The pressure on the UK pension industry to adapt to regulatory change has shown no signs of slowing down this year. Providers must continue to stretch and develop their propositions in line with constant change. It is with this in mind that we share some of the key challenges facing the market which have arisen so far in 2016; pension flexibility and low profitability – taking a look at how pension providers are adapting to these changes and highlighting what employers should look out for to ensure their employees are getting the best outcomes.
Pension flexibility and the need for well-communicated advice
Increased freedoms in pensions have been the greatest head-ache for the providers of late, with many scrambling to offer income drawdown directly from a member’s plan. Whilst some providers have pushed forwards with 100% online functionality, others are finding it harder to adapt to the changes, relying on paper-based forms that have to be posted to members.
Most providers will rightly talk members through their retirement options and try to protect them from potential scams. It is evident that those using technology are finding it easier to educate members about their choices and are supporting with these life-shaping decisions by providing clear information on the details of their plan value, retirement income needs and the options within their plan. Those providers that offer this clarity, along with the functionality to sit down and make decisions online, and all in one place, are well-placed to adapt in a changing market and support your employees.
Traditionally, anyone taking income drawdown (a method whereby the individual chooses their level of retirement income while leaving their pot invested) would have to set up a new policy usually after having taken advice. Some providers are now looking to offer this facility directly from the plan used to receive pension contributions.
The overarching need for individuals to take good, solid financial advice is stronger than ever.
The first step for members considering their income needs in retirement should be to build a long-term plan. But why is this something that most people miss?
There is a perception that advice is expensive and there is no denying that the IFA industry has done little over the years to change this perception, although the removal of commission has certainly not helped. However, when individuals are looking at large sums of money like their pension fund, the amount that would be charged by an adviser would be a fraction of the overall value.
There may be some middle ground, with proposals that pension savers will be able to access £500 of their pension pot to pay for advice. This is part of the UK Government’s wider consultation about financial advice (the Financial Advice Market Review, or FAMR) and is largely aimed at drawing the banking sector back into the marketplace to fill this advice gap.
So what is the next step? As the market for flexible retirement options matures, someone will need to fill this ever-widening hole. The original plan announced in the summer of 2014; free guidance via Pensionwise and the Pension Advisory Service has fallen on its face, with announcements that both departments will be merged and budgets cut, so he needs something to stick and quickly.
The UK pension industry is only one element of the broader insurance landscape; a world funded by the premiums paid by businesses and the general public. By and large it is a low-profit sector, with each provider clambering over each other for a share of millions of potential customers to generate sufficient profit, whilst covering any claims that arise.
The UK insurance industry is the largest in Europe and third largest in the world, behind the US and Japan. It generates 24% of the total EU premium income and contributed £29bn to UK GDP in 2012 and £11.8bn in taxes to the UK Government in 2014.
In 2015 it paid out:
- £27m in motor insurance claims
- £12.9m per day in property claims
- £72m in accident insurance
- £4m a week in emergency medical treatment.
UK insurers have been facing a number of headwinds, including low interest rates, falling annuity sales, an increase in claims from the victims of flooding and compliance with the controversial European Solvency II directive. This directive aims to improve the resilience of the industry across Europe by laying down stiffer regulatory capital requirements. Each of these aspects brings its own unique challenges and some insurers are better placed than others to deal with these.
The pension reforms in 2015 also brought their own unique challenges, with providers given little time to adapt their systems and their propositions, leading to the potential risk for operational and reputational damage.
However, this was also an opportunity for the providers, especially for those who were facing a significant reduction in their annuity business; but it also put them under threat from other financial institutions, such as wealth managers, asset managers, ISA providers and start-up companies.
Ultimately, those with in-house asset management, a strong drawdown proposition and strong distribution channels must have been delighted by the opportunity and some were much better and more innovative than others at getting new default investment strategies to market.
While these outside influences will impact the provider, when evaluating your options as an employer it is worth focusing on who is best placed to help deliver better member outcomes. At Thomsons Online Benefits we create a half yearly Pension Provider Report which evaluates the UK’s main providers and how they are tackling market challenges. If you would like to discuss your options or read our full Pension Provider Report please get in touch at: email@example.com.