Industry experts discuss some of the issues highlighted at our recent Retirement Planner Forum event
Bernard Footitt is technical support manager at Canada Life
Bernard joined the industry in 1986 at Barclays Life. From the start, he has always had an interest in pensions, and has maintained that from a variety of perspectives; sales, business development, compliance - review (new and past business), complaints investigations - technical and marketing support.
He joined Canada Life in April 2007 becoming immediately involved in the re-launch of the flexible lifetime annuity product. His role has expanded to marketing technical support in addition to supporting the company's distribution network.
Kim Lerche Thomsen is chief executive officer at Living Time
Living Time is a new financial services company set up to provide much needed innovation to the retirement income market.
Prior to setting up Living Time, Kim spent most of his career at Prudential where early pensions actuarial roles were followed by general management positions. He set up and managed Prudential Annuities growing it to become the largest annuity provider in the UK. He subsequently expanded Prudential Annuities operations into the bulk buyout market, establishing it as one of the leading players.
Kim then became chief executive of Scottish Amicable and led its integration into the Prudential. After leaving Prudential he became chairman of a managed assets company and then set up Living Time.
Jane Wheeler is principal at Direction Financial Planning LLP
Jane Wheeler FIFP CFPCM APFS is principal of Direction Financial Planning LLP, a fee-based financial planning practice in Taunton, Somerset. She has 20 years of experience in advising clients across the spectrum of financial matters.
Her practice focuses on a small number of high net worth clients, forming strong, long term relationships with them. Jane works as part of a team including a fully qualified paraplanner and clients are encouraged to get to know the team.
Jane has long been a strong believer in comprehensive financial planning in preference to product sales led advice. She believes that client service and real financial planning are the keys to the success of a modern financial advisory business which is synonymous with providing clients with the advice they are really looking for.
Jane served as President of the Institute of Financial Planning and the UK delegate to the international Council of the Financial Planning Standards Board for two years until October 2008.
How have you seen the at-retirement marketplace evolve? What are the main challenges that you think it faces?
Footitt: I think that there are probably two main evolutionary trends. Firstly, the disappearance of the 'cliff edge' retirement coupled with a generally later age at which people access their pension pots as income. For example, about 1.2 million people past the state retirement age are still working and this may account for the increase in the numbers accessing their pension commencement lump sum while leaving their residual fund in reserve and still fully invested.
Secondly, there are more people relying on defined contribution (DC) arrangements to accumulate retirement savings. This means that the individual is taking on the risk of not accumulating enough capital so as to replicate the defined benefit (DB) final salary model of the pensions of yesteryear. When it comes to their 'at-retirement' options, people have to be more flexible about when they take their benefits, and face the actuality of lower retirement incomes that have to last longer.
The main challenges to the providers are to offer a greater variety of retirement income vehicles that can be 'mixed and matched', and provide that income for longer.
Lerche-Thomsen: The at-retirement market has changed significantly in recent years. The introduction of fixed-term annuities and now the so-called 'third way' variable annuity products has opened up a new dimension of choice to retirees.
However, this choice does not seem to be filtering through to consumers as we are still seeing lifetime annuities accounting for nine out of every 10 'at-retirement' contracts sold.
We see this as the biggest challenge currently facing the industry. While lifetime annuities are the right choice for many (and virtually the only choice for those currently aged 75), they cannot be right for 90% of retirees. It is clear that many of these people are not exploring all the options open to them and instead are basing their decision on a limited range of choices. Too often, these are the choices presented to them by their pension provider, which are geared towards simply presenting the best possible income rate and not based on the needs or personal circumstances of the consumer.
Without advice or clear, unambiguous signposting of the other options available, too many consumers are locking themselves into contracts which are either wholly unsuitable to their needs and tolerance to risk, or which can never be changed no matter what happens to the client after they have signed on the dotted line.
Wheeler: In the many years that I have been an adviser, I have seen a number of changes. Years ago clients were pleased with the returns that annuities offered although many disliked the restrictions and the death benefits: over time annuity rates began to fall, increasing frustration.
When drawdown was first introduced, people piled in, many inappropriately, and of those that lived many regretted it! (The families of those that did not live, of course, may have benefited from the arrangement.)
In the swing back to annuities, rates continued to drop: changing economic circumstances and increasing estimates of longevity have pushed annuity rates further down to the point where this option is unattractive to many. At the same time many remain wary of drawdown which, in my view, is unsuitable for most people in ordinary circumstances. The new products that are coming on the market are attractive to some but are still complex and do not yet provide the answer for everyone.
