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:

At Dunstan Thomas we are always interested in the regulator’s involvement in this part of the market. Our Imago Front Office product is invariably affected by these. The outcome of CP11/03 will have an effect on Imago , which of course will affect your usage.

In this article we look at some of the key features, an opportunity to work closer with Dunstan Thomas and the regulator, and an opinion on the impact of these changes.

Here are some of the key features of the CP 11/03:

Cost comparisons

To ensure that firms give consumers enough information about a product’s charges, risks and main features to enable them to make an informed decision. This should be done in a way that makes it easier for consumers to compare similar products. Where reduction in yields are shown, they must be shown for product charges and for charges overall.

The example table in the consultation paper shows how the effect of charges table must change to show:

1.       product charges as a distinct column to total charges,

2.       to provide better explanations for the tables,

3.       use of more descriptive headings,

4.       reduce the length of the tables, by requiring rows only for the year of the chosen retirement date and the first five years of the pension.

These changes are to be made to new business as well as in-force illustrations. The consultation paper lays out some examples. The table below shows an example of the columns proposed for disclosure.

RDR, charges and costs comparisons

RDR rules on adviser charging, ban the payment of commission for advised sales of investments and personal pensions (including SIPP). Product providers that facilitate payment of adviser charges and consultancy charges will be required to describe product and adviser charges separately. The new format for the charges information will need to show the effect of each type of charge in the ‘effect of charges’ table and ‘reduction in yield’ information.

It is believed that these changes will enable consumers to compare product charges on a consistent basis and understand the effects of payment through the product in comparison to payment of the adviser charge separately.

What is a SIPP

The consultation looks to clarify what a SIPP is and in turn improve scheme disclosure. Effectively the definition of SIPP will include any pension product that allows fund or asset class choice. The consultation paper shows some interesting market data that approximately 150 companies are active in the pension market.” The top five pension providers account for more than half the market by number of sales and, together with the second tier providers, cover more than 80% of the market. The small providers share just under 20% of sales.” The FSA estimates that the costs on average of these changes are £775,000 per provider. Clearly users of Imago Front Office will have these changes delivered through the licence fee.

Forthcoming changes will look to:

1.       amend disclosure for SIPPs containing commercial property, commodities, ETF’s and shares,

2.       disclose bank interest on cash held in the SIPP,

3.       the importance of RIY as a method for comparing charges.

Interest

Where interest is retained, it must be disclosed alongside information about charges payable and bank interest rates. By disclosure, this would infer a consumer’s consent of the arrangements provided by the provider and administrator. These rules come into force in April 2012.

Generic illustrations

Generic illustration usage is to be discouraged due to the need to reflect the range of different charging arrangements possible. There are some cases where charging in GPPs is consistent. In these cases generic illustrations will be allowed.

Harmonising projection assumptions

Ensuring there is harmony between projection assumptions made for SMPI (7% less 2.5% for inflation) with other types of illustrations.

Inflation adjustment

Inflation-adjusted projections for pensions are to become mandatory.

In partnership with Dunstan Thomas

The consultation process ends on the 3^rd May. We are happy on behalf of our customers to respond to the consultation process. If you would be interested in Dunstan Thomas participating, please do hesitate to contact me, Chris Read, on cread@dthomas.co.uk, whereupon we can review and respond to the questions that the consultation paper poses.

Our opinion

Whilst we welcome these changes in disclosure, ensuring that all providers of pension products illustrate and disclose on the same basis, the devil is in the details as always.

An area that comes readily to note is in the use of RIY where it is being used in pension arrangement that covers more than one type of asset class. In the example that the FSA uses, they show an illustration with a UK equity fund and a UK bond fund. Each of these funds show differential charges as expected.  Both of these funds will project at different rates respective to their asset class performance.

RIY figures are sensitive to the projection rate that is used. Without, therefore assessing the impact of RIY on each fund, and the standardisation of each projection rate that a respective asset class can use, the consumer will be misled when it comes to product comparisons, let alone fund comparisons.

To disclose standardised fund based RIY seems to be the way to go. The challenge arises in it being able to disclose this information so that is clear and concise and easily understood by the consumer.

