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Hits and myths

Selestia chief executive Brett Williams says the foundations of the retirement market are shifting

For many years in the UK, the myth has existed that, in some way, pensions are not investments but are simply “products”. With the advent of A-Day and pension simplification, it is at last time for that myth to be shattered.

In recent times, both state and employer retirement support has dwindled. The financial services industry and successive governments have been slow to react, with the industry continuing to push opaque life and pension products, and Governments successively reducing tax advantages, adding increased complexity with every intervention.

The result is that many people have lost faith in the product providers, the Government and pensions, choosing instead to use property as a means of saving.

I am convinced that, with pension simplification, we are about to see a funda-mental shift in the way in which people save for their retirement. I believe this shift is market-led. A-Day will make people’s choices greater and easier. In the future, no one will care about pensions which are simply “products” what people will care about is income and financial security in their retirement.

For most people any investment in any product is “for the future” or for “financial security”.

With life expectancy and medical care improving so rapidly, many people do not want to stop work but would want to choose their work and their lifestyle. The key point is that retirement is an investment problem, not a product problem.

Yet, historically, investors and IFAs have spent many hours planning investment portfolios for investment products and then often put the biggest part of their retirement savings into poorly managed with-profits pension funds or pension managed funds.

Outside of the retail pension world, there has been a huge move to creating, properly constructed asset allocated investment portfolios based on an investor’s attitude to risk and yet billions of pounds of the investors’ money sit in pension with- profits funds where the asset allocation is based on the provider’s attitude to risk and its current solvency position or in pension managed funds, which are often anything but managed and are at best balanced.

The simplification of the pension regime will encourage IFAs and their clients to review these funds and consolidate them, just as is happening with their other investment wrappers.

It has to happen and the product wrapper will be just that – a simple transparent product wrapper allowing access to a wide range of funds with proper portfolio construction.

The old-fashioned life and pension companies will see money flooding out to Sipps and to open architecture platforms which can provide the investment solution and also proper portfolio construction tools to help with retirement planning.

The old and false distinc-tion of pensions and investment will go and we will see retirement solutions put together using a range of product wrappers to create tax efficiency and investment efficiency.

These solutions will have to be consolidated and valued at investor level, not product level. The investor and IFA can review the progress of the retirement plan. Neither the life and pension companies nor the invest-ment houses will be able to do this because they do not have the range of tax wrappers or open archi-tecture for portfolio construction and because their systems and business models are product-based not investor-based.

Supermarkets will have to add other tax wrappers which will be harder than they think and the industry will have to stop thinking product and really think about creating investment solutions to investment problems. For quality IFAs, this is a massive opportunity but simple transparent product wrappers require low-cost business processes so the need to get rid of paper and transact, review and measure and monitor online will become a requirement for success.

The need for ongoing review of a client’s portfolio will be greater than ever and the move from remuneration for the transaction to remuneration for the relationship will continue to gather pace.

Pension simplification is long overdue but the impact of it will fundamentally change the way the financial services industry deals with retirement planning because investors will have more choice, become more demanding and will exercise their choice. The industry will never be the same again. The losers will be the life and pensions providers and the winners will be those who understand and respond to the demands of the market to help people plan in a manageable and effective way for the retirement solution they choose.


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