Your IndustryFeb 1 2016

Pensions Outlook – February 2016

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Approx.50min

    Pensions Outlook – February 2016

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      Approx.50min
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      Introduction

      By Nyree Stewart
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      Research from Hargreaves Lansdown shows the FTSE 100 index has fallen 20.1 per cent in price terms from April 27 2015 to January 20 2016, and this drop has consequences for investors.

      Tom McPhail, head of retirement policy at the firm, explains: “Recent market falls are a reminder about how important it is for people to take responsibility for their own retirement.

      “Those who are still some way from retirement should not panic – this is part and parcel of stockmarket investing and they will have time on their side to recover losses.

      “For those close to retirement or drawing their pension, the recent drop could be more serious.”

      But he highlights the benefits of a diversified portfolio, commenting that in the same period that the FTSE 100 index fell 20 per cent, the average mixed asset pension fund dropped 9.4 per cent. He adds: “While still eye watering, it shows how important it is to have a diversified investment in your pension.”

      Multi-asset funds continue to be the favoured option for many investors as they look to take advantage of the pension freedoms.

      The results of the recent Fidelity International Outlook Survey show more than 40 per cent of respondents favour multi-asset investments as their preferred method of delivering an attractive and sustainable income in the next 12 months, with 35.6 per cent preferring equities, while only 3.8 per cent favoured fixed income.

      John Clougherty, head of wholesale at Fidelity International, notes: “Pension freedoms have given retirees added flexibility with their pension savings, but as our survey highlights, there is a clear need for expert help in such a significant but complex area.”

      But it’s not just the asset allocation that can cause issues for pension investors. New capital adequacy requirements for self-invested personal pensions (Sipps) come into place in September this year, causing a potentially seismic shift in the market – while L&G offloaded Sipp provider Suffolk Life to Curtis Banks in January for £45m.

      Mark Smith, operations director at Mattioli Woods, suggests this signals the potential for further consolidation in the market, as the combination of higher capital requirements and higher levels of regulation are a “double whammy” for providers.

      Secondly, he highlights not just the pace of consolidation but also the size of the companies evaluating their options.

      “While previously we’ve seen very small providers looking at their options, [the Suffolk Life deal is] demonstrating that across the whole sector, firms are giving thought to the future.

      “From an adviser and consumer perspective it really underpins who you use for pension provision. What is the stability of that firm and will the provider you’re choosing be the one you end up with?”

      That said, consolidation could yet be hampered by the higher capital adequacy requirements, particularly if a Sipp firm has a large amount of non-standard assets on its books.

      “There’s nobody willing to pick up that business and acquire it because the risk that sits within that business and potential liabilities from a tax perspective are quite high.

      “So [these firms] might be looking at options, but consolidation might not happen because of their exposure. That is where some of those businesses will really struggle and there is the potential for firms to fail.”

      While regulation may have opened up pensions to a new world of investment, they have also increased the risks and make due diligence by pension investors even more important.

      Nyree Stewart is features editor at Investment Adviser

      PENSION TRENDS

      September 1 2016

      Date that new capital adequacy rules for self-invested personal pensions come into force

      £45m

      Amount paid to L&G for Suffolk Life by Curtis Banks

      40.3%

      Percentage of respondents to Fidelity International’s Outlook survey that cite income in retirement as the most common investment need from clients

      DFMs

      The FCA clarified in its handbook that “a DFM portfolio can be [classed as a] standard [asset] when the Sipp operator has arrangements in place to ensure that the portfolio comprises standard assets only”

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