In a recent Tweet (23^rd October 2010) I quote Samuel Johnson, “I did not have time to write you a short letter, so I wrote you a long one instead, the new disclosure regime http://tiny.cc/bgogc”. The idea behind the Tweet was to initiate a thought process that redefining disclosure will require a product that delivers clarity and consistency to understand but completeness to ensure inclusiveness.

The report concludes that there was a general lack of customer  focus on platform output that effectively did not comply with COB rules and TCF outcome 3 (‘consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale’) The GAPP report outlines good practice and poor practice. I will endeavour to summarise the key points.

1.       Ensure adviser related literature is labelled clearly and not intended for consumers.

2.       Ensure adviser related literature is sufficient, appropriate and comprehensible.

3.       Pay regard to the target market.

4.       Provide material in a fair, clear and not misleading manner.

5.       To conduct consumer testing to test the suitability of information.

6.       To provide consumers information that in the case of a multi fund product solution, is consolidated.

7.       To produce a quantity of information that is commensurate to consumer attention and understanding. An example of this would be to ensure that there is only single KFD document to cover product solutions, and to ensure that this is focused and relevant to the respective funds being disclosed.

8.       To provide a clear and balanced view of risks and benefits of the product.

9.       Layering in the form of providing separate addendums for amended and new information should not be provided.

10.   Disclosure must show fundamental information about:

a.       what a platform is,

b.      how the platform works,

c.       types of products/wrapper available.

11.   To ensure the quality of the disclosure material matches the quality of the marketing material so that consumers will be inclined to read both.

12.   Charges information should not be scattered throughout the disclosure document.

13.   Charges information should be contained within an easy to find section.

14.   Structure text to include headings and sub headings to make it easy to read.

15.   Signposting in documents can be used so long as delivers clarity and relevance.

16.   Apply plain language, for instance

a.       use the word charge rather than commission,

b.      do not use the phrase ‘investment money’

c.       do not use the phrase ‘other charges’ or ‘additional charges’, use language that is precise.

d.      do use the phrase ‘time to time’ in the context of describing charge frequency.

17.   To clearly lay out the parties payment (through the parties of platform and adviser) and provide lines of as well as total cost.

18.   Use consistent language to describe an investment manager or fund manager.

19.   Provide clarity on whether cash balances held in accounts are party to the respective charges.

20.   Make the overall costs of the solution clear using a RIY figure.

21.   Separate charge disclosure can be used where the consumer perceives the product solution to be a separate product solution to other products that may be held. For instance a consumer holding a SIPP may require for this to be disclosed separately.

A further quote attributed to Samuel Johnson, “Your manuscript is both good and original. But the part that is good is not original, and the part that is original is not good.” At Dunstan Thomas a principle part of our business is in the design and development of disclosure literature through our Imago Front Office platform. It is vital to our clients and ourselves, that the regulator provides guidelines in that there is no ambiguity, so that clarity, consistency and completeness can be  provided to the production of disclosure material.

As a consequence of these changes, Imago will produce the information required to be submitted to PAYE online instead of currently where the paper versions of the P45 and P46 are displayed.

So for the P46, Imago will print a report rather than the P46 form; and for the P45, Part1 will be replaced by a report. This will allow our clients to enter the information online.

Historically, when there were several different higher rates of tax, a number of “D” tax codes were used – D0 (which is still in use), D1, D2, etc. HMRC has since announced that, from the 2011/12 tax year, D1 will be introduced and issued on P9 coding notices in advance for employers to apply from the start of the tax year.

As a consequence of these amendments we are ensuring that Imago can accept and calculate the new tax code accordingly.

Personalising
The world of illustrations as existed to date is in isolation from the person’s individual circumstances and financial profile apart from establishing the very blunt instrument of judging attitude to risk and selecting funds according to whether you are intrinsically cautious, balanced or adventurous/high risk taking. What we now need to move to is a world that is much more joined up. Questions such as what effect would the selection of this product have on my overall wealth at 50 and/or my retirement income need to be asked? With this holistic view, I might, with my adviser perhaps, do more intelligent planning before buying. I might make different types of decisions about how I take income at retirement.

