The major factor impacting the health of the annuity market is the retirement of the ‘Baby Boomer’ generation1 which is now underway, the survey found of more than 400 providers found.2 This perhaps explains why nearly half of providers (42% of the sample) think the annuity market will remain at the same size despite the fact that compulsory annuitisation aged 75 years was scrapped last month. A small group (6% of the sample) even believe the annuity market will now increase in size.
The abolition of compulsory purchase of annuities at the age of 75 years will be the most beneficial pensions reform for providers’ businesses longer term, according to 58 per cent of pensions providers surveyed during April 2011.
When asked whether wrap platforms should offer annuities, more than two thirds (68%) of providers responded positively. This corresponds with a separate survey of advisers which found that nearly two thirds (64%) would buy annuities if they were available via their chosen platform.
Providers have a great deal of change to prepare for over the next 12 months. Just over a quarter (26%) predict preparations for auto enrolment will be the single most expensive reform to implement this year while the same percentage predicted Disclosure of Effective Deductions on product illustrations will be the most expensive change to bring in. Elimination of commission payments demanded by the Retail Distribution Review (RDR) was predicted to be the most expensive change to make, by one sixth of providers (16%).
Nearly half (42%) gave the pensions reforms of the new Coalition Government to date the thumbs up, although a larger group (55%) said that it was ‘too early to judge’. When asked what the overall ‘long term impact’ will be of all the current pension reforms the overwhelming majority (55%) said that they felt the changes would make for a healthier market in which their businesses could do better than in the previous regime.
Nearly half of respondents (48%) also said that they felt that the changes would help get more people actively engaged in planning and preparing for their retirement. However more than a third (39%) of respondents was less sure – indicating that the changes would increase compliance costs and thus reduce margins. In responding to a separate question nearly two thirds (61%) said that the changes were killing product innovation in the market.
An investigation of changes being forced upon the industry from Europe, found that the European Court of Justice’s ruling that pricing insurance contracts based on gender is in breach of gender discrimination law was the most unpopular European legal ruling -71% of providers saw as a negative development for the market. The second most unpopular upcoming change is linked to the MIFID Review which threatens to tighten the description of non-complex financial instruments that can be traded in an execution-only environment to the point where execution-only business could be restricted markedly.
Very nearly half of providers (48%) predict that by the end of 2012 more than £300 billion of assets will be held on wrap platforms up from approximately £110 billion today. This is a major revelation given the fact that many of those assets are going to be migrated from legacy policies run by many of the life assurers being questioned and it indicates a near tripling of assets under management in the next 18 months.
Providers’ reactions to the wrap revolution are varied. In an open question providers were asked all the key strategies they are adopting to take advantage of the wrap platform revolution. Over a third (35%) are building their own platforms. A smaller percentage (16%) are white-labelling an existing wrap platform in order to outsource administration, asset custody and business processes while getting to market rapidly. One in five (19%) plan to unveil a Direct to Consumer platform – following the success of the likes of Hargreaves Landsdown. Nearly a third (32%) have deepened relationships with one or two specific platform providers. The largest percentage of all (39%) is investing in improving systems and processes to automate transactions that operate through all key platforms.
Chris Read, chairman, Dunstan Thomas, commented on the findings:
“These are interesting findings at a time of a great deal of change for the industry as reforms take effect. Changes always create opportunities and the changes in both at-and post-retirement landscape look particularly interesting as more and more Baby Boomers head into retirement over the next few years.
“The outlook for the annuities market for example is not as negative as it might appear given the abolition of their compulsory purchase at age 75. And the fact that there is a healthy appetite for purchasing annuities via wrap platforms, is very interesting for technology providers like us that provide IT systems which underpin many of the administrative processes around such transactions on and off platform.”
Based on answers given by providers Dunstan Thomas has created a league table of most unpopular reforms and those that providers think will be most beneficial to customers going forward.
Dunstan Thomas Pensions Reform League Tables:
|Most unpopular reforms for providers||Reforms which will help the customer the most|
||Fall of Lifetime Allowance||Unbundling of charges|
||Fall of Annual Allowance||Auto enrolment|
||Disclosure of effective deductions||Abolition of compulsory annuities|
||Solvency II compliance||Disclosure of effective deductions|
||Auto enrolment||Solvency II compliance|
||Unbundling of charges||Fall of Lifetime Allowance|
||Abolition of compulsory annuities||Fall of Annual Allowance|
Notes to Editors
1 Baby Boomers are generally agreed to be those born between 1946 and 1957 when population increases through births were consistently high after the Second World War. This population growth was sustained for more than 10 years on both sides of the Atlantic. Somebody born in 1946 will be 65 years old this year.
2 Dunstan Thomas commissioned Agility PR to fulfil the above survey of 402 pensions providers. Agility PR sent the questionnaire electronically and obtained a 7.7% response rate – a total of 31 fully completed questionnaires collected between 25th March and 19th April 2011.