One provider has sounded alarm bells on a platform ‘capacity crunch' in the wake of pension freedoms. Jenna Towler finds out how platforms plan to keep up with drawdown demand
Standard Life is working on the basis that it will see a fivefold increase in demand for drawdown when pension freedoms kick in from April. The insurer predicts about 30% of retirees will opt for drawdown, compared to just 7% today.
Many of these will fall below the traditional £100,000 viability limit and could be non-advised, which bring its own set of separate challenges.
A fivefold increase in demand for drawdown, advised and non-advised, will no doubt be a challenge for advisers and platforms alike.
Standard Life head of adviser platform propositions David Tiller says platforms’ operational capability will be "sorely tested" come April 2015.
"Many platforms have yet to make the transition to fully clean and unbundled share classes, and are having to devote considerable resources to the ongoing conversion in the run-up to the sunset clause in April 2016.
"Having to also build additional scalability to cope with drawdown demand will put even more pressure on their systems."
Standard Life Wrap, according to Tiller, is already fully unbundled and has invested to automate and streamline processes to deal with increased drawdown business.
"There are a number of considerations for platforms when looking at supporting clients living off their portfolios in retirement.
"At a base level, it is about having industrial-grade straight-through processing. Information capture should be straightforward and review data instantly accessible."
He also says delivering against customer expectations is "paramount", so payment delivery is going to be vital. Therefore, having the ability to make payments on any day, and facilitate accurate PAYE tax calculations at source, will be all-important.
James Hay head of technical support Neil MacGillivray agrees efficient payment delivery will be key.
He explains that most platforms currently release funds on set days in a month. However, things will have to change once pensions freedom begins.
"People will want their money more quickly than that. The idea of giving people flexible access to money will become very important," he says.
Old Mutual Wealth retirement planning expert Adrian Walker agrees pensions freedom will increase pressure on platforms, but will also bring new opportunities.
"The Budget will clearly increase the number of people that look to draw their retirement savings gradually rather than initially purchase an annuity.
"However, we believe the changes simplify some aspects of the drawdown process, such as the need to periodically recalculate payments under capped drawdown.
"We are removing our drawdown charges following the Budget announcements to reflect this simplification."
Walker adds that Old Mutual Wealth is already offering many of the solutions that customers would be looking to use to facilitate pension income from April.
The firm is also looking to add more flexibility to allow customers "to tailor their retirement withdrawals to their needs".
Tiller sees the investment challenge in retirement as "fundamentally more complex, with the client likely to have short-term, medium-term and long-terms monies".
He explains: "These demand different investment approaches and need to be managed effectively, either within a single tax wrapper or across multiple tax wrappers.
"Advisers will gain considerable efficiency in their management of drawdown investments by being able to rebalance across different investment strategies to move assets from the long-term portfolio into the medium-term portfolio and so on.
"To achieve this, platforms will need to develop portfolio-of-portfolio functionality."
Walker also predicts platforms will gain from increased pension consolidation activity "so that people don’t have to inform other pension providers when they take withdrawals".
He adds that platforms also stand to gain from an increase on holistic planning for retirement income, including the use of ISAs and collectives.
"Managing both the investment strategy and wrapper strategy in delivery of long-term income will be easier from one place."
Against the clock
Announced in March and scheduled for the following April, the reforms have been described at coming in at "breakneck speed", and Walker agrees that deadlines have been tight.
"The industry has had little time to prepare for these changes. In reality, every provider will have to assess whether that resource is sufficient next April and adapt to meet the demand."
Aviva head of platform proposition Phil Ralli believes platforms that are active in drawdown will already have a good insight into how to efficiently administer the solution and therefore should be "well prepared for the changes taking effect".
"There may be increased customer interest in drawdown, but the industry will need to manage this as it arises in the most effective way.
"We believe one of the most critical factors is to ensure that consumers understand the changes and particularly the implications of the new freedoms."
Ralli says dealing with increased volume need not be difficult if platforms have planned effectively to cope with rapid growth. However, he warns that over-reliance on automation is the wrong way to go.
"While platforms quite rightly aim to maximise automation, process and systems, they still need to be managed by experts who understand what they are designed to achieve and who for.
"Part of this is ensuring documented processes and adequate system capacity are in place."
FundsNetwork head of advisory services Jon Everill welcomes pensions freedom and says the changes will bring bigger opportunities for advisers.
"The bigger opportunity here is that advising on retirement effectively will involve managing a customer’s assets across the whole range of their investments and tax wrappers.
"By bringing these together in one place, platforms will play a key part in what Fidelity calls ‘total retirement management’. Furthermore, platforms will be able to retain assets for longer, as annuities continue to reduce in popularity for some."
Everill says his operation is braced for increased demand: "There is a near-term challenge relating to customers who have deferred their retirement decision until April 2015 to take advantage of the new freedoms. In many ways, these are nice problems to have and we are staffing up to cope with the challenge.
"Like other drawdown providers, there is a need to upgrade systems and tools to reflect the rule changes and these are well under way. We are also increasing resourcing within our operational areas to meet the likely increased demand."
QS Financial Planning Certified financial planner Graham Bowser tells Retirement Planner in his opinion, any "capacity crunch" will be felt by clients at the lower end of the market, if at all.
"In practice, most IFAs will not be willing to engage with these 'extra' low value retirees who might want to extract funds or use drawdown because the regulatory/complance risk will be so much higher than is the case when dealing with people in the traditional drawdown market (those with £100,000-plus in pensions and have other savings/investments)."
He foresees the existing market continuing in exactly the same way that it does now, with perhaps a slightly higher proportion of mid/higher value retirees using drawdown or even with-profits annuities rather than a pure annuity.
But he adds: "The new wave of potential clients with smallish funds will find a capacity gap as there will be insufficient advisers willing to talk to them.
"Of course, some bright spark will come up with a direct-to-consumer solution that allows people to self-select (or be guided towards) a particular route that they may well find out a few years down the line was not really the ideal solution for them."
Barretts Financial Solutions IFA Kim Barrett sees opportunities from the new pension freedoms, but is not convinced smaller pension pots and drawdown mix.
He says: "A person with a small pension pot will usually not pay our fees. The practicality is that people at the lower level do not bust a gut to take out drawdown.
"But I might have someone who has £150,000 in ISAs, with a £30,000 pension. I would slip that on to a platform and run it as drawdown – why not? The combination of assets makes it financially viable."
He says his firm has a de minimus limit in play of about £75,000: "As a firm, I’m not going to chase assets below that as it isn’t worth it. Under the new regime, my expectation would be that we will have loads and loads of people who want to take all their money out – am I going to advise them? Not in the slightest.
"They could not pay me enough money to put my professional indemnity insurance at risk."
Turning the focus back to the advice space, Standard Life’s Tiller believes advisers face their own "inevitable" capacity crunch.
"Such a sharp increase in demand would test any market and we must assume this will apply to the advice market. In fact, it could be said that the adviser gap in the UK is at least as big an issue as the advice gap."
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