Data mining
Market data demonstrates that individual annuity sales volumes have been affected by pension freedoms. The introduction of Solvency II has also meant life companies have had to give additional consideration to potential capital constraints.
These combined forces have led to strategic reviews of annuity market positioning and some companies have decided to exit the market, leading to a contraction in the number of lifetime annuity suppliers.
There are always opportunities that arise from changing market dynamics and this is no different when it comes to annuities.
Where companies have sought to offload books of annuity business there has been a market for them, which is likely to continue.
Where DB schemes have been seeking to de-risk there has been a growing market for buyins and buyouts. According to a December 2016 report from Lane Clark & Peacock, which looked at the pensions de-risking market 10 years on, “one million individuals have had their defined benefit pension insured with an insurance company through a buyin or buyout”, while “nearly £130bn of liabilities have been insured since 2007, with £70bn through buyins and buyouts and nearly £60bn through longevity swaps”.
Some companies are seeking to make use of their annuity and mortality/longevity experience and underwriting capability in other international markets, such as the US.
There are some key underlying economic factors that can have a big bearing on the fortunes of annuities and guarantees moving forward.
Interest and gilt rates, and therefore annuity rates, have been challenged for a period, causing returns to seem less appealing to customers. Should there be a shift in the economic landscape that spurs a rise in interest/gilt rates, and therefore improved annuity rates, we may see a renaissance in annuity sales and change in customer sentiment towards annuities.
The pricing of guarantees outside of annuities, including unit-linked guarantees, has also proved challenging recently. However, customers with a more cautious outlook might be more willing to engage and pay for guaranteed solutions if they fear the impact of a market downturn and can see the value in a guarantee.
Coming of age
With pension savings requirements generally taken up with auto-enrolment, the focus in the individual pensions market has been on pension consolidation.
Targeting customers in their 40s and 50s, with a pension vehicle that can effectively bring their pension pots together as they approach retirement, has been an extremely competitive part of the market, with life companies, Sipp operators and platform operators all vying for business.
Further driven by pension freedoms, and potentially by the introduction of a digital pensions dashboard for customers, this consolidation drive is likely to continue in the short to medium term.
There is growing excitement about the opportunity for DB to DC transfer business. However, financial planners and providers alike are cautious, given the risk of future regulatory focus and action should the transfer turn out not to have been in the customer’s best interests.
Anecdotal stories on the ‘mark-up’ on transfer values being offered are proving compelling to customers. While the industry rightly preaches caution in the consideration of transfer behaviour, as it has done for those considering how they withdraw their pension funds post-freedoms, this is an emotive subject.
Without prior knowledge of each individual customer’s circumstances it can be difficult to ascertain the right move. There is a great amount of debate on this theme. The potential challenge this poses to historical methodologies and thinking is testing the viability of DB to DC pension transfers.
This is being countered with new materials and resources to help financial planners and customers to better consider the viability of transfers are emerging.
The general outlook for financial planners, in terms of the opportunity to provide value-added advice and support on a range of issues related to retirement planning, remains overwhelmingly positive. Many businesses are positioning their services so that they can provide comprehensive support to customers with key retirement planning considerations, based on individual circumstances and requirements.
For wealthier customers there are opportunities to provide specialist tax-planning products. There has been an associated growth in the availability of this type of solution for the intermediary market.
This includes inheritance tax solutions that target qualification for business property relief and offshore bonds, which may have a role to play from a tax efficiency perspective in a wealthier customer’s portfolio.
There is great excitement in the market about the opportunities for ‘robo’ advice services to help bridge the gap between guidance and comprehensive retirement planning. There has been a recent explosion in the launch of fintech solutions targeting customer acquisition in this space, with most propositions targeting ISA investments through automated investment portfolio management services.
While there are some early examples of services that are seeking to tackle online advice in the retirement space, this may be a tougher nut to crack given the potential complexities of retirement planning. There may, however, be an opportunity for ‘hybrid’ advice services that combine an element of online automation with human interaction by phone or Skype.
At a corporate level, there is an ongoing consolidation dynamic at play across the financial services sectors within which AKG assesses companies. Transactions over the past couple of years are the result of several different strategic objectives and environmental considerations, including:
- the thirst for achieving greater scale and the compelling case/requirement for this in specific markets;
- a move away from any non-core activities and markets that present more risk – regulatory or otherwise – than they deliver in scale or opportunity;
- changing customer and market behaviours, requiring new skill sets, such as digital competencies and routes to market.
Some actions, which may include mergers and acquisitions, disposals and joint ventures, will be more simply achieved, while those with multiple parts, some of which determine the action and some are just ‘carried along’ with it, will not be.
The ability of companies to keep a range of plates spinning, including new business acquisition, existing business retention and the delivery of more tactical projects and work streams while in the throes of this corporate level activity, is bound to prove extremely challenging.
