Pension
Freedoms

It is now more than a year since the much-heralded pension freedom and choice regime came into being.

Suddenly, from April 2015, all people aged 55 and above were given free rein to do with their pension pot as they liked. Yet, far from hot-footing it to their local sports car dealerships, the early indications are that people have been sensible with their hard-earned pension savings.

Many have chosen a form of drawdown, while others have used some or all of the money to pay off the mortgage and other debts, to enter their retirement debt-free.

This supplement offers highlights from a recent live video interview carried out by FTAdviser, speaking to Steve Webb, director of policy at Royal London; Billy Burrows, founder of Retirement Intelligence; and Ben Gaukrodger, manager of savings policy for the Association of British Insurers.

It also contains helpful articles and information to guide you and your clients through the various paths they need to take in order to make the very best decisions about their pension.

As the government marks the first anniversary of the revolutionary pension freedoms, we invited leading experts for their view on how the industry has fared in the new retirement landscape.

Emma Ann Hughes, editor, FTAdviser and Financial Adviser, chaired a panel featuring Steve Webb, head of policy for Royal London, Billy Burrows, founder of Retirement Intelligence, and Ben Gaukrodger, manager for savings policy for the Association of British Insurers.

The transcript is as follows:

Emma Ann Hughes: Do you think the reports of the death of annuities were greatly exaggerated?

Steve Webb: I think they were. There was an initial hit for people who were about to buy an annuity but suddenly realised they didn’t have to following the 2014 Budget. But even now we are starting to see a recovery in the volumes of sales.

I think we will see annuities being bought later into retirement or perhaps as part of a hybrid product in which people are able to carry on benefiting from investment growth but receive greater certainty on their income as they grow older.

EH: We have received a question from a True Potential adviser. The question is: what do you think of the take-up of pensions freedoms so far? Do you think it has not been as great as some anticipated?

Billy Burrows: The first take-up has been from people who have been interested in taking their money as cash. There has also been a substantial take-up in people enquiring about drawdown. I think generally, there has been a good take-up and more importantly, it has engaged people in their retirement income options.

EH: Ben, the ABI has produced a lot of statistics on this. Did they come as a surprise or were they in line with your expectations?

Ben Gaukrodger: I think it is what you’d expect. There was a delay before the pension freedoms came into effect. You’d expect people to hold off for there to be some pent up demand and we have seen that. The latest ABI stats show more and more people are buying annuities or going into drawdown products rather than taking cash and I think we will be seeing more of that.

The last quarterly statistics were informative in that more people are buying an annuity than a drawdown product for the first time since the freedoms came into effect.

EH: Is there room to suggest that while providers are likely to continue to struggle with the fallout of pension freedoms in the short term, annuities should still play a big part in retirement income recommendations for years to come?

BB: People are stuck between a rock and a hard place - low annuity rates and volatile stock markets. There is a very strong case for annuities and that case is more sophisticated. The technical side says that mortality cross subsidy does not kick in until later, while the emotional side says as people get older they want to de-risk, so annuities will still be with us.

EH: Ben, do your members still see annuities as a core part of what they offer?

BG: Absolutely, and they will remain a core product. As I mentioned before, the number of annuity sales is increasing quarter-on-quarter and the amount going into them is increasing. The ABI statistics shows the average pot being used to buy an annuity is £51,000 across the market which is significantly higher than it was. It is still a product that will provide value for a lot of people. It will not be perfect for everyone but is something that everyone should be considering.

EH: So is it good advice to consider an annuity first then consider other options?

SW: It should certainly be on your list. Obviously a lot depends on your attitude, age and your health – there are a lot of things to think about. I hope one consequence of the shake up of the market will be more people getting enhanced annuities.

EH: A question has come in from another IFA who has tweeted: 'FAMR [the Financial Advice Market Review] suggested tackling the advice gap with streamlined advice which could see the banks getting involved again. Do you think banks returning is a good thing?'

BB: I have nothing against the banks getting involved but they must do it properly and that is the difficulty because they have not shown they have the resources to advise properly.

BG: I have no problem with banks getting involved. It is not an issue of who is delivering the advice but the quality of the service that comes through.