As the at-retirement market develops, more and more people will be looking to phase their retirement, perhaps working part-time or in less well paid jobs, as they get older. They will be looking for retirement products that offer flexibility, transparency, simplicity and value for money but they will not necessarily have sufficient other assets or stomach for investment risk to make them suitable candidates for unsecured pension.
We have seen increased movement towards enhanced annuities and postcode related annuities over the past year - what do you think this is indicative of? Do you think for instance it's a movement towards a more personalised service where people get an annuity more tailored to their specific circumstances?
Footitt: Much as I am a fan and advocate of annuities as the main income stream generators in retirement, I have to say I think that annuity rates are quite a blunt instrument. I also think that it is because annuities give people the greatest degree of certainty that there has been this recent surge in specialist annuities.
So medical, life-style, postcoding and increased longevity is bringing about a refining of that blunt instrument with providers offering a far more person specific annuity rate, and that this will continue in the future.
Wheeler: The increase in enhanced annuities reflects the search for better value in annuities for many which is likely to continue. I do not see this as a conscious move to personalisation: clients perceive it as a 'bonus' which they are very happy to accept.
One wonders what the longer term effect on standard annuity rates is likely to be since enhanced annuities, in theory, remove those with shorter expectation of life from the general annuity pool leaving only those that represent less 'profitable' candidates for the general pool.
As to postcode annuities, I cannot see these being a long term solution for providers. The mobility of the population is such that annuitants are increasingly unlikely to grow up, retire and remain in the same postcode: perhaps it will be come tempting to move to certain postcodes in order to benefit from the best annuity rates and then move away again!
What effect do you think the FSA's thematic review of the open market option will have on the annuity market? Do you think providers are heeding the FSA's advice?
Lerche-Thomsen: We welcome the FSA's thematic review of the open market option (OMO). Thirty years after its introduction, it is clear the OMO is failing to secure greater choice for consumers with over 90% still opting for conventional annuities despite the plethora of other options available to them. The reason for this failing is complex - of course it is not the OMO itself but rather the way OMO is presented and explained to consumers that is at the root of the problem.
The FSA has already recognised this fact when it recently expressed its 'disappointment' that 40% of provider 'Wake Up Packs' failed to comply with TCF principles in terms of signposting the OMO.
We began our 'Offer More Options' campaign to reinvigorate debate around OMO and the need to put advice and financial advisers at the heart of better consumer choice. We believe all consumers - regardless of the size of their pension pot - deserve better information and advice at the point of retirement. For many, a pension fund will be the single biggest investment asset they own (after their house) and to allow hundreds of thousands of retirees to invest billions of pounds each year without proper advice or without exploring all the options available could - one day - be regarded as one of the biggest missed opportunities for consumers in the financial services industry.
Wheeler: It seems that the review is already being effective in forcing some companies to highlight clients' rights to them. More annuity purchases coming to open market should, if anything, increase competitive pressure on annuities.
What changes have you seen in how income drawdown is being used?
Lerche-Thomsen: Anyone invested in conventional drawdown in recent months will have seen the value of their pension fund dip dramatically - perhaps as much as 30% or more - and this will inevitably have an impact on the level of income they are taking from the fund.
The introduction of new products to the market written under unsecured pension (USP) rules but with some of the guarantees and security of a traditional annuity has opened up a new avenue of choice to consumers who previously would have avoided conventional drawdown because of the investment risk and effect of higher charges, especially those with pension funds of less than £100,000.
For example, Living Time's Fixed Term Annuities are written under USP rules and allow clients to take income up to 120% of GAD for terms of five years or more (up to age 75).
However, there is no investment risk involved and providing the client survives until the end of the term they will receive a guaranteed maturity amount (known from outset) to reinvest in another appropriate pension product of their choice. This gives clients the benefits of drawdown - a flexible income without being tied in for life - with the peace of mind that their remaining fund is safe from the vagaries of the stockmarket.
How do you see the third way market developing in the UK over the coming years? What space do you think it will operate in and who do you think they are most suited to?
Footitt: I believe that all the noise in the marketplace surrounding the so-called third way is at the pension income end of the market. Far from mitigating the risks of drawing income directly by cashing asset-backed investments, the cost of the guarantees increases the risks of fund exhaustion before the owner dies. To quote Tom Boardman of the Pru, "you can't magic (...) the risk away".