You might combine drawdown with an annuity – take some early income via drawdown and buy an annuity later, for example. In this way we gradually move to a world which is less product-centric and more holistic and geared to people’s own life plans. It ceases to become as important that you have a SIPP providing the drawdown portion, a stakeholder targeted at creating an annuity, a discretionary trust delivering income for your grand children’s private school fees. It becomes more about the end rather than the means to that end. The trick here is that we finally could get to the point where people will get more actively engaged because they are realising their dreams rather than buying a pension.

To achieve this, the illustration process needs to capture (or at least transfer data on) a great deal more information than is collected even in the Fact Find process today. But finding out the value of multiple assets today demands often labour intensive Contract Enquiries which can take several weeks. More business process automation is needed to streamline and automate this process.

But moving to a more holistic view is all very well but how do you make sure you are buying the right product to fill that defined financial gap. We believe you actually are going to need to step back into a multi product illustration where, if say you are looking for a SIPP to deliver drawdown of X in four tranches from age 50 to 60 you need to be able to look at different SIPP providers drawdown offerings, make fund selections, model what would happen in the situation where this specific asset was moved into this specific SIPP. Once you have planned all this you want to be able to benchmark one product from two or three others, comparing them on different measures like projected performance, range of asset options, Reduction in Yield and so on.

The illustrations process still needs to help direct funds to specific financial tasks. The ability to plan across a whole portfolio for different income retirement strategies, based on different attitudes to risk, is key. Delivering all this in a way that consumers can use it to make an educated decision in discussion with their adviser, is also critical.

A new breed of planning tools
To this end, developments are already underway notably in the employee benefits space to create online tools which make it easier to model retirement/benefit scenarios. Take JLT’s BenPal employee benefits tool. Essentially this gives you the option to dynamically play with various scenarios on screen. So if I continue to put X into my DC pension from age 30 to retirement at age 65 this will, bearing in mind the effects of charges, generate an annuity of Y.

If I stave off retirement and carry on paying into the pension until I’m 67 then the pension will generate Z. This is all presented in a highly graphical, bar chart form which can be delivered to any internet connected device, even downloaded from Apple’s AppStore. It is these sorts of tools which make this information much more accessible then current illustrations documents. These sorts of tools definitely help visualise and simplify delivery of information.

One route into this is for the industry to rally around the idea of stimulating people to investigate their net worth at the same time as other routine financial check-ups such as downloading personal current and savings account statements through their bank’s website. Can the short and the long-term financial positions be brought together on one screen if needs be? The technology is already there to offer this. There are many financial planning tools like Voyant (See: http://www.planwithvoyant.co.uk/content/ukpro/home.html ) and Distribution Technologies ‘Dynamic’ family of tools http://www1.distribution-technology.com/ which offer this sort of holistic view focusing on life events like retirement, payment of university fees for your children etc. Although they rely heavily of manual inputting of financial information at this stage, they do illustrate what is possible if financial adviser, product providers and administrators were to run with this vision.

Dunstan Thomas is looking to incorporate a number of online financial planning environments into its current offering for pensions providers and predicts significant improvements and integration work will go into these to make them more powerful for personal financial planning. The ultimate test will be when these tools are accessible via multiple and disparate channels – ATMs, mobile devices and the PC -so that policyholders that cannot afford hands on independent financial advice can do some self service without exposing themselves to substantial financial risk in so doing.

Summary
So what we can predict is that within 10 years these sorts of tools will be in much wider use and various provider’s illustration systems will be integrated into them so that, if in the course of doing all this planning, the customer (or IFA with the customer) identifies a gap in his current portfolio it will be possible to run an illustration and look at the potential impact on the rest of the portfolio of moving that asset into that product, compared to other comparative products for example. Finally, the current regulatory obsession with value for money will also translate to much more sophisticated product comparison tools.

New market entrants
With SIPP becoming the pension scheme of choice for most middle and higher income investors, new entrants have been plentiful to service this burgeoning market.

The choice of SIPP now ranges beyond specialist SIPP providers to insurance companies, banks, wealth managers, stock brokers and wrap platforms, that service the market either directly to the consumer or through an intermediary.

Keeping your clients or the risk of loosing them
75% of new business in the SIPP market is consolidation of investments and  transferring from other providers. Simply put, if you don’t have a SIPP proposition you run the risk of loosing your clients when they get to retirement to another company that does have a SIPP.

