Walking into Partnership’s plush central London headquarters high up in the Heron Tower it certainly has the air of the office of a FTSE 250 company. The surroundings were wholly appropriate until a year ago, when the bombshell Budget halved the insurer’s stock price in the few seconds it took George Osborne to say “no one has to buy an annuity”.
Partnership chief executive officer Steve Groves is frustrated by both aspects. Firstly, Osborne had already got rid of the requirement for people to purchase an annuity and secondly, the market did and continues to misunderstand the Budget, he says.
“The market doesn’t know how to value the Budget”, he says. “On the day of the Budget our share price fell to roughly the value of the business we’ve written and it has stayed around that level. I think that’s the market saying we don’t know how to value this company at the moment.”
“You should view the Budget as a one-off shock. Let’s say half as many people annuitise as used to. But there’s still a wall of money coming through and it still grows at 15 to 20 per cent a year. So you might have a one-off shock to the UK retirement business but then it grows back because the money coming through is growing.
“When the mist started to clear for people, they will come back to the view that this is a growing business and will move away from an embedded value valuation and towards a franchise model valuation, but that probably won’t happen until after the Budget changes come in.”
Despite the dramatic changes wrought by the Government’s freedom and choice reforms, Groves thinks the annuity market could recover to pre-Budget levels as quickly as two or three years, as auto-enrolment drives retirement savings to new heights.
“There is billions of pounds in deferral. People have deferred in different ways, by living off Isas and other savings, and some have deferred by working longer.”
“You’re probably back on a growth trend in the second half of next year, though the exact shape of it is hard to predict. I think our annuity business over the long-term will have fallen by between 25 to 50 per cent as a result of the Budget, but if the market’s growing at 20 per cent you need about two-and-a-half to three years to get back to the level we were at in 2013”, he says.
“The retirement market has some very big structural growth drivers, the biggest being the fact the volume of money being saved is going up and up. I don’t think we’ve seen the high point of the UK annuity market.”
Before the Budget shook the foundations of the annuity industry, Partnership saw its business as a “three-legged stool”: annuities, the care business and a fledgling defined benefit pension de-risking business, Groves explains.
Annuities aside, Groves is confident the DB market is a “massive opportunity” as legacy corporate schemes offload risk at an increasingly fast rate, while the £45bn US care market lacks the kind of point of need insurance products Partnership specialises in.
But like all life companies, Partnership is tight lipped about its development plans for retirement products. Groves will not be drawn on whether the insurer could enter the drawdown market apart from to say the firm is not keen on variable annuities, one of the products Groves thinks is set to grow.
He also thinks annuity-drawdown hybrids will begin to emerge, differentiated by variations on which party holds which risk.
He says: “There’s only three differences between an annuity contract and a drawdown contract: who takes the investment risk, who keeps the fund when you die and who takes the longevity risk. Over time you’ll end up with products where you’re really asking those three questions about risk. For example, drawdown contracts that risk some of their fund when they die in exchange for extra units every month.”
“I suspect in five years’ time we won’t be talking about drawdown or annuities. It’ll be retirement contracts with different splits of the risk a customer takes.”
Second hand annuities
Earlier this month Money Marketing revealed providers were in closed-door talks with the Treasury over the creation of a secondary market for annuities.
Pensions minister Steve Webb says those who missed out on the freedoms should be able to sell their annuities for a lump sum.
Rival enhanced annuity provider Just Retirement has publicly backed the plan and Groves says the idea is good “in principle” and that with the right Solvency II treatment the insurer would be interested in purchasing annuities. But he warns the market would have to be launched with a mandated open market option because “it’s very hard to stop customers being taken advantage of by ceding providers”.
He says: “Some of those customers got bad rates in the first place, to let them get bad rates on the way out as well would be pretty close to criminal.”
New competition for advisers
It is not just providers in a state of flux, says Groves. Advisers are also being swept along by the changes.
Partnership research finds advisers are the most trusted source of retirement information but at the same time providers looks set to re-enter distribution and advice services. Standard Life recently unveiled a new acquisition-driven national advice business and Groves says this is just the start.
He says: “This industry goes in cycle: when I first joined it direct sales was dominant and it was just in the process of switching towards advisers. I think there will be some swing back. More insurers will go direct and run their own distribution and advice services. This is the start of a trend for ceding insurers.”
Technology will be the other new entrant, Groves predicts, as “guided sales” replace the segment of the market abandoned following the RDR.
He says: “There will be a technology-type revolution that will lead to guided sales. We’ve long been saying RDR is good for wealthy people but there will be a huge number of people disenfranchised. Execution-only is probably not the right answer, something inbetween advice and execution-only is a better answer for them. And that’s the direction of travel regulation is heading.”
Advisers and the wider industry should also be braced for a backlash when people are found to have lost out following the Budget changes, he warns.
“I don’t think enough work’s been done on who the winners and losers are. The Government won’t blame itself or voters – it’ll be the insurance industry and the IFAs who will be at the sharp end. It’s much easier to say a product’s been missold than the customer made a bad decision. The industry needs to be careful.”
What’s the best bit of advice you’ve received in your career?
Doing the right thing is always the right thing to do in the long run.
What keeps you awake at night?
I have more trouble staying awake than I do getting to sleep. The thing that bothers me most during the day is the volume of poorly planned change the industry is subjected to.
What has had the most significant impact on financial advice in the past year?
The Budget. It creates opportunity for advisers but it comes with very significant risks to them as well.
If I was put in charge of the FCA for a day I would…
Focus on getting good outcomes for people by making things simple and transparent rather than trying to make sure nothing goes wrong with very complex disclosure, rules etc.
Any advice for new advisers?
Yes, see the answer to question one. The industry gets itself into trouble when it loses sight of this; don’t make that mistake!
2005-present: Chief finance officer, managing director, then chief executive officer, Partnership
2004-2005: Senior actuary in Admin Re, Swiss Re
2000-2003: Head of actuarial services, Britannic Retirement Solutions
1999-2000: Product manager, GE Life
1996-1999: Trainee actuary, then investment actuary, Norwich Union