SW: For us the key word is impartiality. Advice is crucial in enabling people to look across the market, get the best products from the best providers. Would consumers get a full range option if they sought advice through a bank? Probably not.

EH: Having to handle insistent clients is a day-to-day reality of pension freedoms for advisers. If they follow the FCA’s three-step guide, would there not be any potential repercussions?

BB: It is fine in theory but more difficult in practice. You have to feel sorry for advisers because it is hard to give advice when you are looking over your shoulder all the time.

SW: The worry is that the standards of today get applied to things that were decided yesterday. So there is a risk of someone approaching their adviser years down the line and saying ‘no you really shouldn’t have done that’ when they have acted in good faith today. I can understand why people are very cautious about giving advice in those circumstances.

EH: We have had a question come in from an adviser called James Dean who asks: 'We have recently had more details on how the second-hand annuity market is going to work. Does the panel think it is going to work well based on the rules that have been outlined?'

SW: I guess the key question is on consumer protection. There is a set of people for whom this is a perfectly valid option. For example if you have secured a decent level of income already, and the pension pot was something you would rather not have annuitised in the first place, you can now turn it back into capital.

The boffins can’t work out what the right value is but if several people are after your annuity, then hopefully you can get a competitive price.

EH: Ben and Billy do you anticipate your members entering this market?

BG: I guess we will see. The FCA consultation into this has highlighted there are a lot of things that need to be sorted out between now and April next year when this comes into effect. I think the key thing for the market as a whole is about how quick those outstanding issues that have been highlighted are sorted out because it is largely going to depend on the risk the individual providers are going to be prepared to take, and the consumer protection mechanisms.

BB: This is a step too far. The unintended consequences are going to be far reaching and I do really worry that people who have got an annuity that they rely on to maintain a certain standard of living will be tempted to take the cash and find themselves in hard times later in life.

EH: Ben, why do you think the Government back-tracked and did not introduce the long-rumoured Pensions Isa?

BG: I think the key thing was a lack of consensus. There were a lot of people supporting a flat rate in tax and pensions tax relief. There was also a clear focus from the Treasury on Pension Isa and the fiscal windfall that might provide giving the state of the nation’s finances, but there was little support for that and it came with a lot of risk.
Auto-enrolment is still being rolled out and there was not a lot of public support for the Pensions Isa. You also have to look at the political situation the government is facing at the moment. The Government has an EU referendum coming up and it has a small majority in the House. These influence the appetite for pursuing a bold set of reforms like a Pension Isa. This set of circumstances won’t stay in place forever, so looking ahead to the autumn statement or to next year’s budget, there is absolutely the chance of the Pension Isa rearing its head again.

SW: Treasury sources are saying the Lifetime Isa is not a Trojan horse but as I recall it, they didn’t label the Trojan horse ‘I’m a Trojan horse’. I think they will trial the Lisa. If it is popular they can see how it can be expanded – why under 40, why not under 50. I think this is almost a dry run for Pension Isa.

EH: What are the panel’s views on the Lisa? Is it a fantastic extra bit of kit in advisers’ toolbox, or is it a potential nightmare in terms of the 5 per cent exit fee charges?

BB: It is a difficult one because the first port of call for pension savings is in a pension. I think it is complicated and advisers just want certainty so that they can plan ahead.

EH: We have had a question in from an adviser called Ron Head. He asks: 'Have providers been innovative enough in terms of retirement income solutions?'

SW: It is early days. My sense both from joining Royal London but looking across the industry is you had got companies in the run up to April just trying to be legal, trying to make sure their products allowed all the different choices. Since then, providers have started to look at new permeations and more hybrid products.

BG: I completely agree. Getting ready for April 6 last year required huge effort from the industry and I think providers did a good job to ensure they were in compliance with the huge set of reforms. We will see a period of innovation now - I think it will be quite an exciting time for pensions.

EH: Do you think there has been enough innovation and have providers successfully adapted their systems to allow people to properly access the pension freedoms?

