All change in the pensions space

Matt Ward analyses key areas for consideration and development in the retirement market, highlights research findings that emerged from AKG’s 2018 Pension Freedoms Paper and looks ahead to 2019

To better understand consumers and service their requirements in retirement, we need to continue to understand their concerns. AKG’s recent consumer research found that the biggest cause for concern in retirement is running out of money. Care costs in older age, the impact of inflation, paying more tax than one might need to and concern about political instability were also flagged.  

Drawdown freedom 

With the government actuary’s department framework for withdrawals no longer in place and hence, greater freedom around how a customer can take money from their pension fund in retirement, advisers and planners will have to work with clients to establish a drawdown framework of their own.  

Income sustainability

If customers do not want to run out of money, the focus for many will revolve around income sustainability. On the product solutions side of things, annuities can guarantee a lifetime’s supply of income but, broadly speaking, drawdown products cannot, as the sustainability of the fund and withdrawals are reliant on a lot of different moving parts.  

Drawdown portfolios

Investment performance and resilience will continue to be a key discussion point and consideration for advisers. Hence, the construction and make-up of drawdown investment portfolios will be a crucial area of differentiation during 2019 and beyond. Advisers will need to continue to consider whether they do all of the investment process themselves or if they outsource some or all elements to third-party specialists. The adviser research carried out for the AKG pension freedoms paper revealed the following:  

Investment market volatility

Up until recently, the investment markets had been relatively ‘well behaved’ since the introduction of pension freedoms. Should we see a more prolonged period of market uncertainty and volatility during 2019, some drawdown investment portfolios might experience challenge and loss, with the impact of sequencing of investment returns becoming a factor to plan against.  

‘Smoothed’ investment

Given some of the concerns flagged by advisers about investment market volatility, AKG wanted to gauge adviser appetite for smoothed product/fund solutions. The research showed that 17% were already using these solutions for clients, while 32% sometimes advised on these solutions. A further 35% said they would potentially use smoothed product/fund solutions, with the caveat that such solutions need to improve/simplify further beforehand.  

Appetite for guarantees?

AKG also wanted to gauge adviser appetite for guaranteed product/fund solutions. About half of advisers surveyed (49%), said they can potentially see a way forward for solutions in this space but, for most of these, products would need to improve/simplify further before they would consider (40%).  

Improved outlook

Market data clearly demonstrates that the sale of annuities has been impacted by pension freedoms. But it is worth noting that, as flagged in AKG’s qualitative market research with advisers, the decline of the annuity market has not been universally welcomed by advisers. Many still see a strong role as a full or partial solution for many clients. And with AKG’s consumer research showing that running out of money is the key concern for consumers, there will still be a place for annuities moving forward.

AKG also explored through its research with advisers where they would like to see further development in the pensions/retirement market.

Despite the early dominance of drawdown post-freedoms, it would appear that advisers want to see further development here. It is also interesting to see potential appetite for improvement in guaranteed capital/income solutions.

It is unsurprising to see a focus on the cost and value of products/funds/portfolios, given the regulatory focus on value for money. We will continue to see pressure on cost across the value chain, especially on the wrapper and investment management components of drawdown.

Improved digital/online capability and functionality is flagged here, so providers simply cannot afford to underestimate the requirement to invest and progress capability in this area.

There was also some level of interest for further development or improvement in long-term care products, annuity products and inheritance tax products. So, plenty of food for thought across a range of retirement market topics for both advisers and providers as we move into 2019. 

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