solutions and thought leadership being offered. The Submissions being considered in today’s hearing are no exception – they all have one thing in common – they go to matters around the current retirement and product framework. This is not a criticism of other Submissions – it is human nature (even for the experts) to go to what they know – to confine their thinking to the current paradigm of our existing system comprising three pillars of retirement funding and how these might be improved through better customer experiences, product choices and better outcomes.
However, to us at Futureproof we see this as, largely, ’tinkering around the edges’ of the existing framework. None of the Submissions dealt with in today’s Senate Hearing will result in any increase to the actual funding pool or capital pool needed to close the growing retirement funding gap as the population ages.
Now that is not to say that other Submissions don’t present some good ideas and sound recommendations for improvements, particularly around superannuation – most do and a number of those we endorse.
We currently have a three-pillar retirement funding system made up of superannuation, cash savings and social security. In relation to the 1st pillar, much has been achieved and we have reached a position where the accumulation phase of superannuation is now working well. Inevitably, the overall focus has now shifted to the de-cumulation phase, starting with the need for financial advice and embedding insurance, annuities and guaranteed income products. We counsel against the embedding of inferior traditional equity release products within superannuation (reverse mortgages, shared appreciation mortgages and shared equity mortgages/home reversion).
Increasing Rates of Home Ownership
There is even growing support for a broader widening of the objectives of superannuation, beyond its original design as compulsory savings mechanism to deliver an allocated pension in order to alleviate the pressure on the aged pension, to now consider whether superannuation should also fund wider retirement needs such as in-home care need to support ageing in the home, residential aged care and even increased home ownership.
The original designers of Australia’s superannuation system continue to resist fiercely, the use of superannuation to fund these wider needs. We disagree – economic times, demography, fiscal pressures and retirement needs have fundamentally changed as the population ages. New thinking, new retirement funding products and new capital must somehow be introduced to fund Australia’s retirement system.
A strong indicator of fiscal stress within the retirement funding system is the dependency ratio that two decades ago sat at a ratio of 4:1 of taxpaying working age to retirees. This has rapidly declined since to the current 2:1 ratio and now reaches a point of being fiscally unsustainable. More worrying, is the resulting inter-generational unfairness as fewer taxpayers carry a heavier financial burden, especially at a time when the next generation already enter the workforce with high HECS (HELP) debts, carry a disproportional tax burden and are now increasingly are unable to enter the housing market.
This cannot end well for any stakeholder, as the next generation is placed in a position where they will be unable to properly fund their own future retirement.
So, it is important to talk about residential housing and its role in retirement funding.
There does appear to be a strong consensus of views expressed in the Submissions made to today’s Senate Hearing on the importance of homeownership to a secure and funded retirement, even though home ownership sits outside the current three pillars of our retirement funding system. There is also a recurring theme expressed in these Submissions that superannuation balances could, through partial releases, be used not only to deliver an allocated pension, but also as a direct funding mechanism to assist in addressing the declining rate of home ownership in Australia.
An often-overlooked advantage of a systemic shift towards funding homeownership is to diversify investment risk within superannuation. The superannuation system, effectively, forces Australian into an ever-increasing and self-insured exposure to financial markets – notably equities. As an asset class equity delivers around 7% annualised returns over the long term but it has investment risk and it has volatility. Using part of superannuation savings to increase homeownership does nothing to increase the overall pool of retirement funding, but it does have the effect of investment diversification into another asset class (being residential housing) that is not strongly correlated to financial markets. This asset class still delivers around 4% long term annualised returns with low risk and little volatility. This risk diversification can only be a good outcome in our view.
We do recognise that such reform might, initially, increase house prices. This, in our view, is short term pain for long term gain – the answer to that pain is, of course, housing supply. Governments at all levels are now clearly focused on policy that encourages increased housing supply. So, perhaps, the best answer here lies in not ‘throwing this baby out with the bathwater’, by making the recommendation but simply deferring its implementation until the demand-supply balance is better restored over the next 2 or 3 years so as to minimise any inflationary price effects.
