Pension schemes versus real estate (Q2241090)

The authors consider new developments of individual pension products. Section 2 gives an overview of reverse mortgage plans and home revision plans. In section 3 the authors propose a contractual scheme where a single premium is paid by the insured in form of transferring real estate rights (RER) to an insurer; the insured obtains an immediate life annuity. Economic consequences for the contract partners as well as national and international perspectives are shortly discussed. In section 4 a detailed analysis is presented. The fair value of the RER is assumed to be equal to the product of the installment the insurer will pay each period and an actuarial present value based on an `appropriate' interest rate. The installments are exposed to a demographic risk (life expectancy of the insured) and financial risks (value of the RER, leverage). The authors propose a specified formula for the appropriate interest rate (formula 2). Section 4 contains numerical applications for some European countries; formula 2 is strongly simplified by assuming that the appropriate interest equals an adjusted real estate rate of return. Prices of the RER (house prices) are estimates with an ARMA-GARCH process.