Despite the pensions industry’s best efforts to get everyone into a proper pension, many, according to the report, would prefer to put their money into their house, seeing this as a much more viable investment than a pension fund.
This is not surprising. Property prices have risen 50-fold since 1970, with housing market transactions peaking in the late 1980s and mid-2000s.
The report said: “Many individuals now consider their home to be their pension fund and, comparing the typical UK residential property value (which is in the region of £200,000) with the typical life company pension fund at vesting (less than £30,000 on average), it is easy to see why some people think this, especially given the massive real term rise in UK house prices over the last few decades.”
According to the report, investing in property was seen as important as saving in a company pension scheme pre-financial crisis, and only slightly less in 2009.
Property was considered by far the most effective way to make money, with 31 per cent believing this, against 16 per cent for paying into an employer’s pension scheme, in 2009.
Nonetheless, people are still paying into company pension schemes, with 58 per cent of full-time working women paying in, compared with 53 per cent of men. Perhaps not surprisingly, there is a distinct occupational bias.
Professionals put by far the most into their pensions, with 53 per cent making contributions of more than 7 per cent, followed by 26 per cent of “associate professional and technical” staff setting aside more than 7 per cent.
For those relying on auto-enrolment, it could be a different story. The report is quite critical of the recent industry fanfare about the success of AE.
It said: “Put down that gin and tonic and stub out that stogie, because the main event does not hit until mid-2015, when the staging stagecoach looks to pick up the huddled masses, when sub-50 employee populations start to get on board.”
Most of the companies who have met their staging dates so far are those who already have substantial HR departments, pensions knowledge and pensions schemes.
The report said: “The next wave of employers is less knowledgeable about pensions than the larger employers that have already staged, and research carried out by Nest and the DWP indicates they are expecting to get a lot of help getting their organisations ready.”
However, while most employers say they do want advice, only half of those said they would be willing to pay for that advice. With 90,000 sub-50 employers expected to stage a month by 2017, there is expected to be a real scarcity of good quality advice.
With many big-name life companies expected to disappear once they have the good quality large employer business, “Nest seems likely to end up with a large book of relatively poor quality business, mostly (in terms of employer numbers) derived from organisations with limited pensions skill-sets, and displaying poorer persistency.”
But persistency is a feature making a strong appearance in the more established parts of the pension sector.
Looking at the regular premium pensions, the persistency rates are dramatically low, with very little new pension business actually being real new money.
The report said: “Over the 12 years under review, despite having written cumulative new RP of £41bn, the in-force RP rose by only just over £2bn, so that the growth of in-force pension RP was the equivalent of only 6 per cent of the total amount of new RP business written. New business is going down the drain.”
Financial advisers come in for a fair degree of criticism in this aspect, with almost 40 per cent of IFA-placed regular premium pension business lapsing after four years.
The report said: “Cazalet Consulting data, backed up with ABI survey information shows the overwhelming majority of pension SP new business written by life offices derives from surrenders of existing pension savings with a rival provider.”
Poor economic conditions have not helped, combined with a move to platform business, which affects pensions persistency rates.
Platforms are doing well, however, fed by increasing adviser adoption and rising stock markets.
The report said: “The rate of expansion… is expected to continue to grow strongly over the medium term as advisers seek to change their business models to become more reliant on on-going fee income.”
In addition, as more of the world moves online and gets used to conducting everything over the web, so platforms become a more central part of advisers’ daily business.
The report said: “General improvements in and widespread uptake of online technology and transmission speeds have helped boost the attractiveness of platforms which, in turn, have been developing improved functionality for advisers and investors.”
The rise of D2C is expected to create opportunities for many platform providers, and the closer to the customer, the better the margin.
However, margins in general have been on a downward trend, with the aggregate industry revenue margin falling by half over the past three years, from 50bps in 2010 to 20-25 bps in 2013.
It is estimated that altogether, the combined profits of all the UK’s platforms amount to £188m in 2012, with the vast majority made by Vantage –Transact has been making profits of about £10m each year for several years. But many platforms will take some time to turn a profit, as so much money has been invested to turn them into the platform of choice.
The report said: “The vast sums of money sunk by insurers into platform activity is likely to mean they face a much longer period before payback than the independents, require much larger on-platform assets under administration to become sustainably profitable, and will find respectable return on capital targets harder to achieve than for the likes of Transact.”
The report also turns its attention to the choice of funds on these platforms, and notes the rise of passives, in large part due to the RDR, with so much pressure on costs, now that the system is fee-based.
The report said: “Given the fragility of many advisers’ business models, we see a desire (driven by a need simply to survive) to maximise their share of the basis-points pot.
“And one surefire way of reducing fund-manager spend is to move from recommending relatively expensive active strategies to relatively cheap passive ones.”
Nick McBreen, IFA at Worldwide Financial Planning, was not so convinced about a mass switch to passives. He said: “I have no doubt that passive funds do not provide benefits for clients. A total passive portfolio is not going to produce the returns that active funds will. The whole point of people having appropriate advice is to access the funds that do the best.”
He also disagreed with the claim that churning is rife in the pension sector, and that financial advisers are partly to blame.
He said: “I don’t think anybody’s come up with the real truth about this. Post-RDR I would suggest that regular contribution pensions and savings and Isas have fallen off a cliff.”
Whichever side of the debate is right, the financial services industry is in the middle of extensive change, and financial advisers cannot fail to feel the headwinds.
Melanie Tringham is features editor of Financial Adviser
Key points
* Ned Cazalet has published his latest snapshot of the industry called UK Life and Platforms
* Investing in property was seen as important as saving in a company pensions scheme pre-financial crisis, and only slightly less in 2009
* Many platforms will take some time to turn a profit, as so much money has been invested to turn them into the platform of choice
