Twenty months ago Chancellor George Osborne turned the world of pensions on its head. But advisers say provider product development is still yet to make the most of the opportunities that have been created.
While advisers at a recent Money Marketing roundtable had sympathy for the amount of change providers have had to contend with since the March 2014 Budget, they noted there had been little sign of a pensions revolution in product development.
The Government has done its bit to nudge providers into the new world – just three months after the Government launched freedom and choice for retirement saving, it published a consultation on why the pensions industry was failing to respond to the new framework. Frustrated at the slow response from providers in delivering freedoms, the Treasury called on the pension industry to examine the barriers in place for those aged 55 and over who are attempting to access the range of products now available.
It has since gone on to publish the Financial Advice Market Review – focused on opening up advice to the mass market – as it continues to drive pensions reform forward.
Advisers at the event said the new regime has galvanised public opinion and for wealthier clients turned the approach to drawdown on its head.
Towry head of retirement Andrew James argued it is the inheritance tax changes rather than the actual pension freedoms that have had the biggest impact on the advice given to certain wealthier customers.
He said: “We used to advise people that if you have got loads of assets the best thing is to draw off your pension and get rid of that, and then look at other assets. Now you can pass your pension on as an inheritance, if you’ve got loads of assets you would be better off leaving your pension and using your estate up instead.”
But among those for whom inheritance tax is not the top priority, appetite for drawdown has been more muted, said delegates.
Panoramic Wealth Managing Director Gary Jefferies said: “We saw an interest but not a rush to drawdown. We had a handful of clients take small pots – those with funds around £25,000. Then interest died down.”
As advisers and providers get to grips with freedom and choice, their conversations are turning towards blending the options available under the new regime, with a growing interest in hybrid products.
Partnership chief executive Steve Groves argued retirees want a combination of a guaranteed income that is provided by an annuity with the flexibility offered by drawdown.
“You can combine an annuity and drawdown in a simple, tax-efficient and low-cost way. Clients want a guaranteed income which comes within the product build and a low-cost investment solution that they don’t have to chop and change,” Groves said.
The evolution of the at-retirement market towards hybrid products creates an opportunity for annuities and drawdown to be combined in a way that makes the most of IHT rules that now allow pension assets to be passed on at death.
Groves said: “The concept of the wrapped annuity is useful on the IHT side. I would love to be able get an annuity from one provider and put it in a Sipp where the client already has investments, and then turn that on and off as necessary.”
James said he would like to see hybrid solutions to develop even further, allowing the flexibility to combine an annuity from one provider within another provider’s existing Sipp, a development Groves said he was interested in exploring.
Groves argued freedom and choice offered the industry an opportunity to reform traditional drawdown products, making them more efficient and cost-effective. It would, he argued, also drive the open market option value debate that was formerly restricted to annuities into the larger decumulation product landscape.
Groves said: “The natural consequence of pension freedoms was to cause a debate about the cost of annuities and we have seen that. We think reform will now lead to a debate about making the drawdown market more efficient.”
He went on to criticise providers charging excessive fees for drawdown, and called on the industry to offer better value to clients.
Groves said: “I get pretty frustrated with drawdown providers. I see charges that are in excess of 1 per cent and often nearer 2 per cent when you consider the annual management charge and platform fees. If I took 2 per cent and accumulated it over 20 years I’d get a margin eight times the size of that for an annuity.”
He added: “We have launched our drawdown product with all in costs, including asset management and the drawdown wrapper, at about 0.4 per cent. We are looking at the industry to deliver better value from drawdown.”
Groves said the next generation of at-retirement market solutions had evolved to offer flexibility, and was able to respond to retirees’ changing circumstances, including illness, increased longevity, or the receipt of inheritance.
“If your circumstances change you do not have to take the annuity income. It could roll up within the Sipp. You can turn that income off and, if you ever need to turn it back on, it’s there.”
James also called for the next generation at-retirement market to build annuities that better reflect retirees’ changing income needs. “I’d like to see more flexibility around the annuity market. Maybe an annuity where you have higher income at the outset which drops down when your state benefit kicks in. Or something that looks at help with long-term care later on,” James said.
However, there were members of the panel that urged caution in product innovation, noting any new offerings must remain simple.
Personal Finance Society chief executive Keith Richards said: “Complexity is where the pensions industry has got caught in the past. We overcomplicate something in the drive to innovate. People want more more certainty and effective solutions.”
Groves agreed and noted the need for simplicity was not restricted to consumers; advisers, too, had to be reassured about the move to drawdown and annuity hybrids.
“We were surprised at how simple products need to be. Even on the adviser side we discovered a lot of them found it difficult to get over the first step. They were asking ‘is it drawdown or is it an annuity’, as they always thought in those two distinct terms. It took a while to explain. We should evolve products in small, discrete steps,” Groves said.
Eversheds Consulting managing director for regulatory Simon Collins agreed simplicity was important, adding that providers needed to restore consumer faith in pension products.
“We need to find some products that have credibility and are trusted by the consumer,” he said.
Building on the importance of trust, the panel turned to the issue of including guarantees in any post-freedom and choice products.
Since consumers still want the protection of an annuity in retirement but were moving away from traditional products, the panel questioned the way in which guarantees could be offered in the future, with some speakers particularly worried about counterparty risk.
Jefferies said: “I am sceptical of guarantees and over the years I’ve seen so many that don’t work.”
Groves agreed, adding: “The stuff that makes me wary is the presentation of a guarantee that is not a guarantee, it is a hidden expense.”
To further protect both savers and the pension industry’s reputation, Jefferies also called for a cap on the amount savers could withdraw from drawdown products in a bid to limit the risk of ruin that comes through a combination of sequencing risk and high annual withdrawals.
“I would have liked a cap on the drawdown withdrawal to a maximum of 10 per cent because at least then hopefully you have got 10 years of pension that will last,” Jefferies said.
Hybrid products look set to grow within the at-retirement market post-freedom and choice, and providers are gradually coming to market with their next generation offerings.
These products will continue to evolve as more is learned about the demands and needs of future retirees but for the next generation of solutions to work, the industry must bear in the mind the need for flexibility, efficiency, and above all, simplicity.
By Gill Wadsworth - Money Marketing
30th November 2015