Pension backed loans - RHLF · pension backed loans Savings Unsecured housing loans Can be finance for housing or finance secured by housing (and used for another purpose) The value

Copyright © 2010 Eighty20

Pension backed loans

October 2011

2

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

Mortgage financeFully secured or pension backed

loansSavings

Unsecured housing loans

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

Mortgages account for 63% of all consumer credit by value, but only 5% of the number of active accounts

Mortgages773,371

63%

Secured credit

228,97419%

Credit facilities, 135,752,

11%

Unsecured credit87,978

7%

Short-term credit7470%

4

Consumer credit: Gross debtors book Q2 2011

(R Millions)

Consumer credit: Gross debtors book Q2 2011

(Number of accounts, 000’s)

Short term credit5481%

Mortgages1,8105%

Secured credit4,33512%

Unsecured credit6,29218%

Credit facilities*22,82964%

Source: NCR Consumer Credit Market report*Note: Credit facility includes all credit cards, store cards and overdraft accounts

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

5

2,090

205,343 739,115

4,523

39,463

184,476

31,574

110,535

224,862

0%

20%

40%

60%

80%

100%

Mortgaes Secured Unsecured

< R10k R10k-R15k R15K +

Number of credit agreements 2011 Q2 (Loans granted, R Million)

Source: NCR Consumer Credit Market report

(5%)(12%)

(83%)

(31%)

(58%)

(11%)

(20%)

(64%)

(16%)

74%

49%

34%

16%

7%

0% 20% 40% 60% 80%

<R3,500

R3,500-

R7,000

R7,000-

R10,500

R10,500-

R15,000

R15,000+

26%

51%

63%

66%

77%

0% 20% 40% 60% 80%

1%

3%

11%

22%

48%

0% 20% 40% 60% 80%

We can use survey data to explore various household characteristics

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

% of Households

Households in inadequate accommodation*

Households with a mortgage

Households with other formal credit**

6

Households with no wage income

49%

18%

10%

11%

8%

0% 20% 40% 60% 80%

<R3,500

R3,500-

R7,000

R7,000-

R10,500

R10,500-

R15,000

R15,000+

7

Agenda

Overview of housing finance

Focus pension backed loans

Pension Backed loans

8

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).

Poorer households make 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

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

Basic product overview

Target market

Core product features

Marketing and

educationDistribution Servicing

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

Who? What? How and where?

Value proposition

9

Through employer/ retirement fund

It is possible to accumulate a meaningfully large amount against which to borrow

10

1 2 3 4 5 6 7 8 9 10

R1 500 R1,832 R3,682 R5,548 R7,433 R9,335 R11,255 R13,194 R15,150 R17,125 R19,119

R3 500 R4,275 R8,590 R12,946 R17,344 R21,782 R26,263 R30,785 R35,351 R39,959 R44,611

R5 000 R6,107 R12,272 R18,495 R24,776 R31,117 R37,518 R43,979 R50,501 R57,085 R63,730

R7 500 R9,161 R18,408 R27,742 R37,165 R46,676 R56,277 R65,969 R75,752 R85,627 R95,596

R9 000 R10,993 R22,089 R33,291 R44,598 R56,011 R67,532 R79,162 R90,902 R102,753 R114,715

R0

R20,000

R40,000

R60,000

R80,000

R100,000

R120,000

R140,000

Potential value of pension-backed loan(By current income and number of years contributing to fund)

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

Va

lue

at

en

d o

f ye

ar

Number of years contributing

PBL’s are cheaper than mortgages

11

Mortgage PBL

R50 000 10 years

R50 000 10 years

Interest rate: 10% (prime +1) Interest rate: 8% (prime -1)

Initiation fee: R1 000 Bond registration cost: R1 568 Transfer costs: R3 506

R250 initiation fee No bond costs

R48 monthly admin fee R5 debit order fee (charged to

client by bank)

R12 monthly admin fee No transaction cost charged to client

(salary deduction)

Instalment: R741.02 Other costs: R53.00 Total costs: R794.02

Instalment: R609.67 Other costs: R12 Total costs: R621.67

Loan amount and term

Interest rate

Monthly fees

Cost to client

Comparison between Mortgage and PBLTotal cost to client

Initial costs

Source: telephonic conversation with Standard bank

PBL’s are cheaper than micro loans

12

PBL (Standard Bank) Micro loan

R10 000 36 months

R10 000 36 months

Prime less 1 (8% p.a.) 32.1% (repo rate X 2.2) + 20%

R250 initiation fee R100 initiation fee

R12 monthly admin fee No transaction cost charged to

client (salary deduction)

R? monthly fee R5.00 debit order cost charged on

bank account



Loan amount and term

Initial costs

Monthly fees

Total cost to client

Comparison between a PBL and unsecured micro loanTotal cost to client

Interest rate

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

Target market

Core product features

Marketing and

educationDistribution Servicing

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 payrol

Who? What? How and where?