Whilst Futureproof strongly concurs with the view that superannuation should be widened to provide funding assistance, we do so with some qualifications. Accessing superannuation savings to provide additional funding for home purchases should not be limited to first home buyers – there are many Australians through a variety of personal circumstances (being illness, divorce, retrenchment, unemployment and parenting) that have sold or lost their home and are desperately trying to re-enter the housing market to secure their financial futures.
Our second qualification is that it is not enough to simply increase the rate of home ownership without also focusing on new product innovation at the back-end that is needed to later monetise the asset upon retirement. Pushing asset-rich retirees into reverse mortgages (including the Government Equity Access Scheme) disadvantages retirees through rapid depletion of their home equity and delivers unintended consequences of inter-generational unfairness by precluding full inter-generational wealth transfer.
It should be again noted that none of these ideas go towards solving the underlying retirement funding gap. So where is this thought leadership to come from?
Fintech Industry Driving Thought Leadership
The Senate Economics Reference Committee is to be commended for widening the terms of reference of this enquiry to include the fintech industry – this the first recognition that the real solutions needed have not been forthcoming from industry incumbents and what is truly needed is thought leadership, widening of scheme design and implementation, and new retirement funding product innovation.
Fintech innovation such as the Equity Preservation Mortgage® now provides the catalyst for improved funding outcomes for Australia’s retirees. Options to address the fiscal deficit in retirement funding have to date, been limited and unpalatable. Indeed the Aged Care Minister’s Task Force does not recommend any increased taxpayer funding or levy for retirement and aged care. This leaves even fewer funding options, being stricter means testing of assistance for poorer retirees and increasing US-style user-pay models for wealthier retirees.
However, with 65% of Australian retirees being homeowners yet under-funded for their retirement, it is abundantly clear that current thinking promotes Government policy that must inevitably force asset-rich retirees to sell their homes or push them into reverse mortgages either in the private market or via the Government Home Equity Access Scheme.
Fortunately, fintech innovation now provides the obvious and much needed solution.
A New Funding Paradigm
Recommendations – Government Policy Initiatives To Achieve Better Outcomes
Futureproof made the following key recommendations to the Economics References Committee:
- The Government engage Accenture via the Minister’s or Treasurer’s office, to provide a financial assessment of the impact of the Equity Preservation Mortgage® on the Australian retirement system
a) implementation of the Equity Preservation Mortgage® within superannuation in accumulation phase for pre-retirees and in decumulation phase for retirees to provide greater choice, options and better financial outcomes, particularly focused on the asset-rich;
b) replacement of the reverse mortgage by it as the underlying financial instrument supporting the Government’s Home Equity Access System so as to avoid equity depletion and deliver far better financial outcomes for all stakeholders; and
c) policy settings that would support its adoption at scale in the private market (see point 3 below).
- Early releases of a portion of superannuation be permitted to:
a) increase the rate of home ownership through funding home deposits for first home buyers to increase the rate of home ownership; and
b) accelerate mortgage repayments for existing homeowners or paying out of debt upon retirement to enable the principal asset to be monetised.
- Accelerate the availability of Equity Preservation Mortgages® in the Australian market to deliver far better financial outcomes for asset-rich retirees and their children by:
a) encouraging superannuation funds to be more active as institutional investors in the wholesale mortgage funding market (secured by AAA rated first mortgages to provide reliable long-term 6%-7% returns as part of their overall investment strategies);
b) fast tracking of regulatory review of the Equity Preservation Mortgage® by APRA and ASIC; and
c) provide Treasury support via the Australian Office of Financial Management (AOFM) to underwrite the initial RMBS securitisations of the Equity Preservation Mortgage® to provide initial liquidity for lending institutions.
Summary
In summary, the Futureproof submission is about creating a new fourth pillar of retirement funding in Australia – home capital. This is the last remaining asset class of sufficient size and depth of capital to make any real difference to closing of the retirement funding gap.
