From Special Report: At Retirement - May 2012
Heavy on your minds
Advisers have to deal with many factors weighing heavily on the at retirement market in addition to the usual task of convincing the younger generation to get serious about saving
Routine longevity underestimations will be the retirement income killer, should people live just three years longer than 2050 expectations.
This is the latest warning to blight the at retirement sector, having marched forth out of the International Monetary Fund’s analysis of longevity risk impact.
And according to Aviva’s Spring 2012 Real Retirement Report, over-55s are looking increasingly fearful about their financial future.
Having said all that, the report showed over-55s were actually better off financially, with inflation fall, average monthly income rises and a 24 per cent increase in savings pots.
But unstable interest rates, volatile stock market and speculation of further quantitative easing is not painting a particularly rosy picture for annuities and drawdown. Let us also not forget the Solvency II and gender directive forces at work.
So how is the market shaping up to manage the turmoil it faces?
Bob Bullivant, chief executive of Annuity Direct, said poor pension saving should be a focus in knocking the retirement market into shape.
One of the hot topics in this respect has been pension minister Steve Webb’s BBC Radio 4 announcement about workplace pension schemes.
In a nutshell, the minister suggested introduction of defined ambition schemes. The risk would be shared between employer and employee, as opposed to just one or the other as with final salary and defined contribution schemes respectively.
Mr Bullivant said clients at retirement were generally savvy and wise. It was those saving towards it now, with lack of interest in building up their pots that were of massive concern.
Talking in terms of retirement income was key to stopping people arriving at retirement with lowly pension pots, Mr Bullivant added.
The last eight months have showcased a more buoyant stock market and inflation drop which has turned investment risk into investment gain for pension savers.
But according to Mr Bullivant, who knew what the future held in such uncertain times?
Annuity Direct clients are those seeking at retirement incomes. The firm has found it “a tricky call” to make the best of uncertain interest and annuity rates.
He said: “Clients have been losing sleep over worrying about their retirement and financial future. We put their minds at rest because what they need is a truly independent adviser to shop around and really use the open market option. This is imperative.”
The ABI has been trying to drive the open market option forward, with a code of conduct, insisting all its members sign up. Mr Bullivant said the market seemed to be heading in the right direction.
“The real issue with drawdown is not the amount of income available. That is looking at it the wrong way round. The minute you start chasing income, it is problematic. It needs proper risk analysis,” Mr Bullivant said.
The short answer to the retirement conundrum at the minute, he added, was that it was very difficult to get clients what they desired. Unfortunately we are in a position where the market is where it is. But there is only way of doing this, and that is through an IFA and properly,” Mr Bullivant said.
But despite investors’ greatest efforts to build up a decent pension pot, the sword is double-edged.
According to the IMF’s April 2012 global stability report, the overall low interest rate environment in the UK could marginally curb pension funds’ demand for safe assets.
Chapter 3, Safe Assets: Financial System Cornerstone, stated: “A protracted period of low interest rates would put pressure on pension funds to shift to riskier assets as the present value of future payable benefits increases – an increase that is even greater if longevity risk is properly accounted for.”
It added that unanticipated increases in the human life span has caused small longevity forecast errors; being an average of three years.
By the IMF’s estimations, if everyone lives three years longer the present discounted value of the additional living expenses, of everyone during those additional years of life, will amount to between 25 and 50 per cent of the 2010 GDP which was £2 trillion.
In all the longevity concern, market uncertainty and low interest rates, how is the at retirement market contracting to address the issues?
According to Safe Home Income Plans member feedback, some of those in retirement have found themselves with interest-only mortgages and unable to sell and downsize.
And more than that, some endowments have not been maturing as much as expected and there is increased debt among over-65s.
Director general Andrea Rozario said this was likely to impact the equity release market.
She added: “People are recognising more and more that housing wealth is becoming a prominent option given the landscape. There will be no explosions in the market overnight but we will see the market growing.”
Ms Rozario said there was a hefty chunk of work to be done on understanding and awareness of equity release, and all retirement options to get through the tricky time.
She explained: “People can ring-fence an element of equity, or take a drawdown option. There are many choices.
“The products do not need to be simpler because people find these available features very attractive. Bringing more advisers into the market and increasing understanding and awareness is the way forward.”
Ship has started a consumer awareness campaign involving lobbying for the government to push retirement awareness forward, with options in equity release, annuities and drawdown.
According to Ms Rozario the market needed to shape up to address changing needs of those facing retirement.
“Our perception of pensioners has to change,” she stressed.
“You cannot treat them as one whole group. There are ranging needs at different ages as people live longer. The market needs to be adaptable and flexible to that trend.”
And the concept of much needed flexibility in the at retirement market, is not just a message coming from the equity release sector.
According to retirement product provider Primetime Retirement, formerly Living Time, the annuity “middle market” of more flexible solutions has gained a firm foothold.
Chief executive Kim Lerche-Thomsen said the retirement market was on the cusp of a major evolution. He said there were now real signs of innovation that would take the once niche “third way” options onwards.
“There is now virtually no such thing as a standard lifetime annuity, with more and more clients getting personalised, underwritten annuities that are based on postcode, lifestyle and - where applicable - medical factors,” Mr Lerche-Thomsen said.
Unisex rates is another story that has blighted the retirement headlines of late. But we are yet to see the true effect on rates, and how providers will adapt.
According to Mr Lerche-Thomsen, Solvency II would continue to have a negative impact on rates, although much of this had already been factored in by providers.
He said modest signs of rate increases had shifted GAD upwards a little, offering a slight welcome break for drawdown incomes. But he added the immediate short-term outlook was uncertain and it was unlikely the market had reached the bottom with annuity rates yet.
Mr Lerche-Thomsen said: “Providers need to offer a clear position for IFAs so that they can discuss these issues with their soon-to-be retired clients and reassure them about what impact these changes may have on their future income.”
With many factors weighing heavily on the at retirement market, it is not surprising product development and innovation seem so prominent. And advisers could be working harder than ever, just to get clients close to the income they need.
Nicola Culley is a senior features writer of Financial Adviser