PensionsFeb 26 2019

For smart advisers, the pensions opportunity is only just beginning

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For smart advisers, the pensions opportunity is only just beginning

The column will reach a glorious crescendo, hooking in all the facts and figures from the start, before ending on a quiet yet thoughtful note, which will leave you yearning for another instalment next month. Either that, or it’ll be a poorly formed rant. No one knows yet. Exciting, isn’t it?

So here we go…

  • Some £23bn has been withdrawn from pensions since 2015, when the new freedoms were announced.
  • Direct platforms (a hint of what’s to come) have grown from £98bn in 2013 to £185bn in 2017.
  • The personal pension market is worth more than £400bn.
  • The drawdown market is worth £384bn.
  • Fifty per cent of assets, more or less, are in pension assets in the advised platform sector.
  • One-third of plans entering drawdown are non-advised.
  • One-third of annuity purchases are non-advised.
  • Two-thirds of drawdowns are pension commencement lump sum only; no income.
  • The UK baby boom isn’t when you think it was. There was a small boom in 1946 because of post-war jiggy, but the real boom was in the mid-1960s. Most baby boomers here are only just 60.
  • New research from Just suggests that up to 3.6m over-65s have been forced to retire involuntarily without what they consider adequate provision in place.

That’s enough for now. What’s making me think of all this is a piece of work we’ve been doing at the Lang Cat about how well our industry (providers) and profession (advisers) is positioned for helping people create coherent retirements in a world where advice is unaffordable for many. We’ll come back to that assertion a bit later.

The potted summary is: not all that well. If you’re an investor who doesn’t use the services of an adviser, you are pretty exposed. As we’ll see in a moment, the product and functionality set you can access is much more limited than that available to advisers.

Adviser approaches

But everything isn’t unicorns and glitter in the advised side either. Yes, there are more products out there that try to do interesting things; we might mention the Canada Life (formerly Retirement Advantage) retirement account hybrid drawdown/annuity mash-up, and Just is doing its thing too. There isn’t even much to get excited about on the platform/investment side, bar 7IM’s retirement income service. 

No, it’s slim pickings out there. And that’s been adequate for two reasons: first, we haven’t hit the boom yet. Most retirees are of a vintage where they enjoyed defined benefit pensions. The spike in transfer activity was big, but still didn’t really dent the £1.3tn in DB schemes. Apart from that, their drawdown pots are supplementary, probably through either defined or freestanding additional voluntary contribution arrangements if they changed job later in their working lives, or if their scheme was yanked from them.

Not pin money, perhaps, but not essential either – that’s why we see the high proportion of PCLS-only drawdowns.

The second reason is that advisers have picked up the slack, especially where individuals do require income from their drawdown pots. This has arguably worked for everyone – clients get an adviser, advisers get some nice chunky pension pots to charge 1 per cent on, and a huge bunch of potentially awkward customers take their potential mis-selling liabilities and plonk them firmly on to advisers’ PI books. 

But all this won’t be good enough for long. And I’m not the only one to think so; our friends in Stratford think so too. The Financial Conduct Authority’s Retirement Outcome Review (ROR, and I can’t be the only one to think that it should be the ‘Retirement Outcomes Ambitious Review, or ROAR’) has exactly this in its sights when it talks in CP 19/5 about “retirement investment pathways”, and frankly putting what my Irish friends would call ‘manners’ on the whole thing.

How to serve

Now what this really all shakes out to is functionality and the ability of providers, whether advised or direct-to-consumer, to serve this space effectively. The paper we’ve been working on – which you can download free from our website (it’s imaginatively called ‘Retirement Income in the Direct Platform Market’) – gives lots of detail about who does what, but suffice it to say that it’s far from a level playing field.

This poses an interesting conundrum. Should investors who can’t/won’t/don’t want to use an adviser have access to adviser-style functionality in order for them to defeat their own self-limiting behavioural biases? Or should they be starved out so they don’t get ideas above their station?

To be clear: I’d love to see some kind of mechanism that ensures everyone can get access to professional financial planning at the point of retirement (whatever that is any more). I suspect even state funding for that would be money well spent. 

But here’s an uncomfortable truth: when we look at how self-managed drawdown clients who are drawing income cope with the vagaries of the stock market, quite different patterns emerge from those who use an adviser. We all know that advisers and consultants and academics beat themselves up to identify sustainable withdrawal rates (and that’s a column for another time). But those clients who have put the better part of £100bn into direct drawdown in the past few years aren’t as interested in that.

I don’t have a big stat for this; I have to work on anecdotal experience from talking to non-advised drawdown providers. But given that, I think there is a far higher incidence of clients changing their income on a monthly or regular basis than in the advised sector, where a rate tends to be set and then only adjusted annually. 

It seems that many self-managed drawdown clients are exhibiting behaviours that are a sort of live-fire exercise version of what cash flow planning is meant to do. Markets down? Feeling edgy? No problem – we won’t replace the bathroom this quarter as we were planning. We’ll hold off on the South Africa winter holiday and consider freezing our ass off in Whitby instead. If stuff comes back round we’ll take a bit more out and that won’t hurt as much.

The consequences

Where does it all end? Well, those 3.6m retirees aren’t all sitting on £250,000 self-invested personal pension pots. Many just need a bit of a hand. This industry is going to build tools for them, and although they haven’t been very good so far, that’s probably only a matter of time. 

I wonder if we’ll see a closing of the gap between what we see on advised platforms and what we see on their direct cousins. I can’t help thinking that we’re already seeing some moves in that direction. Many of the life companies – Canada Life, Scottish Widows, Royal London, Prudential – are in build or live with new platform-like propositions that give clients and advisers some of the experience we know now as platformy. But they’ll try to do it at a much lower rate than the ‘pure’ platforms (perhaps bringing that big old balance sheet into play) and make it much less complex. All of them have their eye on the at-retirement market. 

One of them, so far, has broken ground to say that it’s going to recruit 700 advisers to try and do some damage in this space, or at least its parent has. But look at the line from the Scottish Widows business, to the Lloyds branch network, to the Schroders joint venture, and tell me there isn’t something you could stitch together there given a budget and enough coffee. I should know: I started my career as a tied adviser for Scottish Widows. 

The next few years will, I believe, see us as a sector really start to get to grips with what it means to serve this market. In the advised space, that will challenge centralised investment propositions and the idea that you can happily take 1 per cent for a bit of rebalancing and a toolset that tells you what sustainable income means. In the direct space, it will challenge the view of what’s suitable in terms of functionality, and just how much of a poor cousin it can be to the advised sector.

And running all through this will be the impending wall of money that is going to hit us as a sector. That £384bn is as nothing. We are either going to be ready or we aren’t. I don’t know who wins in all this, but whoever does is absolutely going to be living the high life for decades to come.

Mark Polson is principal at the Lang Cat