AKG's 2018 Pension Freedoms Paper, Grasping the nettle: Working together to achieve better retirement outcomes, outlines the direction of travel in the market, including the customer, adviser, provider and solutions landscape. The paper discusses key challenges and opportunities, old and new, for a range of market stakeholders and participants. The paper also illustrates, through market research, the thoughts, behaviours and requirements of customers and advisers.
In this feature, we summarise some of the key themes from the paper including some headline findings from the adviser market research.
Freedoms are good for business
Let's start with the easy bit. The pension freedoms changes have largely been good news for advisers. AKG's research showed that 77% of advisers are spending more time/resource on the provision of retirement advice since the introduction of pension freedoms.
Areas of concern for advice businesses
However, advisers are clearly concerned about the potential impact of Regulatory change/challenge (77%) and Political volatility (47%) on their businesses. Advisers also expressed concern about Investment volatility (59%), a recurring theme for the paper, and Capacity/resource for their business (28%).
New business sources for advisers – client segments
Predictably, finding it uneconomical to do so, advisers are unlikely to service those with retirement funds of £50,000. AKG's research indicates that the 'sweet spots' are those clients at retirement with funds between £100,000 to £250,000 and those with more than £250,000.
Acknowledging the changing profile of drawdown
Historically, drawdown business was conducted solely through intermediaries and with typical minimum product entrance requirements of c.£250,000. ABI data, however, now points towards an average drawdown fund of under £70,000. Drawdown is therefore being used by more customers with lower retirement funds than was previously the case.
Now, without the GAD framework in place for withdrawals, it will be interesting to monitor exactly how drawdown is being utilised by customers.
For example, has it been picked just because it is perceived to be more flexible than annuities? Is it being used to strip out cash, in a tax efficient manner, over the short- to mid-term? Is it being used for the provision of income over the longer term, to be underpinned by an investment portfolio? Or a combination of these factors?
And so, there is huge potential for advisers to deliver comprehensive and valued retirement planning services to clients, with many of these planning strategies involving drawdown. Advisers will need to use all their skills, and employ a range of solutions in their toolkit, to optimise these planning opportunities and achieve positive retirement outcomes for clients.
Understanding key planning concerns for advisers
But what is on advisers' minds in relation to their clients? In AKG's market research with advisers we asked, "What are your main investment/planning concerns for clients at- or post-retirement?"
The top four concerns were:
- 'Investment volatility' – 48%
- 'Running out of money' – 45%
- 'Sequencing of investment return risk' – 41%
- 'Longevity risk' – 36%
Some fundamental issues for consideration here, all arguably linked in some way to the sustainability of retirement funds. This will certainly remain an area of focus for the market, on both the adviser and provider side, during 2018/19 and beyond.
And for these reasons, despite the slightly low ebb for provision of such solutions post-freedoms, there is likely to remain a case for the role of annuities and other forms of guarantees in the market in future years.
From an investment perspective, the composition and performance of drawdown portfolios will remain front of mind.
Adviser requirements from providers
In AKG's market research with advisers we asked, "What are the key requirements for providers to be successful with advisers in the pensions/retirement market following the introduction of pension freedoms?"
The top five were:
- 'Service delivery standards' – 58%
- 'Range of product/fund solutions' – 54%
- 'Financial strength/sustainability' – 48%
- 'Digital/online capability and functionality' – 45%
- 'Technical support (tax/pensions)' – 33%
The importance of being able to deliver on core business competencies and disciplines is hammered home here for providers who want to be successful with advisers.
Identifying areas for development/improvement
AKG was also keen to explore with advisers where they would like to see further development or improvement. Our market research with advisers therefore asked, "In which areas would you most like to see further development or improvement in the pensions/retirement market during 2018/19?"
The top five were:
- 'Drawdown products' – 46%
- 'Guaranteed capital/income solutions' – 31%
- 'Cost of products/funds/portfolios' – 29%
- 'Digital/online capability and functionality' – 25%
- 'Value of products/funds/portfolios' – 24%
Despite the early dominance of drawdown post-freedoms, advisers want to see further product development. It is also interesting to see potential appetite for development or improvement in guaranteed capital/income solutions.
It is unsurprising to see a focus on cost and value of products/funds/portfolios given the regulatory focus on value for money. We will continue to see pressure on cost across the value chain, especially on the wrapper and investment management components of drawdown.
Improved digital/online capability and functionality is flagged here, as well as in the findings about adviser requirements from providers, and so businesses simply cannot afford to underestimate this requirement to invest and progress capability in this area.
More experience to be gained
Without exception, the pension freedom changes caught people by surprise. The changes have also coincided with a wider period of regulatory and political change and challenge. So, what we have seen initially is three years of adjustment to the new freedoms with further work to be done in 2018/19 and beyond.
The number of 'baby boomers' approaching retirement is well documented, many of whom are yet to make their retirement decisions. Advisers and providers across the market must therefore continue to learn quickly from those customers experiencing the initial stages of pension freedoms to better target future business opportunities and enhancements to services.
For a variety of reasons, the pensions/retirement market has become, and will remain, a fascinating place in which to transact business and to serve customers over the coming years.