Altus Consulting has today released an industry white paper; ‘The High Cost of Freedom: Retirement in 2020’. The paper summarises the impact of 2014’s Budget announcement on the retirement income market, outlining predicted winners and losers and recommending strategies for providers and advisers to adopt in response to the new pension freedoms for consumers.
Projections of the future market share for annuities vary widely. Research by actuarial firm Towers Watson suggests that these products will eventually form as little as 20% of the ‘At Retirement’ market. Altus Consulting say that product innovation from insurers is essential to provide income solutions that are both easy for the consumer to understand and better value than annuities. Such innovation will generate significant new demand for advice.
Jon Dean, Consultant at Altus says ‘For most product providers, the last 12 months have been about getting their current propositions adapted for the new flexibilities. Typically, firms need longer than this to bring genuinely new products to market, so initially we expect to see variations on drawdown bolted on to other pension schemes. The real work on innovation begins in April.’
The paper predicts that ‘Pension bank accounts’ which offer cashpoint access to retirement funds will be a reality by 2020. These are expected to be aimed mainly at customers with small pension pots. Additionally, it says some insurers will exit the UK market by 2020 due to the decline in demand for annuity products, with some providers moving into overseas markets such as the US and Australia which have seen renewed interest in these products.
However, Altus Consulting has said that Life companies will still be well positioned to cope with the decline in annuity sales as the majority of firms shift from focussing on annuity operations into platform and drawdown accounts. Similarly, annuity specialists are expected to leverage their existing underwriting capabilities, targeting defined benefit de-risking deals in the short term whilst building new long term business models.
The paper also suggests that other products will emerge to replace annuities which involve more complexity, for example by use of options and derivatives to hedge risk. Such propositions are more likely to require full advice to achieve regulatory approval. Navigating the new options, as well as the recent changes in inheritance tax laws, will create more opportunity for advisers.
The paper concludes by outlining six key strategies for firms to survive and prosper in the new world:
- Target operational efficiency – through automation and product simplicity
- Build scale – re-use as much capability as possible to minimise unit costs
- Diversify – specialists have been hardest hit by the changes
- Look overseas – other markets still want annuities
- Expand into D2C – target mass market with low-cost/online simplified advice
- Vertical integration – combine advice, servicing and investment to capture a bigger slice of the available margin
Dean says: ‘The current reforms in the UK pension market have caused major upheaval for most organisations, and will continue to do so. The changes in the market are likely to force many firms to reinvent themselves altogether by changing their business models and supporting systems to meet consumers’ new expectations.’
Dean added: ‘The biggest issue is that providers will have to operate at much lower margins, as regulators are interested in cutting costs for scheme members, and consumers themselves are shopping around more than before. The main challenge we face as an industry is that in the midst of all the changes taking place, pensions themselves are no better understood than before. However, this could present great opportunity for advisers while new products which are better suited to today’s retiring market begin to emerge.’