In the UK, we talk about our jobs, homes and cars on a regular basis but now, at last, we are also talking about another important factor: pensions.
At one end of the scale, auto-enrolment has forced people to consider how they engage with workplace pension savings, while at the other, pension freedoms have sparked interest in how they access their pension fund at retirement. Somewhere in the middle there is the fascinating world of transfers from defined benefit (DB) to defined contribution (DC) pensions.
There is still plenty of work to do in the pensions arena to further encourage customer engagement, including improved pensions education and communication; better transparency of pension/investment charges and terms; enhanced use of digital solutions across the pensions industry; cost-effective access to retirement advice for more of the population; and a continued focus on customer outcomes.
Here, we examine some of the key market challenges and opportunities for the companies targeting business in the UK pension/retirement market and, by association, some of the implications for international propositions from this initial experience.
The awakening
The UK retirement market has evolved in the two years since pension freedoms were introduced. Many companies and stakeholders across the market have had to re-appraise and evaluate their strategies because of these changes and react to the emerging behaviours, developments and trends.
For those seeking opportunities in the pensions market it has been vital to keep up to date with key industry statistics and research initiatives. From an industry statistics perspective, both the ABI and the FCA have issued regular customer data bulletins since the freedoms were introduced. In terms of gaining an insight into customer behaviour and thinking, research exercises carried out by Citizens Advice and Ignition House have been useful.
So, what are some of the things we know at a headline level?
- Many customers with smaller pension funds have been taking advantage of the pension freedoms by withdrawing their money in one fell swoop.
- Customers are still buying the previously installed flagship retirement products, annuities and drawdown, with drawdown gaining in popularity.
- It has been reported that the tax raised from people making use of pension freedoms has exceeded initial government estimates for 2015/16 and 2016/17 by £1.7bn.
- Some customers may be paying more in tax due to how they are taking withdrawals.
- Having initially accessed drawdown for the flexibility of being able to access their pension funds, some customers might not be giving due consideration to investment requirements for their remaining money.
The offshore market for British expat pension savers, however, has largely been constrained during this period by other legislation for non-EU jurisdictions and required adjustments in general. With the exception of Maltese Qrops, the market has been slowed in its ability to take advantage of these freedoms, but its attention has been keenly focused on the potential change, particularly in jurisdictions such as the Isle of Man, where the opportunity is keenly felt.
Drawdown drawbacks
Drawdown has been the obvious winner in terms of retirement product popularity post-pension freedoms. For those companies seeking to profit from this – via product wrapper and/or investment charges – it has been imperative to seek involvement in the drawdown market.
The drawdown sector is extremely competitive, with life companies, Sipp and platform operators and investment houses, such as asset managers and discretionary fund managers (DFMs), all chasing opportunities.
The average drawdown fund size has fluctuated during the past two years but these are now much lower than traditional drawdown fund sizes would have been prior to pension freedoms.
For those with existing drawdown business, the importance of retention is underlined in recent statistics from the FCA, which show that during Q2 and Q3 2016, 59% and 56% of customers elected to remain with their existing drawdown provider.
This may be a sobering thought for those excited by the new business opportunities.
It won’t all be plain sailing for drawdown. The FCA recently announced a thematic review into non-advised drawdown sales since the pension freedoms, due to report by the final quarter of 2017/18. It will be interesting to monitor the progress of the review and its associated ramifications for companies that facilitate non-advised drawdown.
In November 2016, the FCA released its Asset Management Market Study, Interim Report (MS15/2.2), and in June this year its final report. It contained ramifications for asset managers and DFMs, and has relevance to the investment component within drawdown portfolios.
There will be a focus on the transparency of investment solutions and pressure on costs, underpinned by the ongoing debate around active and passive investing.
Drawdown investors’ portfolios are likely to be affected by the performance of equities. Since the introduction of pension freedoms, and despite Brexit, we have largely seen a period of growth in the markets.
Should we subsequently see this growth profile challenged, with an ensuing period of uncertainty and volatility, we may see drawdown portfolios, and customer sentiment, adversely impacted.
