What exactly is product innovation?

By Fiona Tait, Pensions Specialist

Ros Altmann reportedly hoped for more product innovation following pension freedom¹ and, according to one poll, 66 per cent of advisers also believe that providers should be doing more².

This article considers whether there is a real client need for new products, or whether we should be focusing our attention on efficient delivery of the ones we’ve got.

The product wrapper

Pension benefits in defined contribution (DC) arrangements can be taken in four ways, and any product developments must fall into one or more of these categories:

  • Lump sum
  • Income drawdown
  • Scheme pension
  • Annuity

Apart from the general and not inconsiderable need to simply keep up with legislative changes, recent developments have tended to focus on creating solutions that combine the best of each of these options. Thus in the past few years we have seen the introduction of annuity plans with added investment and flexible income options, and drawdown plans with underlying income guarantees.

The trouble is, none of these products has gained significant market share. One reason could be that the charges associated with more complicated products tend to be higher; another could be that there are already enough products in this space for those who feel they need them.

Potential innovators are therefore faced with two choices:

  1. Identify a different aspect of retirement where consumer needs are not already being met and develop something to address it. This will probably come but will take considerable time to develop.
  2. Develop support services to enhance the value of existing products

Royal London’s focus  is very much on the latter. We believe that pensions are still primarily about income in retirement, and one of the biggest risks to consumers in an environment where there are no formal income limits is running out of money.

That’s why, rather than re-designing a drawdown product which currently meets the needs of the majority of consumers, we have chosen to launch tools such as the drawdown governance service, which help them to identify how much income they can safely withdraw and keep on track as conditions change.

It’s also why we ultilised all of our expertise to design and manage our range of risk-managed drawdown fund, Governed Retirement Income Portfolios, which are designed to minimise volatility and the additional sequencing risk applicable to regular income payments.

Further improvements to both product and planning tools will be developed over the next few months but the most fundamental objective this year is to prevent people unwittingly spending their retirement income too soon and too fast. If anyone feels they need to look for innovation I suggest this is it.

1 Financial Adviser “Pension tension as industry split over product innovation” 31 May 2016
Survey by MetLife, published in Pensions Age 21 June 2016