A major factor challenging the ingenuity of making these third way products work is the small size of most pension funds coming on stream, therefore annuities will predominate in the UK market for decades. There is also a mature market for hybrid annuities in the UK, to answer some of the drawbacks of having to make one, irrevocable decision about retirement income at the relatively early age of 60 to 65.
These products range from investment-linked annuities through to rolling five year cyclical tranches of immediate income coupled with the opportunity for investment growth in the residual pension fund. This gives certainty of income for five years with multiple options at each five year review to change the levels of income secured for the next five years as well as changes to dependant annuity benefits. There is also an option to secure a full conventional or enhanced annuity at a later age when the benefit of cross-subsidisation is significantly better.
Where I think the third way product model does have an impact is at the fringes of income generated from capital liquidisation, that is as a single-premium investment bond with guarantees where HMRC seem quite relaxed about treating the '5% for life' guaranteed income as purchased life annuity income taxing only the deemed interest element of each payment.
Lerche-Thomsen: Our belief is that the market for products sitting in between the extremes of conventional drawdown and traditional lifetime annuities is huge. The scope for new innovative products should ensure that consumers are better served, providing that all the key stakeholders in this industry work together to help deliver better information and advice to them.
Our view is that the days of the lifetime annuity are numbered. They will remain a core product solution for those seeking an absolute income guarantee, but the stranglehold they have on the market is beginning to loosen. As more new products enter the market that offer greater flexibility and choice to consumers, the logic of locking in to one contract for life will become harder and harder to justify, especially if longevity continues to stretch the 'average' retirement lifespan.
'New way' products, rather than 'third way', will become the norm. With the size of the at-retirement market set to double as the baby boomer generation reaches retirement age. The outlook for consumers and advisers is very encouraging, providing the industry can rise to the challenge and ensure that consumers across the wealth spectrum are offered the information and advice they need to make informed choices.
Wheeler: Third way products are, of necessity, complicated: they attempt to provide a solution to a highly complex situation. If people need simplicity, they are still stuck with traditiona- annuities. The products currently available are relatively new in the market and the providers have as yet had little experience of them. My feeling is that guarantees are priced highly partly due to the fact there is little experience as yet but also because there is a perception that clients are willing to pay for guarantees in this uncertain world. I imagine that as more products come to the market, competitive forces may drive down these costs.
In any event these third way products are likely to remain costly for the mass of people with very small pension funds. The market is likely to remain for those with fairly substantial funds or as part of the solution for those with larger funds.
What gaps do you think currently exist in retirement provision - for instance why is there such a lack of products to help finance long term care?
Footitt: I do think that the greater gaps in retirement provision do appear in the non-pension segment of financial services for the 50+ market. We need more novel products of the 'deferred annuity' type to cater for liquidity needs as we get older. Some models of income patterns in retirement point to the need for higher and increasing income in the early years of retirement - the 52 week a year holiday entitlement period - peaking at around age 78 with a levelling off from then on.
It is arguable that liquidity as opposed to income needs kick in at that time, such as long-term care needs. There is one new provider bringing a product to this end of the retirement phase with a longevity income plan that purchases a future income after a minimum period of non-pension capital investment.
The message to us all is "Can we please have more of these - and quickly!"
Wheeler: What is really missing is planning for retirement, not merely more retirement products! Increasing numbers of people are arriving at their long-awaited retirement date without having made sufficient provision and without having any understanding of how they could combine their various assets to provide for what may be a very long retirement. Pension planning is only part of the necessary provision for retirement.
The impact of increasing longevity, while reflected in current annuity rates, has still not been felt by most people. Products such as that offered by Life Trust go some way to provide protection against falling real income in old age but are not a complete solution although helpful for some.
Long term care insurances were withdrawn from the market, one assumes, because the insurers could not make profit from them: a return of these policies would be welcome to many but only if they could be provided on a guaranteed, rather than reviewable, basis as the latter defeats the purpose. The annuity debate will remain with us and will become more pressing as personal accounts are introduced. I feel that for those in personal accounts, a return to the old guaranteed annuity style plans would be welcome so that people's contributions would 'buy' a guaranteed amount of income each year from retirement date. This would be far more attractive than the usual money purchase arrangement which offers nothing but unknowns to the member: this is particularly unattractive to those on lower incomes without other assets to compensate for poor returns from pension plans.
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