BB: The industry is littered with people trying to do things in the middle that haven’t really worked. I have great interest in the so called guaranteed drawdown option. I think they would work. I still believe, and I am in the minority, that good solutions for many people are investment-linked annuities. The most interesting bit of innovation will be on deferred annuities. They use them in the US and it makes planning for drawdown much easier because you know that all you need to do is get to 85 then you are home and dry.

SW: One of the areas we have been looking to innovate is on investment strategy because if people are looking for income, and with rates of return very low, there is a danger they go for high risk to get high income. What we have been innovating on is on the whole area of multi-asset investment that gives you that reduced volatility because you are spreading the risk, and then you draw income by taking the capital units out of your retirement account.

EH: Do you think enough is being done for those in the accumulation stage?

BG: Figuring out what is going to be the right default strategy for the customer base is going to be difficult. It depends when an individual plans to buy an annuity, it depends at what point they are taking a product.

BB: The new buzzword in retirement is ‘journey’. People are still getting their minds around how this ‘journey’ is going to pan out and of course it has changed a great deal. The only point I make is how can you have a sensible investment strategy in the run up to retirement unless you have some idea of what you are going to do in the other end?

EH: How do advisers help their clients come to terms with the reality of retirement?

BB: It is all about income planning, clients would say it is difficult for them to do these cashflow forecasts but once they’ve done them, they are in a much better position. The best thing an adviser can do is help their clients take a longer term view of what their retirement objectives are.

EH: Steve, how does an adviser make sure that the client doesn’t just think ‘I’ve heard I can take tax free cash, wonderful, I’m going on a cruise’?

SW: Ros Altmann has spoken about getting people who are aged 50 engaged with their pensions which would be a big step forward from where we are now. Certainly, you need to engage people when they are old enough to be interested, but young enough to have time to do something about it.

EH: A question has come in from Matt Walne who says pension accumulation is becoming more and more difficult. Is that something the panel would agree with?

BG: In parts yes. The change away from DB to DC means that people now have to be more engaged with their pensions. Auto-enrolment has been a huge success in helping younger people save for retirement and the industry will work hard to ensure it continues to be a success.

EH: Steve, do you think the accumulation process is going to get simpler?

SW: In the Budget, the Chancellor was saying the under 40s have not been well served by pensions so here is a Lisa. That does not make thinks simpler, that makes things more complicated. We have got the Treasury who is interested in saving, you got the DWP doing workplace pension and really, they need their heads banging together.

BB: In many respects it is easier to buy a pension. I think the problem is pensions are still not exciting or sexy enough and we have to find a way in engaging people with their pensions so they take some ownership and interest.

EH: Do you think AE will help with this, or will it be the case of the Australian experience where people sleepwalk into engaging with their pension once they have accumulated a big enough pot?

BB: You have hit the nail on the head. One you’ve got a decent amount of money it becomes real, and I think that AE is a step in the right direction.

BG: DB schemes put the pensioners’ worth in numeric terms on a pension statement – people take a lot more interest in it. And I think the same will happen with DC.

EH: So you think once people are able to see the amount of money with their AE, they will become engaged?

SW: To a point but it is going to be glacial if we are not careful. We are still only at one per cent on one per cent contributions. It will rise to 8 per cent by 2018 but even that is not on all of your earnings – we have to get beyond that, otherwise it will be decades before we get realistic amounts going in.

EH: So many interesting points – thank you. We have seen a sea change on how people can access their pension pots but not in individual behaviour and habits. Huge swathes of money are still heading towards annuities and there has been a lack of product innovation – although some are starting to filter through. Whether the Government will make more changes to pension taxation remains to be seen.

Thanks to our panel, Steve, Ben and Billy for providing their insights on this topic.

Advertorial Feature

One year on from the start of ‘Freedom and Choice’ in pensions, where are we? Have people blown their pension pots on the famous Italian sports car? Or have they been terribly British and responsible, enjoying a bit more freedom but largely leaving their money invested for later life?

When looking at the statistics, it’s important to distinguish between the actions of the initial surge of people, who had been counting the days since the 2014 Budget in order to access their cash, and then the regular steady flow of people coming up to retirement in the normal way.

