Annuity market predicted to halve in size following Budget changes, finds new Dunstan Thomas poll
17 September 2014
Over three-quarters (77.4%) of retirement product
providers predict the annuity market will be
significantly smaller by the end of next year, according
to a new poll conducted by retirement solutions provider
Dunstan Thomas. Findings reveal that over half (51.6%)
of providers think the annuity market will be 25-49%
smaller; while a further quarter (26%) think that the
market will be cut it in half – reducing by 50-74% by
the end of 2015.
Guaranteed guidance
widely criticised
HM Treasury’s offer of
Guaranteed Guidance (extending to face-to-face advice)
for all those considering ‘liberating’ their pension pot
from April 2015, was also widely criticised by
providers. Furthermore, 71% of providers think George
Osborne should never have offered this measure without
proper consultation with the market.
Simplified Advice definition higher priority
One potentially positive outcome from this failure is
that it should accelerate the FCA’s plans to define
Simplified or Guided Advice as the ‘middle way’ between
full face-to-face advice and non-advice-based financial
decision-making. Three-quarters of providers (74.2%)
believe this will be the outcome and judging by the
industry bodies’ recent output as regards resourcing
this guidance, it is clear the momentum and will is
there to define Guided Advice.
Drawdown
changes criticised
Nearly a third of
providers (29%) also questioned the wisdom of dropping
all limits on drawdown from April 2015. One in five
(19.4%) gave the thumbs down to reducing flexible
drawdown’s MIR (Minimum Income Retirement) to £12,000
per annum (from £20,000). However there was broad
support for other reforms announced in the budget as
most agreed that reforms were needed and saw the Budget
changes as the beginning of the process.
Blended product innovations predicted
Two
key changes to the annuity market were predicted as a
result of making their purchase voluntary: over half
(55%) predicted an explosion of innovation in blended
annuity/drawdown and other hybrid retirement products.
Less positively for the industry, over a third (35.5%)
took the view that retirement age individuals would put
off annuity purchase until much later in retirement.
Disappointingly for consumers and the Government alike,
few providers (3.2%) expected the change to lead to
increased sales of enhanced annuities and none thought
that it would lead to all annuities being fully
underwritten – outcomes which could lead to better
annuity rates for customers.
Mis-selling
allegations set to rise as money runs out
The largest concern of providers (stated by 32% of them)
associated with the Budget reforms is that there is a
‘need for very rapid product innovation as at-retirement
flexibility becomes the key requirement’ driving the
market. Nearly a third of providers (29%) said that they
feared ‘Being exposed to increased risk of mis-selling
allegations when retirement funds run out’ (for those
raiding pensions early). Understandably the next largest
concern (for 25.8%) was resourcing Guaranteed Guidance.
Other more general market changes which were
predicted by providers this year included:
Increased
sophistication of at-retirement options on platform (for
42%)
Increase in the number of Execution Only (D2C)
platform offerings (for 22.6%)
Fall of
non-Auto-Enrolment (AE) Personal Pensions sales (for
19.6%)
Widespread SIPP consolidation
threat receding
More surprisingly, only 6.5%
of providers placed consolidation of SIPP providers as
#1 in list of changes that are most likely to happen in
2014.
Less than 10% of providers will leave AE market
in next 18 months
Providers seemed unsure of the
impact of AE as it expands exponentially this year and
next. For example one fifth (19.35%) believe it will
affect them at some point but have no idea when. Only
6.5% predict that they will need to pull out of the AE
market this year and half that number (3.2%) believe
they will need to pull out by the end of next year;
whereas 32.3% think it will have no impact on their
business and a further 38.7% are totally unaffected
because they are not serving the AE market.
AE Capacity Crunch will hit smaller employers
and TPR first
Most providers believe that
the focus of the AE capacity crunch will lie elsewhere:
58% predicted that smaller employers (mostly reaching
their staging dates this year and next) will struggle to
meet deadlines for enrolment. A further fifth of
providers (19.4%) believe that The Pensions Regulator
will run out of capacity to handle enforcement of
employers which have failed to join on time. Over 16%
are AE capacity crunch deniers – believing that it will
not prove to be an issue in 2104 at all. A small
minority (6.5%) believe NEST will be the only AE product
offering left in the market as other providers exit.
Providers back AE charges cap
The majority of providers (55%) back the setting of AE
scheme charges cap at 0.75%: 19.4% back it outright
while a further 35.5% support it with the proviso that
providers are allowed to apply for permission to
increase charges in order to offer specific
products/funds.
Online & interactive blended retirement
illustrations needed
The Dunstan Thomas poll
also gauged reaction to mooted suggestions for how
providers and advisers might help customers understand
their options at retirement and make better informed
decisions as a result:
1. Making pensions
illustrations much more interactive – encourage people
to play with scenarios and educate themselves online in
the process – backed by 38.7%
2. Improving pensions
and investment education for all – backed by 38.7%
(equal top priority)
3. More effective blending of
illustrations so that annuity and drawdown mixing can be
better understood – backed by 16% of providers.
Pot follows proposals only win over less than
half of market
Providers gave lukewarm
support to the DWP’s ‘pot follows’ member proposals:
64.5% thought the £10,000 small pot size limit was set
correctly. However less than half (45%) agreed with the
concept of automatic transfer of small pots to new
employer schemes and only slightly more (48%) thought
small pot transfers should be unadvised. Only 16% agreed
that legacy (non-AE) pots should be excluded from this
arrangement.
Provider and platform charges still falling
Finally, providers believe that provider and platform
charges are still falling: 39% believe pension provider
charges are falling, 35.5% believe platform charges are
also continuing to fall and 22.6% believe retail
investment product provider charges are still falling.
39% also believe fund manager charges are falling as the
impact of charges transparency and platform regulation
associated with RDR continues to be felt amongst
providers and distributors alike.
Chris Read, chief executive, Dunstan Thomas,
commented on the findings: “Provider reaction to seismic
at-retirement reforms dropped on them by the Chancellor
in this spring budget has been more muted than one might
expect given the dramatic impact it is likely to have in
specific product areas like annuities. We believe that
the industry knew that reform was badly needed and these
changes, like AE, open up a real opportunity to
re-engage current and future generations of retirees in
building well-resourced saving pots for retirement. This
is something which is desperately needed if we are to
avert a looming retirement savings catastrophe.
“The development of more
interactive, blended online retirement illustrations and
scenario planning tools, will be one aspect of a
kaleidoscope of positive changes which will emerge from
the rubble of market reforms being forced on the market
over the next year.”
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