The pensions freedom and choice agenda, announced at Budget 2014 and implemented in April this year, took fund managers by as much surprise as insurers. Eighteen months on, what can we see happening in the asset management world, as investment houses digest the implications?
The biggest change in the new agenda was the final abolition of any requirement, perceived or real, to buy an annuity. Insurers who made annuities a central part of their business took an immediate, and massive, hit to their market capitalisations.
The effects for asset managers were less immediate and took longer to work out, but there can be little doubt now of the upside for fund management groups – if they get their strategy and delivery right.
Previously, asset managers could expect to have a 20 or 30 year relationship with the pension saver, watching assets build up over this time frame before, in most cases, the “bucket” emptied as an annuity was purchased.
In the future, even quite modest pension savers are much more likely to keep their money invested in the markets in “retirement”, drawing income from the fund as required. This can now be done either regularly or flexibly on an “as needed” basis, known as “income drawdown”.
With retirement lengthening as longevity increases, fund managers could expect to double the period of time they hold assets, and take charges from those assets.
This could transform business models. Certainly, as annuity sales have fallen, and continue to fall, the various structures of income drawdown have clearly increased in popularity, and this increases the opportunity for fund managers still further.
It has taken time for this to sink in, with fund houses moving at different paces. Many are thinking about how to tailor their fund ranges to provide income-focused funds. Some have launched new funds potentially suitable for income drawdown.
But simply launching a new fund, or funds, is not enough in itself. Fund houses will not attract – and retain – assets from pension schemes and individual investors just by having some funds available.
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They will need to speak authoritatively about pensions and retirement issues, clearly articulating a proposition to investors. They will also need to be more accessible to investors than some are right now.
It is in these areas that clear blue water has started to open up between competitor houses. Some have greatly increased the noise level around pension investment and ways to generate income in later life. Others have said very little indeed. This will likely matter further down the track, and could be the difference between long-term winners and losers.
To an extent, the willingness, or otherwise, of a fund house to articulate a proposition to schemes and investors is a function of the distribution model adopted. If your route to market is predicated entirely on the provision of investment services to pension schemes, there may be an argument for being seen to “say” less.
If you deal, even at the edges, with retail investors, the arguments for silence are weak. Even pension schemes have end users – scheme members – and they will expect their fund manager to be saying credible and cogent things about pensions if they are to feel confident that their money is in the right place.
Pensions freedoms have also sparked change among fund managers about those very routes to market.
Some fund groups, such as Fidelity, have dealt with retail customers for years in parallel to their institutional business streams. As more and more consumers decide to direct their pension investments themselves in retirement, the need to be open to direct individual business is increasing.
The huge success of direct-to-consumer platforms such as Hargreaves Lansdown, combined with the wall of money likely to come from baby-boomers entering retirement in coming years, has meant a re-think of traditional, intermediated routes to market.
Some fund houses are examining possible direct distribution, and some are acting to build it. More are likely to follow, leveraging their brands to engage directly with their customers.
What is clear, however, is that the new pension freedoms are changing the insurance and investment markets fundamentally, and that some of those changes are still emerging. Watch this space.