Su

pp

lyD

em

an

d

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

Value proposition

13

Through employer/ retirement fund

Employers and fund administrators must agree to facilitate payroll deduction

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

Total market

Currently has / uses the product

Does not have / use the product

Does not have access to the

product

Too poor

Excluded by default

Excluded by design

Has access to the product but does

not use it

Does not want the product

Potential users

Market enablement zone

Source: Based on a paper entitled “The Access Frontier as an Approach and Tool in Making Markets Work for the Poor” by David Porteous

Market redistribution zone

Market development zone

14


Total market




product

Too poor

Excluded by default

Excluded by design


not use it


Potential users





15

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

16

FSC PBL Origination: 2004 – 2008

Nu

mb

er

of

loa

ns

Source: Banking Association of South Africa

R M

illi

on

s

Rand value Number of loans Average value

Ra

nd

s

1,013

1,083

1,181

795764

0

200

400

600

800

1,000

1,200

1,400

2004 2005 2006 2007 2008

56,10658,787 59,635

38,212

44,605

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2004 2005 2006 2007 2008

18,055 18,422

19,80420,805

17,128

0

5,000

10,000

15,000

20,000

25,000

2004 2005 2006 2007 2008

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

17

895

1,575

1,685

718

0

500

1,000

1,500

2,000

2008 Q3-Q4 2009 2010 2011 Q1-Q2

Value of loans secured through retirement benefits(R Milliona)

R M

illi

on

s

Source: National Credit Regulator

According to the NCR, just 1% of secured lending is secured by retirement benefits. Note however that NCR data does not cover all lenders

18

Vehicle48,30789%

Other security2,6815%

Furniture & other durables,

2,645, 5%

Retirement benefits

7181%

Insurance policy

580%

Breakdown of secured loans 2011 Q1-Q2(Loans granted, R Million)

Source: National Credit Regulator


Total market




product

Too poor

Excluded by default

Excluded by design


not use it


Potential users





19

20

9.8 m 1 m 2.3 m

FORMAL

DOMESTIC

INFORMAL

UNEMPLOYED

DISCOURAGED

4.4 m 2.2 m 19.8M

Source: LFS 2010 Q3

3.5 million unemployed under the age of 30

2.4 million unemployed under the age of 30

The labour force comprises almost 20 million people including those who have lost hope of finding a job

21

9.8 m 1 m 2.3 m

FORMAL

DOMESTIC

INFORMAL

Source: LFS 2010 Q3

Around 5 million employed individuals say their employer contributes to their pension fund

UNEMPLOYED

DISCOURAGED

4.4 m 2.2 m

4.9 mEmployer contributes to pension

9.8 m 36 000

Privately administered and underwritten funds have the most members

1,17560%

713%

725, 37%

Privately administered and underwritten funds Transnet, Telkom and Post Office Government Employees Pension Fund

22

Total Net Assets(R Billions)

7,570 86%

80 1%

1,160 13%

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

South African retirement fund industry

Total active members(000’s)

Total assets = R2 trillion Total active members* = 8.8 million

23

864

408 425

1,088

0

500

1,000

1,500

2,000

2,500

R1-R

3500

R3500-R

5500

R5500-R

7500

R7500-R

10000

10000+

Private Enterprise

Source: LFS 2010 Q 3

474

246 192 220

650

0

500

1,000

1,500

2,000

2,500

R1-R

3500

R3500-R

5500

R5500-R

7500

R7500-R

10000

10000+

69 26 28 24 84

0

500

1,000

1,500

2,000

2,500

R1-R

3500

R3500-R

5500

R5500-R

7500

R7500-R

10000

10000+

Number of employees by employment sector(Formally employed individuals)

National/ provincial and local government

Government controlled business% employer

contributes to pension: 39% 62% 69% 70% 70% 61% 85% 91% 96% 96% 71% 88% 93% 97% 96%

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

00

0’s

of

em

plo

ye

es

3 3213 500

Total with pension:3.2 m

Total with pension:1.5 m

Total with pension:203 000

24

Currently have/use product

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


not use it

28.2 million

?

28.2 million

15.3 million

4.2 million

7.9 million

4.0 million

217 000

Market redistribution

zone

Market development

zone

Market enablement

zone

9.5 m34% of the

market

54% of the market

24.8 million

3.4 million12% of the market

Total marketAdults 21+

Currently do not have/use product

Informal employment


product

Unemployed/ not economically

active

Government employee

Employer does not contribute to pension fund

Earns less than R1500

Too old (64 or more)

1.8 million

25

Market redistribution

zone

Market enablement

zone

Current market

Market development

zone

Number of adults

≈ 12% ≈ 34% ≈ 54%

Current market Has access Does not want Does not have access Too poor

?

3.4 million 9.5 million 15.3 million

?

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

Meso layerSupport

infrastructure

Micro layerOrganisational infrastructure

(diversity, capacity, innovation, competition)

Macro layerInstitutional infrastructure

(policies, laws, regulations)

The consumer

Pension fund administrators / lenders and payroll administrators need to work together

Difficult to monitor use of funds

Captive markets (typically lender is the fund or is associated with the fund administrator)

No requirement in terms of asset protection No requirements relating to housing as a financial

asset Weak verification required for loan purpose

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

Some hypotheses: Access problems and PBLs

(Service providers, information, macro environment)

Thank you

27

Questions

[email protected]

021 460 [email protected]

Documents

Pension backed loans - RHLF · pension backed loans Savings Unsecured housing loans Can be finance for housing or finance secured by housing (and used for another purpose) The value