It is clear from the evidence a lot of people who might routinely have bought annuities during 2014/15 held off annuity purchase so that they could access some or all of their cash as a lump sum in April 2015 or soon thereafter. Annuity sales collapsed quickly after the 2014 Budget, while cash withdrawals and drawdown investments surged in the second quarter of 2015.

But even in the first few months of the new freedoms, cases of people blowing huge pension pots on riotous living appear to have been relatively infrequent. One reason for this is the large lump sum tax liabilities which would be incurred if anyone took all their pension in one go.

The tax system provided a strong incentive to spread withdrawals, and that is an important lesson when thinking about ways in which the tax relief system might be reformed in future. A combination of pension freedoms and tax free withdrawals in retirement could be a real recipe for people running out of money prematurely.

What is more interesting is the way that the market has already started to develop since then. The latest Association of British Insurers's (ABI's) statistics suggest that annuity sales have already started to recover lost ground and, in
the latest quarter, more people bought an annuity than
went into drawdown.

The evidence seems to be that many people have used cash in a responsible way, paying down debts or investing in their own home, rather than on round-the- world cruises.

Some money has been taken out of a pension and put on deposit, which doesn’t look like a good long-term strategy, but it is too early to say whether this is a temporary phenomenon with the money then invested rather than being left in a current account.

To see a bit more detail behind the figures, the chart shows how those Royal London customers who have the benefit of a financial adviser chose to exercise their new freedoms between April and December 2015.

Over this period, the average amount taken in a cash lump sum was just £11,400 – barely enough to pay for a spare wheel on a luxury sports car!

Interestingly, the average amounts have dropped quarter-by-quarter, with the largest cash lump sums taken straight after the starting gun was fired for pensions freedoms. In the most recent quarter, the average cash withdrawal was just under £10,000.

On drawdown, we have seen a surge in sales of our Income Release product, with over three quarters of a billion pounds invested between April and December 2015, and an average fund size of around £68,000. Sales have been relatively steady quarter-by-quarter, suggesting that this is likely to be an ongoing trend.

In terms of withdrawals from drawdown products, we have paid out just under one third of a billion pounds in 136,000 payments averaging just over £2,300. Again, this would seem to suggest that people are using their pension pots for income rather than for large lump sum purchases.

On annuities, although this is not a major part of Royal Lon- don’s business, what is interesting is the average pot used to buy an annuity has hovered around the £40,000 mark.

This is notably higher than the sorts of figures which used to be quoted for the ‘typical’ annuity purchase and reflects the greater availability of options to commute small pension pots into cash.

Moving on to the 2016 Budget, the great focus in the pensions world was the chance of a major shake-up of the system of pension tax relief.

With the publication in July 2015 of a Green Paper on ‘strengthening the incentive to save’, speculation had reached fever pitch as to whether the current system would be replaced with a new ‘pensions ISA’ with no up-front tax relief, or alternatively perhaps a flat rate of tax relief would be introduced, reducing the tax breaks for high earners.

In the event, the speculation became too much for the Treasury who let it be known about ten days before the Budget that there would be no big shake-up.

It was clear that there was no consensus between a Treasury that was sold on the pensions ISA idea and most commentators and industry experts who were concerned it would fundamentally undermine pension saving.

At one level it was a big relief – a ‘tax relief’ if you will – that there was to be no big shake-up.

With repeated changes to annual and lifetime allowances, the system of tax relief had become a source of major instability in a system which is supposed to be about planning for the long-term.

There had been some hope that as part of a radical shake- up, the pre-announced changes to annual and lifetime allowances might have been abolished. But no such luck.

The cut in the lifetime allowance to £1 million from April 2016 has gone ahead, with complex rules for those wishing to apply for protection against the new lower limit.

Worse still the tapering of the annual allowance for those with total income (including the value of employer pension contributions) over £150,000 is now going ahead. This is a ludicrous tier of complexity, making sensible planning for many of those on higher incomes almost impossible.

Self-employed people who cannot know what their profit is going to be in the coming financial year now cannot know how much they can put in a pension. Similarly, those whose incomes depend significantly on variable bonuses are put in a position where they might accidentally save too much for a pension and face a penalty, simply because they had a better year than expected.

