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Sinking feeling: Winners and losers from Osborne’s pensions revolution


The UK pensions market is splitting in two eighteen months on from when Chancellor George Osborne first unleashed revolutionary reform on the industry, say investment analysts.

The rapid pace of change has left some businesses better able to cope with the new landscape, while others struggle to complete basic tasks and battle dwindling revenue.

Money Marketing research into traditional life companies, platform providers and occupational pension schemes reveals how different parts of the market are coping with the changes.

A year-and-a-half from the Chancellor’s bombshell Budget, and four months since the reforms took effect, we look at the winners and losers and the impact on customers and advisers.

Will life companies with creaking IT systems be able to adapt quickly enough to deal with customers’ demands for regular withdrawals? Can annuity providers launch credible investment and drawdown propositions? And could asset managers suck up insurers’ business with revamped investment products?

Tech problems

Our research shows new withdrawal options flexi-access drawdown and uncrystallised funds pension lump sums are available at the vast majority of providers, but customers usually need to transfer to modern products or platforms first.

Likewise customers may need to make an internal transfer to take advantage of the full range of death benefits. In addition, Money Marketing revealed last week how firms such as Aegon, Standard Life and Aviva will not allow savers to add to transferred capped drawdown arrangement, blocking them from taking advantage of the higher annual allowance.

The Lang Cat principal Mark Polson says old technology is the “big inhibiter”.

He says: “Our own research found whereas new platforms give you flexi-access drawdown but not UFPLS, older systems give you total withdrawal or UFPLS but no flexi-access drawdown. That’s driven purely by technology.

“It will cost all the money you can shake a stick at to update those systems and that would only help people take their money out and would essentially be a case of turkeys voting for Christmas.”

And while customers can transfer to more modern systems, Polson warns internal transfers are not straightforward.

He says: “Those are the worst transfers because firms are very used to sending money out but it’s less common to move money within.”

He adds platforms’ ability to adapt is helped by agreements with technology providers that mean systems are upgraded in line with regulatory changes.

AKG Actuaries head of communications Matt Ward says the freedoms will not truly be up and running until at least 2016, when providers launch considered responses to the changes.

Poles apart

Stockmarket analysts agree life companies are becoming “increasingly polarised” into firms that can replace income lost from high margin individual annuities and those too reliant on old business models.

And they warn all providers will see asset flows hit by up to 30 per cent if the Government opts to flip the UK from an EET model to a TEE system.

Credit rating agency Moody’s senior credit officer Dominic Simpson says providers with substantial in-house asset management, a foothold in the growing defined contribution market and strong distribution will thrive.

Expertise in bulk annuity business, equity release and drawdown products will also put them on top, he adds.

Based on the ability to replace income lost through issues such as the charge cap on pension funds and the risk of entering new areas of business, Moody’s says Standard Life and St James’s Place are best placed.

Aviva, Legal & General, and Prudential are ranked in the middle, while Scottish Widows and Aegon are the least able to cope, it says.

Scottish Widows and Aegon say the analysis fails to reflect their strategy for growth in the new environment. A Scottish Widows spokesman says: “We are confident that our continued investment in our corporate pensions and retirement platforms, bulk annuity capabilities and launch into the intermediary protection market will put us in an even stronger position.”

But Barclays European insurance research director Alan Devlin agrees with the rankings. He says Standard’s platform, asset management and new advice business makes it well diversified.

He predicts bulk annuity deals will eventually outweigh individual annuities and firms with existing capabilities in this area will be well positioned. Earlier this year Scottish Widows outlined its plans to enter the market.

He says: “The big losers are the monoline firms like Just Retirement and Partnership. Bulk annuities will help them recovery, but I’m not sure blended products will make much of a difference. Why would you go to them when you can go to established players like Standard Life Investments’ Gars or Aviva  Investors’ Aims funds?

“The freedoms have leveled the retirement playing field towards asset managers and took away the competitive advantages of insurance companies. They are the winners because they will grab some of that money directly and through firms like Hargreaves Lansdown and St James’s Place too. If they win, by definition asset managers win.”

Fund managers have signaled their intention to expand further into the retirement market with BlackRock appointing Osborne’s former chief of staff Rupert Harrison as chief macro-strategist in June.

Aberdeen Asset Management, meanwhile, hired former shadow pensions minister Gregg McClymont as head of retirement savings in July.

Investment Association director of public policy Jonathan Lipkin says: “In retirement income we expect in the future savers will choose a variety of approaches that will include annuities, but that’s likely to sit alongside some kind of longer exposure to investment markets.”

He adds: “The issue for asset managers is we have considerable expertise in delivering income but what else will people be looking for? Managers could look to deliver things like income underpins, or perhaps partner with insurance companies to offer a degree of longevity pooling.”

An analyst at a leading investment bank, who wants to remain anonymous, says the stock market “already reflects the difference between the growth profiles of the groups, such as auto-enrolment being a long-term growth area for firms like Standard Life”.

But he says it has not factored in the impact redrawing the tax relief landscape would have on firms heavily reliant on assets under management.

In his summer Budget speech the Chancellor said “pensions could be like Isas” and the accompanying consultation suggested scrapping upfront relief on pension contributions.

