Asset managers are likely to be the main beneficiaries of the radical pension reforms, Moody’s Investors Service has said, arguing that the retirement income market transformation will lead to a continued differentiation between insurers and asset managers.
The ratings agency’s analysis of the market suggested that competition is set to increase from already high levels, with incumbent insurers chasing shrinking pockets of value.
Speaking to FTAdviser, Laura Perez-Martinez, one of the company’s European insurance analysts, said that insurers’ competitive position in the long-term investment space has already been eroded over time by increasing competition from asset managers.
“The UK life insurance industry has experienced substantial outflows consistently since 2008, which is in stark contrast to the inflows captured by asset managers,” she added.
While several of the largest life and pensions businesses have their own in-house asset managers, Moody’s pointed out that insurers’ pricing power in asset management is less robust than in traditional insurance products, given the fierce competition and open nature of the market.
“In addition, the retention levels in savings and investment products can be lower or less sticky than traditional insurance products as asset management products tend to be more vulnerable to shifting investment preferences, fierce competition or volatility in capital markets.”
To make the most of next month’s at-retirement reforms, it suggested that insurers need either strong asset management operations, longevity and risk expertise to write bulk annuity deals, or distribution capabilities with strong platform propositions.
“Distribution capabilities and particularly platform propositions are areas where we see greater risk of potential new entrants with platforms often known as ‘a technology arms race’,” noted Ms Perez-Martinez.
Insurers that own platforms with critical scale, such as Cofunds, Old Mutual or Standard Life, are likely to benefit from capturing more flows and further margin by selling in-house investment funds, according to Moody’s.
“Although we recognise that ownership of scalable platforms enhances insurers’ control over distribution, platforms are also subject to significant regulatory changes and competition,” read the analysis.
“Furthermore, these platforms’ contribution to most insurers’ profits have generally been very modest.”
As for bulk annuity transactions, Moody’s expects more competition at the smaller end of the market, as several insurers look to replace the profits lost from individual annuities.
Recent annual reports from both LV and Prudential have backed up this assertion, with the blow of individual annuity sales slumps since the last Budget softened by increased revenues from bulk deals.
Meanwhile, enhanced annuity specialist Just Retirement also diversified into the area, announcing its biggest transaction yet last October.
A special report on all the market changes coming under pension freedoms offering CPD minutes is will be published later today.
peter.walker@ft.com
