By Claire Norris, Director of the CFO Office, Partnership
Whilst you don’t have to think too hard to see the political upside from this surprise announcement, it also underscored government’s impatience with much of the industry.
So it is a shame then that the Budget fall-out has been worst felt by insurers that have built business models on the basis of consumer choice, selling the vast majority of their business to individuals who, upon receiving independent financial advice, choose to leave their accumulation phase providers and opt for the best available guaranteed income. Promotion of the open market option, independent financial advice, and simpler, low cost solutions for smaller pension pots have been the lobbying themes for these insurers for over 10 years.
Is the short-term reaction misguided; is the market lashing out at the product instead of the practise? Time will determine how well annuities weather the storm as more people obtain advice at retirement and better understand their options.
There can be little doubt that the short-term changes, and proposed long-term reforms, will drive changes in consumer behaviour, product innovation and distribution. However, the basic considerations for retirees remain unchanged: What is my overall wealth; what are my short, medium and long term income needs; what is my appetite for risk (both in investment performance and risk of outliving my savings); and what products are available?
Managing longevity risk will remain core to the decisions consumers take – even if this is a concept that many are not familiar with. The variability of life expectancy around the average is the risk which leaves retirees exposed to outliving their income. Longevity risk is even higher for those who qualify for enhanced/impaired annuities, where the assessment of life expectancy is more difficult and the variability of life expectancy is greater. Outliving one’s wealth and being unable to provide for a standard of living above the basic provisions of the state would seem a poor outcome for lifelong savers.
Annuities provide a certain and guaranteed income for life. They provide a mechanism for supplementing income achieved through investment return, with a safe decumulation of capital over the future lifetime of the consumer. Annuities transfer all risk associated with the management of investments and longevity exposure to the insurer. As a product, annuities afford consumers the option of a single point of ‘at retirement’ advice, a single upfront decision and the peace of mind thereafter to get on with enjoying retirement. Few products offer this simplicity and surety.
With the Chancellor’s promise of guaranteed guidance for all consumers at retirement, there is anticipation that more consumers will assess their options and shop around for the best products for their needs. Annuities will remain on the agenda for retirement planning and remain a highly relevant option for many retirees as part of a balanced portfolio to provide their income needs in retirement.
However, as with all major reform, it will be those insurers who take stock and adapt quickly that will have greatest success in the new environment. Indeed, insurers will have to better understand consumer needs in the context of the changing environment.
With the greater flexibility for use of pension funds, a proportion of today’s ‘captive’ annuity audience will seek out more flexible solutions which reflect changing needs during retirement. A true understanding of these needs and attitude towards risk can only be developed over time as the changes embed and data can be analysed.
Annuity providers will be looking to diversify propositions and offer product flexibility in the following areas:
• Investment flexibility especially in the current low interest rate environment
• Income flexibility during retirement to suit changing needs including the provision of Care
• Alternative methods for delivering longevity risk cover in conjunction with investment products
• Provisions of services to benefit both advisers and consumers in the assessment of options
• Greater technology innovation to improve speed and access to product
In the short term, retirees face an uncertain choice. Some with the ability to defer may choose to ‘wait and see’ how the market options develop and take stock in 2015 and those without that flexibility will be discussing their current options with advisers. Without a doubt, there will be more people seeking advice today than was the case pre-budget.
Consultation is underway to shape the long-term reforms and annuity providers will keep a watching brief on the FCA’s plans for implementing widespread “free guidance”. It is a pivotal 12 months for ensuring that the longer term reforms and development of the advice model, come together to ensure that increased choice leads to better outcomes for retirees.
Change programmes across many insurance companies will be reshaping and mobilising proposition focused workstreams. Those who can be nimble will have the greatest chance of success. One thing is certain: the Budget announcement has focused the pension industry agenda and set in motion a tight timetable for true reform.
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