There is no doubt that greater flexibility will provide greater challenges and inevitably, greater risk. Individuals will face difficult decisions and the industry, from employers to providers, will need to develop new products and services to help them.
The Treasury says the proposed changes include plans to offer all DC scheme members access to free and impartial faceto- face guidance on the range of options available to them at retirement, which will cost £20m over the next two years to develop. If, however, DC plan trustees will have a legal duty to supply free face-to-face guidance to individuals, how this “free” advice will be financed remains to be seen.
Golden opportunity
One thing that will be sure to happen is a new wave of investment reviews. DC default funds traditionally protect members from swings in annuity prices as they approach retirement. If schemes no longer expect people to be buying annuities, many schemes could start from scratch.
Threadneedle Investments chief executive officer Campbell Fleming sees the changes as a golden opportunity for asset managers. “It is in the long-term interest of the economy and the country to have a vibrant savings and investment sector, where individuals are encouraged to save more. A pension and investment framework that emphasises choice and optionality is to be welcomed,” says Fleming. “This Budget has thrown down a challenge for the investment industry and we must continue to innovate and deliver what our customers need.”
Lean years ahead for insurers
Of course, it is not just asset managers who will be reacting to the announcement. The impact on the UK life insurance industry and related sectors also needs to be considered. The immediate reaction by the market was heavy sell-offs as the likelihood of new annuity business was suddenly and drastically reduced. In the immediate aftermath of the announcement, shares in annuity provider Just Retirement tumbled 42%, while Partnership shares plummeted by 55%. By the end of the day of Osborne’s announcement, some £4.4bn had been wiped off the life insurance sector.
Providers, while anticipating a lean time of it in the short term, remain optimistic however that once the dust settles, many people will see annuities as a viable option for a steady, reliable retirement income. It is perhaps worth remembering that Osborne’s plans also caught regulators by surprise. Just last month, the Financial Conduct Authority vowed to shake up the market, which it described as “disorderly”, after it found that three-fifths of consumers buying an annuity failed to switch from the company they had built their pension up with. The Chancellor’s announcement came just a week after the FCA had began its competition market study.
Far-reaching consequences
With regulators playing catch-up, perhaps the annuities announcement will result in significant changes for broader capital markets too. In order to match their long term annuity liabilities, annuity writers are currently heavily investors in gilts, corporate bonds and infrastructure. If the market for annuities declines, there is likely to be less demand for these types of long term, illiquid assets and they will be replaced by shorter duration assets. This will clearly have implications for government and corporate funding.
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