I don’t think I’ve written much about the so-called retirement income market before, which is odd because it’s very big, quite interesting in a difficult and complicated sort of way, and going through a huge amount of change.
Thinking about the name first, the reason it seems problematic to me is simply that it contains the “r” word (r for retirement). I think I’ve said before how strange it seems that the industry has become so fond of this word at exactly the same time that it has stopped believing in the concept it describes. In the world after defined-benefit pensions, the idea of “retirement” as a stage in life during which people do no paid work and live on their savings is rapidly becoming a fantasy (if you want to know just how fantastical it is, consider than at the moment the average personal pension pot at retirement is less than £30,000, which will produce an annuity income of about £1,500 a year at current rates).
But the problematisticity of the name is a small part of the whole. Overall, what I’d like to know is where this market is going.
Although average personal pension pots at retirement are still heartbreakingly small, there are of course many bigger ones on a spectrum that stretches from the average up to, say, Fred Goodwin. And it seems that virtually every UK life company, a growing number of foreign entrants, a few asset managers, an interesting band of specialist retirement income providers, some of the platform owners and of course a large number of advisers and other distribution businesses have their eyes on these more affluent retirees as a key strategic priority.
The range of solutions on offer continues to proliferate – first within the annuity space, and then beyond it into the still-emerging drawdown market. Certainly the days when your only big decision was whether or not to index-link your annuity are long gone. But it’s still very difficult to see the new shape of the market as it grows and changes.
Will it continue, for example, to be dominated by advisers? Regular readers of this blog will both know my conviction that for most ordinary people most of the time, the role of financial advice is evaporating as fast as a raindrop on a Bank Holiday barbecue. But maybe the retirement income decision is different, especially if an annuity is involved: an annuity, after all, is one of the very few remaining big, important and irrevocable decisions still out there in financial land, and even a fanatical D2Cer like me does flinch a bit at the thought of consumers making their choices unaided.
Will the market continue, for another example, to be divided into a binary distinction between “annuity” and “drawdown” options? The two are already showing signs of meeting in the middle, with annuities that offer investment flexibility and drawdown investments that offer some protection against unexpected longevity. In the end, there is a pot of money and a whole bunch of things you can do with it to make it fit for the owner’s purposes and preferences, of which providing a lifetime guarantee is just one. I don’t think that the existing binary choice makes much sense from a consumer perspective.
And then thirdly, and perhaps most interestingly from my point of view, to what extent will it become a branded market, and if it does then what sort, or sorts, of brand will be most compelling to consumers? As you can see from the list in my fourth para, the most interesting thing is not so much the increase in the number of players, but their increasing diversity. To my eyes, as someone working in the industry, a choice between, say, Just Retirement, Schroders and Hargreaves Lansdown is a choice between an apple, a pear and a banana. But will consumers, and indeed advisers, see it like that? Will the majority of consumers even know or care? Or will the market turn out like, say, the death-in-service life cover market, where fewer than 10% of those covered even know who their insurer is?
It’s quite fun for me to muse about these and a whole lot of other questions that come to mind in this extremely dynamic market, but of course for the providers and other organisations who are thronging into the area it’s all a bit more serious than that. At the moment, the situation reminds me a bit of those early days in the stakeholder market where all the firms aiming to enter it had all done their sums and knew that they couldn’t make any money unless they achieved a 30% market share, so if you added together the market share targets of all the firms involved they came to well over 300%.
I don’t think there’s an equivalent hard number to dramatise the current lack of realism and excessive optimism of the players in the retirement income market. But I think the mistakes being made at the moment are still exactly the same.