“A man loves the meat in his youth that he cannot endure in his age.” Shakespeare’s aphorism on pension savings (OK, it’s on aging — from Much Ado About Nothing) is relevant today in light of radical changes to pensions savings in more recent history.
The dawn of pension freedoms last year shook retail investing to its core. At Platforum, we have hard data to illustrate just how much and how quickly things have changed – and we have strong views on where we believe the industry is headed.
As You Like It: Rise in assets and sales in pension wrappers
At the end of last year, just over half (51%) of adviser platform assets were held in a pension wrapper. These are retail assets, largely invested in SIPPs, rather than DC assets (source: Platforum Adviser Platform Guide, April 2016). This compares to just one third two years ago.
In Q4, 68% of flows to adviser platforms went into a pension wrapper — which means that we should expect AUA in pensions to rise more rapidly than for ISAs or unwrapped.
But this isn’t just a 2015 phenomenon. The surge in sales to pension wrappers started just after George Osborne’s budget in March 2014 and really took off in Q4 2014. Net sales to pension wrappers jumped more than four-fold year on year in Q4 2014 to £4.4bn.
There is no mystery behind the jump in sales to the pension wrapper: advisers tell us that the pension freedoms were very good for business. One adviser we spoke with recently said:
“The biggest shake up was the pension freedoms. Our firm has seen its biggest increase in client enquiries, and it has also been a record year for profitability. [The firm has operated for over 20 years]. Client awareness around pensions and retirement has been greater. We’ve been proactive on content. We have written blogs, podcasts… And the issue has been covered a lot in the press.”
The growth in assets in pension wrappers isn’t new money. It is mostly a result of investors consolidating their pension savings on platform.
And one of the reasons that this shift toward pension wrappers is important for adviser platforms is that pension money tends to sit on platform longer (so-called “sticky assets”). We expect an increasing majority of adviser platform customers to take advantage of drawdown in retirement, again staying on platform for longer.
The Tempest: Sales to pension wrappers will slow
However, despite the recent rush of activity, we expect sales to pension wrappers will slow in the next two to three years. The main reason for this slowing is the tapering of the lifetime allowance. The lifetime allowance for pension contributions is now £1m. Advisers focussed on high net worth individuals will have clients who are reaching or have reached this ceiling. This may lead to increased demand for alternative tax-efficient savings vehicles.
Love’s Labours Lost: Implications for platforms and providers
We don’t doubt that retirement will continue to be a big focus – the meat of youth being spent on the viand of old age, in Shakespeare’s adage. Yet we believe that the passage of time will erode the delineation between pensions and savings products. The LISA is a good example. Also, a large number of people in their 50s buy NISAs, collectives and even bonds with the underlying rational being eventual decumulation rather than accumulation per se.
Platforms that have a strong SIPP pedigree have benefited from the pension freedoms. They have the technical expertise to help advisers and their clients through some complex decision-making. But beware too narrow a focus. We encourage those known for SIPPs to broaden their appeal. As SIPPs decline in importance, platforms need to ensure they have a path to continued growth and relevance.
The Winter’s Tale: Product development in a vacuum
The pension freedoms were rushed in at a furious pace. Product development lifecycles usually start at 18 months and can stretch out much further than that. Product IT engines are not famous for speed of change implementation. The focus on compliance in 2015 must move to innovation and those who listen to customers and innovate quickly will win. Those who innovate quickly but in a customer vacuum will face expensive product development and launch costs and poor new business flows.
In this, the Year of the Customer, we implore firms to listen to customers.
Where we hear demand for innovation in offering guaranteed products (that are cost effective and with performance that can be benchmarked), we also hear demand for better tools from platforms to deliver income. In the words of an adviser we spoke to last week (tweet or email us if you are willing to share your views):
“Innovation would have been nice if it was genuine innovation. Rather than innovation in products, it would be better to receive better support and service and better turnaround times.”
Or, as the Bard would instruct:
“A course more promising / Than a wild dedication of yourselves / To unpathed waters, undreamed shores.” (Winter’s Tale, Act IV, Scene 4)
There is much to play for in this new environment. We’re here to support you on your journey.