Time to retire the pension?

I’m really looking forward to discussing with fellow professionals how the pensions scene is rapidly changing to challenge investment managers’ traditional business models, but also to provide them with a unique opportunity to innovate and capitalise upon these developments.

One thing is clear: pensions are at a crossroads.

Historically, wealth managers focussed on ‘baby boomers’ preparing for retirement. As they now enter their golden years, baby boomers are finding this world a far more complex (and confusing) place than they ever could have imagined or planned for. For them, retirement was meant to be an event; now it’s become a phased process.

At the same time, a younger generation of customers is much more informed, wants greater transparency from an industry infamous for its opacity and demands higher levels of service from wealth managers.

So this is the brave new world of pensions: an aging population, combined with low birth rates, low savings rates and higher levels of debt - coupled with considerable levels of customer mistrust - are creating a growing retirement burden which is shifting increasingly to the individual.

The key question then is how the investment management industry can meet consumers’ ever-changing needs. Will it be the design and launch of a radically different pension proposition for accumulation or decumulation products? Or will it be more subtle innovations which make current solutions more effective, less costly and more transparent?

There are two key approaches investment managers can take to transform their business models and make the most of these new market opportunities.

First, they could develop tailored investment solutions that replicate the certainty of outcome previously available from annuities, while also meeting the need for value for money, transparency and phased retirement planning.

Careful consideration must be given to how to extend beyond the traditional ‘at-retirement’ product marketplace to help the older generations fund long-term care and the more active retirement lifestyles they are likely to expect.

For example, the new pensions freedoms in the UK are likely to encourage a significant increase in individuals going into drawdown.

The second approach is for investment managers to adopt a direct-to-consumer strategy, leveraging platform technology to aggregate their own and other fund managers’ investments within a range of pensions and other product wrappers.

Successful entrants to the D2C market will be those who use digital technologies to engage with customers at the front-end, supported by strong back-office systems to maximise customer engagement, while keeping costs low.

Investment managers need to be mindful of conduct risk, especially when offering a guided or advised sales process, as well as ensuring the suitability of wrappers and funds on offer. Perhaps the biggest risk of D2C remains the potential conflict with advised clients as well as platforms.

In both scenarios, investment managers must also deliver their fiduciary responsibilities through clear, ethical brand values, well-governed mandates focused on the end consumer and transparency of reporting. These are more than just hygiene factors.

Fundamentally though, this brave new world of pensions is an exciting one where wealth managers really do have a once-in-a-lifetime opportunity to capitalise upon seismic industry changes.

The winners will be those who focus most on individual customers’ needs and develop products that remain relevant to them throughout their lifetime.

Andy Masters, UK head of savings and wealth management at KPMG