The real danger is that higher earners will have even less engagement with workplace pensions and ultimately that is to the detriment of us all.

Steve Webb is director of policy for Royal London

The pensions landscape is starting to take shape and a combination of products seems key to making it work.

It is just over a year since the chancellor of the Exchequer launched a revolution in pensions. No more compulsory annuitisation meant people had to suddenly wake up and take an interest in their financial affairs, rather than just tick a box when it came to buying an annuity.

The entire, technology-driven world is abuzz with the concept of ‘client engagement’, and whether by lucky accident or by deliberate design, pensions have fallen into that bracket too. Not before time, some might say.

For too long the financial services industry has complained that people were not saving enough or thinking about their future.

Pension freedom has now put pensions on the front pages, and along with auto-enrolment, finally made people start to think about their old age. Fears abounded in the run-up to pension freedoms that pensioners – or near pensioners – would be irresponsible with their money.

Apart from a few anecdotal instances soon after pension freedoms launched in April 2015, it appears those accessing their pensions are being reasonably cautious.

Those with small pension pots are using some of their money to pay off debts – arguably getting themselves into a better financial situation – while some are using it for home improvements.

But as the year has gone on, what has become apparent is that after the initial euphoria of ‘breaking free’ from annuitisation, many pensioners are thinking that they would actually like some certainty.

It does not matter that in the months after George Osborne’s announcement, many companies saw their annuity sales fall off a cliff, and several businesses had to merge – Just Retirement and Partnership, for example.

Since the end of last year, annuity sales have started to make a comeback, as the virtue of having a secure income is starting to become more obvious. Uncertain stock markets have made people realise putting everything into income drawdown has its drawbacks, and once the money has gone, it is very difficult to make it back through stock market performance.

Investors are starting to realise that pensions and investments are a complicated business. But the solution over the long-term appears to be one involving a combination of products (a mixture of drawdown and annuities, in any type of combination).

What this means is that clients, even if they choose a safer option, have to take responsibility and make a decision.

If that gets people more engaged with their long-term financial futures, then that must be a good thing, despite the tax windfall expected by HM Treasury in the short term.

Melanie Tringham is features editor for Financial Adviser

Just over two years ago, the pension world was rocked by the announcement that people would no longer need to buy an annuity.

It was a matter of seconds after the Chancellor, George Osborne, had finished delivering his March 2014 Budget when the first of many customers called our offices to cancel their application for an annuity.

What happened in the days and weeks after that announcement were headlines and suggestions that the annuity market was dead and that sales would plummet, which of course, they did. But die, they did not.

The latest factsheet from the Association of British Insurers (ABI) statistics suggests that individuals who have retired in the last year, have, on the whole, adopted a sensible and cautious approach.

It is true that around £3bn has been withdrawn as cash from pensions, but when you consider that the average pot size was around £15,000, you would be hard pressed to think of any alternative that would have as direct an impact on lifestyle as a full withdrawal.

The fact that in the last quarter of 2015 more than half of all cash lump sums were for individuals under 60, suggests we may be seeing a shift in how people retire.

Canada Life research carried out suggests that more than 60 per cent of individuals do not expect to stop working completely when they ‘retire’, and we are seeing trends where people are choosing reduced hours contracts rather than a hard stop.

Just in March, the former director general of the Confederation of British Industry John Cridland was appointed to lead the first reassessment of the pension age. He is charged with considering life expectancy and ‘wider changes in society’.

The news was greeted by headlines suggesting that tomorrow’s generation would need to work until they are 75. What does appear clear though is that flexibility and security remain at the heart of retirement for most individuals.

As expected, billions that would normally have gone into an annuity have poured into drawdown contracts, and for many individuals this would have been the right thing to do. However, since pension freedoms, those individuals have witnessed the FTSE 100 fall by more than 10 per cent.

One of the challenges for customers is ensuring they understand sequencing risk when considering a drawdown. After all, performance can be shown in a number of ways, from compound growth to discrete year-on-year performance to annualised returns.

Less experienced individuals view annualised returns as the simplest way of picking a fund (despite the warnings that past performance is no guarantee of the future). So obtaining financial advice is something we believe is essential to ensure an individual understands the risks they could be exposed to.

