In the wake of last week’s Budget, it is the changes to pension decumulation which have been seized upon.
These were to some extent motivated by the opportunity to increase the tax take, given the accelerated access to pension pots and the associated increased consumer spending by seniors.
But amid the furore, the key thing to remember is there has been no change to the UK’s demographic drivers, which remain highly positive for financial services firms.
We are in the early stages of a two-decades surge in the number of people reaching retirement.
While the affluent baby-boomer generation will no longer be shoe-horned into annuities, their financial requirements will still need to be met by product and fund offerings and ongoing advice, meaning there is a huge opportunity for those providers and advisers that get it right.
There will be a few bruises and broken bones as some firms have been rocketing in one direction at high speed, and have now had to slam the brakes and activate their airbags.
These same firms are busy trying to recalibrate their SatNavs and plot a new direction. But in the round, the changes are highly positive for the retirement sector.
The individual annuity market is clearly going to decrease, as an annuity is now non-compulsory and one of several options, instead of being the primary one.
That said, it is a mistake to think the market will disappear altogether not least because, for part or all of their income needs, some savers will appreciate the certainty of return that only an annuity provides.
Some providers that are currently reliant on individual annuities for a significant proportion of their revenues may look to the bulk annuity market.
Immediately prior to the Budget, the talk was of a potential capacity crunch for pension scheme de-risking as increasing numbers of defined benefit schemes seek to transfer liabilities to insurers.
This Budget should serve to help ease that problem, as certain existing bulk annuity providers now have more capital to devote to that sector, and other insurers with retirement income skill-sets look to migrate those to the corporate benefits arena.
Baby-boomer-driven demand for product development
Returning to the provision of financial services for individuals, the Budget means we are now on the threshold of a torrent of product development. The baby-boomers’ bounce has not evaporated. It is still there, but the solutions to service it will be more varied, thereby placing demand on providers to invest in product development and communications.
To switch philosophies from Conservative to Communist, the changes announced by George Osborne implicitly contain an exhortation to “let a thousand flowers bloom” and free the industry to become more creative.
Whereas past decumulation rules were quite restrictive and stood in the way of product development, providers have now been given licence to innovate, which inevitably will lead to increasing variety of retirement income options.
At present a lot of capital is tied up in writing annuities, but much of it (if not diverted in pursuit of bulk annuities) will be released over time and may be allocated to developing new propositions.
Although some providers trying to find a new direction may struggle in the short term, the human capital already deployed in the annuity market is a strong, experienced resource.
This can be turned to help provide modern offerings to meet the considerable need of retirees that has not abated and, indeed, is set to increase.
Diligent savers who have prudently contributed to their pensions every month for 40 years will not suddenly go berserk when they hit retirement and blow their life savings simply because the Government has changed the rules. But we should be mindful that, where retirees choose not to annuitise, there is investment risk to the value of their capital and income, and longevity risk that they outlive their resources.
When it comes to taming investment risk, there already are a number of insurers (such as Aegon, Axa, MetLife and MGM) having some success in marketing retirement-
oriented unit-linked offerings that incorporate guarantees of capital and income. We expect this segment will grow in terms of size and variety of propositions, and attract new entrants and capital.
As for mitigating life expectancy risks, it seems likely we will see the kind of longevity swaps used by defined benefit pension funds adapted for the individual market to provide savers with some protection against that longevity risk. In practice, savers would agree to pay a premium to provide an income benefit that would kick in should they live beyond a certain age.
The adviser landscape
The Budget changes to pension decumulation create tremendous opportunities for providers, platforms, fund groups and, especially, advisers.
The provision of financial advice on an ongoing basis straddling accumulation and decumulation; the freedom of access to their pension savings with the need to reduce investment risk and protect against the risk of running out of money.
In a landscape in which innovation will mean product and fund options will be multiplied and more sophisticated, consumers’ need for and the value to be had from high quality financial planning will never have been greater.
The at-retirement advice proposition will never have been as compelling, driving a significant increase in the demand for advice, and begging the question as to whether there will be enough appropriately qualified advisers to go round.
Ned Cazalet is chief executive of Cazalet Consulting