The business challenge
SIPPs are now a mainstream pension product, however they are still perceived to be complex products which are difficult and expensive to administer.

This is made more so for new  entrants to market who have a set of unique challenges of:

• Cost — how to administer comparatively small numbers at an acceptable cost
• Risk — how to de-risk a complex SIPP environment and service
• Knowledge — how to keep abreast of legislative and market changes
• Integrate—how to interface to existing  IT systems
• Service—how to maintain client service and control

Leading stockbroker and investment manager Hargreave Hale Limited has attributed the rapid entry and success of its SIPP, launched in April 2009, in part to its decision to strategically outsource SIPP administration to pensions administrator Dunstan Thomas.

Once Hargreave Hale decided that they wanted to enter the SIPP marketplace with its own offering in early 2009, they recognised that there were four key challenges to making this move successful long-term:

• Providing robust and high quality client service for its SIPP policyholders
• Administering a comparatively small number of plans, at least initially, in a cost effective manner
• Keeping abreast of dynamic legislative and market changes affecting SIPPs
• Enabling interfaces with existing in-house investment management and IT systems to achieve efficiencies and return on investment

Hargreave Hale addressed these challenges by selecting Dunstan Thomas’ Imago SIPP administration platform.  The system went live a year ago and has delivered very positive results for the stockbroker.

 Imago is linked to Hargreave Hale via a secure web portal. The system’s daily activities and transactions include new business, asset transfers, bank files, payroll and updates from Hargreave Hale’s own Investmaster investment management system.  Hargreave Hale retains the client and FSA relationship, whilst outsourcing all relevant reporting documentation, data gathering and calculation work to the Imago platform.  Imago also produces all reporting documentation including benefit statements, SMPI reports and reports into the FSA and HMRC returns at tax year end.

 Stuart Brookes, director, Hargreave Hale:
“Outsourcing this gritty administration to Dunstan Thomas has enabled us to focus on bringing a highly cost effective, flexible, future-proofed and unique SIPP to market rapidly, whilst continuing to look after our customers in the way we always have.  The Imago offering has exceeded our initial expectations both in terms of the platform itself and the system and market knowledge of Dunstan Thomas’ pensions team.”

Dunstan Thomas supported its expanding outsourced pensions administration service portfolio with a team of pensions administrators who were recruited in 2009 to work from its headquarters in Portsmouth.

Chris Read, chairman, Dunstan Thomas, explains the outsourcing trend:
“Hargreave Hale represents a trend in the market for strategic outsourcing in order to help firms retain a strong focus on the customer whilst ensuring all reporting and documentation remains highly informative, accurate and meets statutory requirements.  Our stated desire of offering the option of Imago software ‘as a service’ is now finding favour with some of our more astute and fast moving clients such as Hargreave Hale.”

IFAs responsible for pre-retirement communication?
This was particularly stark for pre-retirement communication which nearly a third (31%) of providers said was the adviser’s responsibility. That said, there is a nagging concern that providers are most at risk of Disclosure non-compliance: 52% of respondents thought that they were most ‘at risk’ while 31% (perhaps the same providers) thought adviser firms were more exposed.

Provider response to FSA request for asset-level pensions projections slow
Just a quarter (26%) of providers is offering the more detailed and accurate illustrations requested by the Financial Services Authority (FSA) in its Thematic Review of SIPP operators, published in September 2009. Nearly half (44%) still do not intend to offer asset-level illustrations this year. The remainder (30%) are intending to put new illustrations in this year to tackle this issue.
For a link to Imago Front Office Version 4

Wake Up pack won’t reach all of us
Another disclosure requirement from the FSA – the so-called ‘Wake up Pack’ – is now offered by 48% of providers surveyed, while over a third (35%) are putting this in this year and more than one in six (17%) aren’t prioritising this sufficiently to put it in this year.

Unbundling of charges almost universal
By contrast a more impressive 61% of providers have already completed work on systems to enable unbundling of charges so that it is clear to policyholders (specifically platform users) what percentage of charges associated with a transaction are going to the IFA, investment firm, administrator and platform itself. A further 22% are looking to make this possible by the end of 2010.