The recent volatility experienced across equity markets in particular, has made individuals approaching retirement think about what is most important to them. Individuals who chose to withdraw an income of around 5 per cent last year may have seen their pension funds drop by closer to 16 per cent because of their timing.

During focus groups with consumers approaching retirement or at retirement last year, we asked what was most important: growth potential or surety of income. While growth is still important, the overwhelming consensus was that by retirement age, “if you haven’t made it, you’ve got to make sure you keep what you have built up”.

This somewhat explains why we saw annuity sales plateau in the latter half of 2015, and more advisers are now looking at ways to provide security of income allied to investment strategies that can give growth potential.

Blended solutions offer advisers the opportunity to truly customise solutions for their clients and add real value to their own service propositions. It is also fair to say that offering an annuity as part of a broader retirement solution is a lower-cost way of providing the guaranteed income that most individuals look for.

Let us not forget that some of the concerns of individuals about annuities were removed in the pension freedoms legislation. For example, individuals purchasing an annuity can now guarantee their income for longer than 10 years – in some cases up to 30 years – which can not only guarantee full payback of capital, but often more, making them a more appealing proposition than they were a few years ago.

In fact, our own experience has shown more than 12 per cent of guarantees taken are for terms longer than 10 years, with a fair proportion at 20 years and 30 years. The ABI data highlights that the annuity market is not dead, but it has changed. Instead of the default option for most individuals it now occupies a legitimate place in the bank of solutions available to those looking for a retirement income.

We expect that as more advisers look to broaden their range of solutions, annuities will continue to have a place in the retirement income planning process.

While we believe this could still be the right solution for some individuals, especially those who are risk-averse and want the certainty of a guaranteed lifetime income, and with many alternatives for shorter-term objectives now entering the market, lifetime annuities could become a more relevant product for later life.

There are alternative products that have been introduced over the past year. Fixed-term products are seeing traction among consumers who want a guaranteed income without the need to be tied in for life. Many individuals are choosing this option, with a range of terms from one year to 20 years.

At the end of the chosen term, the individual receives their guaranteed maturity value, which they can reinvest, withdraw or use to purchase an alternative retirement income product. These products allow advisers to create bespoke retirement solutions for their clients in a way that was not possible for most people prior to pension freedoms.

Choosing a fixed-term product can allow an adviser to meet a client’s immediate income needs in a secure way, which then allows them the flexibility to concentrate on continuing to build for longer-term growth and income in later retirement life.

This type of solution allows advisers to offer flexibility and security for clients, and represents an excellent way for advisers to regularly engage with their clients to continually provide the ongoing retirement solutions that today’s market will seek.

In summary, a year on, pension freedoms has had significant impact in terms of the behaviour of individuals approaching retirement and in terms of the products that providers are continuously developing.

For advisers, it has created an opportunity to redefine their service propositions and business models. We believe that there will be more enhancements and changes to come.

Efty Mateides is propositions manager, retirement income at Canada Life

Pension freedoms have opened up opportunities yet made life more complicated for consumers, advisers and insurers.

The reform has thrust insurers into a complex landscape with multiple default options, longer investment horizons, greater product diversity and - most challenging of all - customers phoning up for help at a time when the retail distribution review (RDR) has exacerbated what was already a significant advice gap.

When considering the impact of the freedoms on insurers’ business model, it would be easy to focus on the commercial implications of no longer being able to sell expensive annuities to inert customers, the potential for new decumulation products or buying IFAs to secure distribution channels, but that would miss the wider context of an industry that had already found itself at a historic crossroads.

Life insurers thrived for generations selling the 25-year savings product that only worked if you held it for 25 years. But now the sector is being asked to deliver flexible solutions that can constantly evolve to meet the changing needs of customers, public policy and the latest technological breakthroughs.

To do this successfully, a whole host of change is needed but at the heart of this lies the need for a much closer alignment between advisers and manufacturers.

The life insurance industry was one of the great innovations of the British Empire that for 200 years has played a key role insuring the nation and helping it save. The sector has helped consumers build strong financial futures and created capital for businesses to invest aided by tax incentives, strong balance sheets and exceptional levels of trust.

