The worlds of retail investment and pensions have become more closely aligned since the freedom and choice reforms introduced in 2015. And the degree to which they are now interlinked may be much more significant than realised.
Eighteen months ago I wrote in this column that the first signs of the pension freedoms fund-flow “boom” had emerged. The shift to lower-cost products, coupled with the retail investor nervousness seen last year, may have prevented that boom from truly materialising. Nonetheless, there's circumstantial evidence that pension changes are having an impact on fund flows – just not in the way we expected.
In a marked change from previous practice, the past year and a half has seen investors continue to favour pension wrappers over Isas. Net sales into personal pension wrappers stood at £4.3bn last year, more than three times the £1.4bn that went into Isas. This trend continued in the first two months of 2017, though the Isa season has tended to provide a temporary corrective to the pattern.
I wonder, however, whether pension freedoms are still the primary catalyst for this shift. Could it instead be the wave of defined benefit (DB) transfer requests that has been enhancing fund flows in recent months?
Of course, the pension reforms – giving retirees more flexibility over how they invest their money – did clear the way for DB scheme members to consider a move to defined contribution offerings. But it is the more recent spike in transfer values that advisers say has prompted the real surge in interest.
A closer look at fund sales data appears to corroborate this theory. The swing from Isas to pensions began in 2015, but it has accelerated notably since last August. From that month onwards, net flows into funds via self-invested personal pensions (Sipps) and the like total £3.6bn, according to the Investment Association. That’s a 30 per cent increase over the same period in 2015, a time when investor sentiment was much more buoyant.
August is relevant as a starting point because that is the month when the Bank of England cut base rates to 0.25 per cent, giving a further fillip to bond prices and ultimately DB transfer values. For better or for worse, these soaring valuations have convinced many to cash in their pensions.
The flip side of this increased activity is a continued falling away in Isa business. In the seven months since last August for which data is available, net flows total less than £400m. Compare this with the figures mentioned above, and you can conclude that pension flows have been propping up the funds industry during a difficult period. How much longer this can continue is another matter.
Dan Jones is editor of Investment Adviser