Not spotting abnormal investment transactions
A quarter (26%) of providers does not have systems in place for spotting abnormal investment transactions despite this being a requirement of the FSA

Corporate SIPP on the up
On market trends, six out of ten (61%) providers predicted an explosion of the corporate SIPP market from 2011 and 30% of the market is already gearing up for this, as Defined Benefit schemes continue to be considered as dangerously expensive corporate liabilities.

Solvency II preparations slow
More than a sixth (17%) are building risk management systems to assess solvency risk exposure more accurately in line with Solvency II requirements. 39% said they were still preparing plans for Solvency II compliance and more than a third had no plans to devote any resources in this area at all which is surprising given that we are still suffering in the worst recession in over 50 years, largely because the banks did not properly understand their risk exposures and failed to properly value the assets their investment arms were investing in. The final deadline for full implementation of Solvency II is October 2012, so financial services firms have 16 months to get their house in order.

Efficiency drives
More positively, 35% of providers are focusing over the next three years in launching new product on existing systems, while 26% expect to remain focused over this period on improving processes, systems and operational performance.

TCF compliance requires more BI & MI
Priorities for ensuring compliance with Treating Customers Fairly (TCF) principles were building Business Intelligence systems which give them a more holistic view of customer communications (top priority for 39%) and the next highest rated issue (top priority for 22% and second top priority for 26%) to support TCF compliance is illustrating that Management Information (MI) is properly linked to key business decisions. Reports on timeliness and quality of service levels in administrative processes were also being prioritised (rated top by 26% and second top by 13%) for TCF compliance.

The most costly operational processes amongst providers today is MI reporting followed by asset migration work (most notably transfers out). Banking and investment management costs are not far behind. MI reporting generates the most exposure to risk for providers’ businesses, again followed by at-retirement transfers out processes.

Cutting product costs
The audience was split on how it was aiming to reduce the cost of products to clients: 31% said that they felt they would do this by investing in better administration systems; while 17% were aiming to reduce costs by automating more processes. 39% said they did not think product costs needed to fall significantly.

Chris Read, chairman, Dunstan Thomas Holdings, explains:
“Effective disclosure which gives customers more accurate and timely information which in turn stimulates further and more sensible long-term saving for retirement, is the key theme of the regulator right now. That is why we have devoted resources to taking a snapshot of where providers are on the disclosure journey.

“Our findings reveal that operational risk management is traveling further up providers’ agendas and that the cost of compliance is continuing to rise. Providers are now looking for ways to cut costs through automating systems and improving administrative processes.

“Yet providers have not fully faced up to their responsibilities around policyholder communications pre-, at-and post-retirement. There is a good deal of confusion about whether the weight of responsibility lies with the IFA or with the provider. There is a great deal of food for thought here for the FSA, or its successor, after the upcoming election.”

There was some discussion on variable or asset based projections for illustrations purposes rather than the use of the product wrapper 5, 7 and 9 basis. The need for variable projection capabilities has been driven out of two key reasons.

1. Firstly the financial downturn of the past two or so years has illustrated the inaccuracies of using inappropriate projection rates for asset classes that don’t perform at the same rate.

2. The FSA declared on the need for more granular, asset-level projections in its ‘SIPP Operators – Report on the findings of a Thematic Review’ dated September 2009 and its associated fact sheet ‘SIPP Operators Thematic Review – Regulatory Responsibilities’ which summarised as follows: “It is important that firms consider the nature of underlying assets and use projections that use realistic growth rates.”

In a further quote from the Pensions Thematic Review, the FSA go on to state, “For example, money held in a cash account will be expected to generate lower growth rates. Firms are not bound by the FSA standardised maximum deterministic projection rates, currently 5%, 7% and 9% for pensions. COBS 13 Annex 2 2.4R(1) confirms that projections must be calculated using lower rates of return, if the standardised rates overstate the investment potential of the product.”

In response to the Pensions Thematic Review and the intentions outlined in COBS 13 Annex 2, we have launched a new version of Imago, Imago Front Office Version 4. Version 4 supports variable asset projection rates, whilst additionally maintaining product rates. Reduction In Yields can be set at both the product and asset level so as to continue to provide a basis for product comparison and asset transfer justifications.