The analyst says: “If contributions go in net of tax, not gross, and relief for higher earners is cut, the flows going into the industry will drop away very sharply ­- they could drop by 20 to 30 per cent. That’s a big issue.

“Post-Budget the growth area of pensions has been thrown into turmoil because a saving regime that could move to net of tax is going to be less profitable for life companies at the same time as there is more pressure from fund management groups”, he says.

Drawdown battleground

Since the reforms were announced income drawdown has been trumpeted as an obvious winner. Association of British Insurers stats show drawdown sales have doubled and around 11,500 are now sold per quarter as savers shun annuities and people enter the market with pot sizes previously considered too small for drawdown.

But actuarial consultant AKG says: “There is much less certainty than prior to the pension changes about the potential profitability of this type of business for providers, who need assets under administration, or advisers, who may be increasingly reliant on fees generated from portfolio values.”

Moody’s says although drawdown is less capital intensive than annuities, the margins for providers are also lower.

Simpson says: “Simpler product designs that can be easily replicated across players will also likely suppress future margins and risk-adjusted returns.”

Despite these issues providers are developing drawdown propositions, including non-advised products, Money Marketing research shows.

Hargreaves Lansdown, Standard Life, Scottish Widows and James Hay all allow customers to enter drawdown contracts without the help of an adviser, although tighter investment options are normally imposed. Aegon is exploring the area, while Aviva says it expects to launch a product “in the near future”.

Royal London insists on customers using an adviser when entering drawdown but will let people manage their own funds once the contract is set up.

Platform provider James Hay says around 15 per cent of its drawdown business is non-advised.

But Threesixty Services managing director Phil Young says providers are too obsessed with short-term targets to be successful in the direct-to-consumer model.

He says: “It’s like being a Premier League manager. There are big budgets talked about but unless you deliver really quick instant results, the people being put in these positions to deliver D2C propositions are getting fired.

“Analysts love the Hargreaves model – so there’s almost a need for providers to say they are following them. No-one has the patience to invest over years, the people in these firms are living month-to-month, not over the long-term, and that’s how they’re incentivised. The theory is good but can people hold their nerve?”

Expert view

The UK life sector is becoming increasingly polarised, with some insurers better equipped than others to cope with the challenges arising from the pension reforms. Following the reforms announced in the March 2014 Budget and effected from April 2015, UK individual annuity new business sales declined by around 50 per cent in the last nine months of 2014.

In this new landscape all UK life insurers – including those that performed well during 2014 – are subject to headwinds to some degree, notably their ability to replace lost individual annuity value of new business.

However, the increased savings from auto-enrolment, the pension reforms and increased demand for certain risk insurance products also present opportunities which some players are better positioned to exploit.

In light of this, we see a polarisation of the UK life sector with the emergence of three distinct groups:

– High ability to grow cash generation and more than replace any lost VNB from annuities, with low execution risk (for example, Standard Life and St James’s Place)

– Medium ability to replace lost value of new business and grow or maintain cash generation, with medium execution risk (for example, Aviva UK life, Legal & General and Pru UK life)

– Low ability to replace lost VNB and maintain cash generation, with high execution risk (for example, Scottish Widows and Aegon)

The insurers that possess the following key advantages are better able to combat the prevailing headwinds: Insurers with sizeable in-house asset managers to benefit from the increasing shift to asset management; with scale to take advantage of growing but low margin defined contribution pensions with strong distribution capabilities through a flexible and efficient platform and/or with an established advice arm with bulk annuities and equity release expertise to compensate for the loss of individual annuities; and with a strong income drawdown proposition, despite the relatively low margins off-set by low capital consumption.

The pension reforms will lead to operational and reputational risks for some insurers, as they are challenged to make their systems compliant. Asset managers and digital investment specialists – who have the most to gain from the pension reforms — will compete with insurers to sell new retirement products and retain maturing pension assets.

However the low interest rate environment is not a key risk for UK life insurers, as their profitability is much less vulnerable to interest rates staying low for the next five years than the likes of Germany, the Netherlands and Norway.

The stronger UK economy should support discretionary spend items such as life insurance products. Furthermore, higher asset prices have benefited UK insurers, some of whom meaningfully increased their profitability in 2014.

Dominic Simpson is senior credit officer at Moody’s

(click on table to enlarge)



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There are 3 comments at the moment, we would love to hear your opinion too.

  1. terence o'halloran 30th July 2015 at 5:32 pm

    From my observations and experience the only winner in the medium to long term will be the Treasury. The next major equity and or fixed interest adjustment will be catastrophic in respect of individual investors confidence and a bonanza for the compensation pirates.

    This whole freedom pantomime is a disgrace and an insult to professional integrity. The fines will prove nothing but another crop of ‘scape goats’ will be born.

    I hope that you remember my words.

  2. Very true Terence. For Treasury read George Osborne.Balancing the books during his stewardship will further his cause to be PM at the end of this term, then do a Blair and get out before the proverbial hits the fan.

    Nothing changes, those in power just stick two fingers up and enjoy the ride on the gravy train.

  3. From the headline the answer is easy.

    Winner: HM Treasury
    Losers: Everyone else.

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