The last two decades have brought a tsunami of change and the market has shifted from competing on commission and complexity towards offering simpler products, platforms and services.

The policy framework has seen 15 material changes in the last 17 years headlined by RDR, auto-enrolment and pension freedoms with more to come, especially if Lisa proves to be the Trojan Horse for a more fundamental shift to taxed, exempt, exempt (TEE) that many predict.

Consumer expectations have been re-set as we become increasingly familiar with digital services like Amazon and iTunes.

In all aspects of life consumers are increasingly omni-channel, wanting to deal with providers on their own terms, delegating, but not abdicating decisions and living more dynamic lives that require flexible solutions and demanding simplicity.

The insurance sector has notoriously arcane back office technologies which has limited its tech innovation to date, but that will change in the next decade as firms manage their legacy IT issues, personal ownership of data leads to customer aggregation starting with the pensions dashboard and cutting edge innovations such as AI, robo-advice and analytics are fully established.

We are rapidly approaching the day of reckoning as it becomes increasingly apparent just how different the actuarial skills and pensions expertise that made insurers successful in the past are to the digital skills and asset management expertise they need to be successful in the future.

So, it is in this context that the pension freedoms have further blurred the boundary between accumulation and decumulation, exacerbating the need for flexible lifetime solutions that treat ‘retirement’ as a beginning not an end.

The services of life insurers will be more important than ever but the shape of the industry will change beyond recognition. We see three distinct models emerging:

1. Platform asset administrators We expect three to five firms to emerge as winners following a period of intense consolidation which will see the minnows taken over or go out of business. These firms will invest heavily in their technology giving them one underlying admin platform at the back end which will support ‘universal accounts’ enabling customers to move seamlessly between tax wrappers and other channels.

They will supplement this with sophisticated marketing services (digital front end, analytics, robo-advice, aggregation) to support the delivery of better digital experiences both directly and through intermediaries. Such digital insight will also enable them to develop investment solutions much more closely aligned to client objectives.

Having emerged as the dominant administrative platforms they will seek to vertically integrate to increase revenue by buying distribution and/or strengthening asset management propositions.

They will take proactive steps to manage legacy books by moving customers and assets onto the platform and by running off what is left either by outsourcing IT or customer service or selling to specialists.

Their customers will still need insurance solutions to deal with living too long or not long enough but these will increasingly be sourced from specialists and integrated into funds or platforms. Critically margins will find a new level with platform administrators needing to operate within 20 or 30 basis points, not the historic 50 to 100 bps.

This will mean a wholesale change in working culture and staff as basic functions are automated and products simplified. They will need half as many people, fewer actuaries and administrators but more customer experience experts and digital scientists.

2. Legacy back book consolidators We expect a small number of back book consolidators to emerge with the requisite actuarial and operational skills to manage run offs in a cost effective way for the majority of back books in the industry.

This will take account of the majority of complex with-profits business with their inherent guarantees that cannot easily be migrated to platforms.

The cost of moving to new traditional life platforms will remain prohibitive in many cases so these firms will instead become experts at legal entity rationalisation, process efficiency, outsourcing, off-shoring and work-flow technology to reduce costs.

3. Insurers We expect insurance to become an increasingly global market with firms with capital and actuarial expertise developing more flexible insurance and longevity solutions often packaged as tradeable securities on the global markets.

These will predominantly be ‘wholesale’ businesses with the customers being owned by the platforms and back book consolidators.

Key ingredients such as the bulk annuity and re-insurance market for term assurance are already well established. The future will see the development of more sophisticated customisable solutions that can be integrated into asset gathering platforms.

What does this mean for advisers?At one level the future is the same as the past, any successful adviser needs to have a clear picture of the needs of their target customers and a clear proposition. However, the way this is achieved in future will be very different to the past.

It seems likely that the core adviser market will move towards restricted models, in many cases this will see the platforms buying distributors – advisers will need to consider how important independence really is to their customers and why.

