Chancellor George Osborne described the 2014 Budget, which included offering defined contribution savers the ability to withdraw as much of their savings as they like after the age of 55 instead of the effective requirement to buy an annuity, and for all retirees to receive guidance, as “the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921”.
Initial reactions post-Budget was one of confusion, with questions arising about the ability of pensioners to know what to do for the best with their retirement savings and where they can turn to for advice. Meanwhile annuities providers responded to the falls in their share values, by rushing to bring one year fixed-term annuities to the market.
However, as the smoke continues to clear, the industry is still scrambling to get to the bottom of what the new landscape will look like. In response to this change we decided to reach out to the industry by conducting a survey to assess the issues the reforms present, and identify the concerns of the industry and stakeholders.
Pension managers represented the majority of the 200 respondents, followed by trustees, consultants, sponsors, and advisers. The remainder were spread across a range of stakeholders including asset managers, government, insurers, and law firms.
Perhaps one of our respondents best summarised the situation with the simple quote that there are “interesting times ahead”.
More than 80 per cent of respondents thought the changes are positive for the industry. Encouragingly, those surveyed overwhelmingly felt individuals stood to gain the most from the changes relative to sponsors, consultants, asset managers, insurers, wealth managers, and government (which was ranked second in terms of benefitting from the changes – presumably due to the positive effect the changes are likely to have on the ‘pensioner’ vote just before a General Election).
However, this is where it gets ‘interesting’. The new freedoms have brought with them several new layers of complexity, which 90 per cent of respondents agreed will result in some degree of complication to retirement planning.
This complication is likely to arise from the need for an attitude change - to no longer see accumulation and decumulation as two distinct stages, but as one single journey. Even further than that, 73 per cent viewed having an asset manager that could offer products and services for DC schemes that linked to other financial products, such as ISAs or bank accounts, as an attractive proposition for ‘retirement savings’.
However, despite the need for a joined-up approach, 84 per cent of respondents agreed that no one default product would be able to cover both pre- and post-retirement solutions.
Yet there are signs the industry sees change in the wind. Asked whether DC trustees might now extend their offerings for the whole lifespan of the member, 59 per cent of respondents agreed or strongly agreed.
Almost 65 per cent of respondents felt default funds were likely to be restructured, while 24 per cent felt they would be withdrawn and replaced.
Agreement on the need for default funds to change does not extend to what sort of structures trustees will be offering to members. When asked which type of default fund should be employed, the respondents were almost equally divided.
An income drawdown solution was selected as a likely default offering by 29.5 per cent of respondents. An income drawdown and deferred annuity default was selected as a likely option by 23.1 per cent of respondents, lifestyling with risk assets moving to cash was identified by 22.1 per cent, and the ‘traditional’ default of assets being de-risked over time ahead of an annuity purchase was selected by 20 per cent of respondents.
So while the structure of default funds post-Budget seem up in the air, at the at-retirement stage respondents overwhelmingly felt the Budget changes would give rise to demand for multi-asset income drawdown products. A statistically insignificant proportion of those surveyed disagreed there would be a demand for such products, while 81 per cent ‘believed’ or ‘strongly believed’ there would be.
Interestingly, in light of a lot of the post-Budget commentary, 52 per cent of respondents felt annuities will still have an important or very important role after retirement, with only 34 per cent stating they will have a less important role.
“Annuities will always have a role to play in providing income at lower ends of the retail market and for those who are lower risk investors,” one respondent said. “However, the decision to buy the annuity has now changed for those at the higher end of the market into an investment decision. When annuity rates are high annuities will be relatively unattractive relative to a drawdown fund and vice versa.”
Whatever the solution, respondents clearly valued simplicity and low cost. More than 32 per cent identified this as the aspect they most valued from their asset manager. The next most popularly selected aspects were support with trustee and member communications and trustee and member education, on 17 per cent each.
Just under 17 per cent of respondents valued innovative investment products most highly, followed by support through investment advice, which was valued by 14 per cent.
With the new freedoms and options available, members will clearly need more help to make decisions.
The government acknowledges this. In the Budget, Osborne promised free face-to-face guidance is to be offered to all DC savers, and pledged £20 million as a first step to enable this. However, there remains considerable ambiguity around how and by whom this will be delivered.
As one respondent said: “The additional flexibility at retirement is welcome with current annuity rates being so low. But I am concerned that members may not be given the right guidance, and about who will provide this guidance.”
Almost 90 per cent of respondents to our survey were either concerned or very concerned that an advice gap or lack of knowledge would lead to inadequate planning before and during retirement.
A lack of meaningful consensus over who should provide the advice is perhaps a factor in this concern.
IFAs were the leading choice to bear the responsibility of providing retirement advice, with 25 per cent of respondents backing this option. However, opinion was divided with trustees and the government selected as the preferred advice party by 17 per cent of respondents each, and consultants coming in fourth at 12 per cent.
“Many of the above will find it hard to provide the advice or find themselves conflicted or with vested interests,” one respondent said. “Some form of true independent guidance structure will be needed to enable members to make informed decisions or which points them to an IFA for more specific advice.”
Putting it into action…
So while it is clear the industry is positive on this brave new world of pensions, there is a considerable amount of work to do in developing the products that will deliver the best solutions for members and trustees, and ensuring everyone involved has the information they need to prosper.
On this evidence, the industry feels default products will need to change. Solutions will need to address the entire lifespan of the member’s savings journey, and asset managers would be advised to keep simplicity and cost control front of mind for the new approaches they develop.
In any event, multi-asset products which can provide for drawdown, and potentially transition into a later life annuity purchase, will clearly be popular.
As one respondent neatly put it: “The changes create some fantastic opportunities for the pension industry to assist members to get better and more flexible outcomes from their DC pots. The challenge is to keep things simple to support members to work towards a target and this better value and financial security into retirement.”
At HSBC Global Asset Management we’ve seen some of the views and sentiments expressed in the survey reflected in clients meetings. The budget has provided a catalyst for positive change, a change in which we are determined to play a key role in providing quality, cost-effective client solutions for our partners in the DC space.
Stuart White is head of institutional, UK, HSBC Global Asset Management