Advisers need to accept that customers will increasingly move between advised and direct channels. This will challenge historic industry practices of channel ‘ownership’ and intermediaries incapable of meeting this constructively, for example by restricting customer’s access to digital direct services, will not thrive.

The choice of platform will be ever more critical. As they evolve from pure administration of tax wrappers and assets to offering embedded analytics and AI this will give forward thinking intermediaries the capability to fundamentally transform their own marketing and robo propositions.

Successful intermediaries will recognise the potential for these platforms to transform their businesses. More than anything, the key for advisers will be to establish fundamentally different relationships with platforms.

Too often in the past the relationship with insurers was based on mutual mistrust, arguments over customer ‘ownership’, commission dependence and fundamentally different interests.

More mature relationships will be needed based on honest dialogue, shared interests and with intermediaries and platforms entering into long-term partnerships as equals.

Andrew Manson is principal consultant, advisory, financial services of KPMG

The enormous changes to the pensions landscape have left many with a sense of trepidation about the choices on offer, but at least it’s got people talking.

The freedom and choice pension reforms have been in place for just over a year and have profound implications for the retirement savings market.

The changes mean that individuals can access their retirement assets from the age of 55 and have flexibility about how they withdraw the cash rather than facing restrictions that forced most people to buy an annuity.

One notable impact is these freedoms have brought pensions to the fore – pension savings are now viewed as real money and are being talked about down the pub. Anything that makes people think more about how they will fund their retirement should be viewed as a positive.

The reforms fit well in a world where people are more uncertain about when they will retire and more likely to continue to work in some capacity after their formal retirement. The ability to access savings in a flexible fashion, topping up income from work, will suit many.

Experience since the new rules were put in place shows that annuity sales are down significantly and individuals are more inclined either to take all their cash out or to stay invested and take out money as and when required.

This new freedom is a great opportunity for retirement savers, but also a great challenge.

A recent study tracking in detail the retirement income decision-making of more than 80 defined contribution (DC) scheme members over a period of nine months, found widespread trepidation at the decisions to be made, with many viewing freedom and choice as a minefield, and not knowing where to turn for help.

Information received from providers created overload, and was often a source of confusion. The tabloid press was often viewed as the only source of clarity.

For fear of making the wrong choice, most people making decisions about their pensions at retirement want to follow a path of least resistance, which typically means sticking with their current provider if they can.

The idea of shopping around for a better deal is not often entertained. The financial industry needs to better articulate the choices people face – including the option to leave money in the pension scheme until it is needed – and to adopt clearer and more consistent language in communications.

With the overload and confusion that people experience in navigating pension choices, there is a clear role for high-quality financial advice. However, the research also found barriers to scheme members benefiting from that.

Many people did not have an ongoing relationship with an adviser and were unsure of how to find one and not sure who they could trust. Some also found the economics challenging, either being reluctant to pay the typical level of fees, or in some cases struggling to find an adviser who would take them on.

This chimes with the issues outlined in the recent Financial Advice Market Review, which makes welcome suggestions about clarifying the role of technology in reducing the cost of delivery of advice and guidance, and creating the prospect of lighter-touch and lower-cost streamlined advice.

Better products will also be required to help scheme members get the most from the pension reforms. Many consumers will value simple, packaged drawdown solutions, and perhaps also flexible drawdown plans that can be mixed and matched with annuities that provide secure income in the later years of retirement.

Well-governed and low-cost default investment strategies will help savers who value pension freedom but do not want to have to engage with complex investment decisions. And finally, we have to ask if we are seeing the beginning of the end of pensions?

Will people under 40 clearly favour the Chancellor’s new Lifetime Individual Savings Account over traditional DC pensions? It seems more likely that the Lifetime Isa will be a short-to-medium term saving vehicle that will be used for housing purchase rather than retirement income.

The important thing will be to make the new vehicle as simple as possible to encourage take-up. It will be good if more people reach retirement with some housing equity, but it is also important for people to have a retirement income too, and for those in employment to make the most of any employer pension contributions on offer.

The most effective way of encouraging retirement saving will likely remain low-cost, well-governed workplace pension schemes, with auto-enrolment and good quality default funds.

Alistair Byrne is senior DC strategist of State Street Global Advisors