Annuity market predicted to halve in size following Budget changes, finds new Dunstan Thomas poll

17 September 2014

Over three-quarters (77.4%) of retirement product providers predict the annuity market will be significantly smaller by the end of next year, according to a new poll conducted by retirement solutions provider Dunstan Thomas. Findings reveal that over half (51.6%) of providers think the annuity market will be 25-49% smaller; while a further quarter (26%) think that the market will be cut it in half – reducing by 50-74% by the end of 2015.

Guaranteed guidance widely criticised
HM Treasury’s offer of Guaranteed Guidance (extending to face-to-face advice) for all those considering ‘liberating’ their pension pot from April 2015, was also widely criticised by providers. Furthermore, 71% of providers think George Osborne should never have offered this measure without proper consultation with the market.

Simplified Advice definition higher priority
One potentially positive outcome from this failure is that it should accelerate the FCA’s plans to define Simplified or Guided Advice as the ‘middle way’ between full face-to-face advice and non-advice-based financial decision-making. Three-quarters of providers (74.2%) believe this will be the outcome and judging by the industry bodies’ recent output as regards resourcing this guidance, it is clear the momentum and will is there to define Guided Advice.

Drawdown changes criticised
Nearly a third of providers (29%) also questioned the wisdom of dropping all limits on drawdown from April 2015. One in five (19.4%) gave the thumbs down to reducing flexible drawdown’s MIR (Minimum Income Retirement) to £12,000 per annum (from £20,000). However there was broad support for other reforms announced in the budget as most agreed that reforms were needed and saw the Budget changes as the beginning of the process.

Blended product innovations predicted
Two key changes to the annuity market were predicted as a result of making their purchase voluntary: over half (55%) predicted an explosion of innovation in blended annuity/drawdown and other hybrid retirement products. Less positively for the industry, over a third (35.5%) took the view that retirement age individuals would put off annuity purchase until much later in retirement. Disappointingly for consumers and the Government alike, few providers (3.2%) expected the change to lead to increased sales of enhanced annuities and none thought that it would lead to all annuities being fully underwritten – outcomes which could lead to better annuity rates for customers.

Mis-selling allegations set to rise as money runs out
The largest concern of providers (stated by 32% of them) associated with the Budget reforms is that there is a ‘need for very rapid product innovation as at-retirement flexibility becomes the key requirement’ driving the market. Nearly a third of providers (29%) said that they feared ‘Being exposed to increased risk of mis-selling allegations when retirement funds run out’ (for those raiding pensions early). Understandably the next largest concern (for 25.8%) was resourcing Guaranteed Guidance.

Other more general market changes which were predicted by providers this year included:
Increased sophistication of at-retirement options on platform (for 42%)
Increase in the number of Execution Only (D2C) platform offerings (for 22.6%)
Fall of non-Auto-Enrolment (AE) Personal Pensions sales (for 19.6%)

Widespread SIPP consolidation threat receding
More surprisingly, only 6.5% of providers placed consolidation of SIPP providers as #1 in list of changes that are most likely to happen in 2014.
Less than 10% of providers will leave AE market in next 18 months

Providers seemed unsure of the impact of AE as it expands exponentially this year and next. For example one fifth (19.35%) believe it will affect them at some point but have no idea when. Only 6.5% predict that they will need to pull out of the AE market this year and half that number (3.2%) believe they will need to pull out by the end of next year; whereas 32.3% think it will have no impact on their business and a further 38.7% are totally unaffected because they are not serving the AE market.

AE Capacity Crunch will hit smaller employers and TPR first
Most providers believe that the focus of the AE capacity crunch will lie elsewhere: 58% predicted that smaller employers (mostly reaching their staging dates this year and next) will struggle to meet deadlines for enrolment. A further fifth of providers (19.4%) believe that The Pensions Regulator will run out of capacity to handle enforcement of employers which have failed to join on time. Over 16% are AE capacity crunch deniers – believing that it will not prove to be an issue in 2104 at all. A small minority (6.5%) believe NEST will be the only AE product offering left in the market as other providers exit.

Providers back AE charges cap
The majority of providers (55%) back the setting of AE scheme charges cap at 0.75%: 19.4% back it outright while a further 35.5% support it with the proviso that providers are allowed to apply for permission to increase charges in order to offer specific products/funds.

 Online & interactive blended retirement illustrations needed
The Dunstan Thomas poll also gauged reaction to mooted suggestions for how providers and advisers might help customers understand their options at retirement and make better informed decisions as a result:
1. Making pensions illustrations much more interactive – encourage people to play with scenarios and educate themselves online in the process – backed by 38.7%
2. Improving pensions and investment education for all – backed by 38.7% (equal top priority)
3. More effective blending of illustrations so that annuity and drawdown mixing can be better understood – backed by 16% of providers.

Pot follows proposals only win over less than half of market
Providers gave lukewarm support to the DWP’s ‘pot follows’ member proposals: 64.5% thought the £10,000 small pot size limit was set correctly. However less than half (45%) agreed with the concept of automatic transfer of small pots to new employer schemes and only slightly more (48%) thought small pot transfers should be unadvised. Only 16% agreed that legacy (non-AE) pots should be excluded from this arrangement.

Provider and platform charges still falling
Finally, providers believe that provider and platform charges are still falling: 39% believe pension provider charges are falling, 35.5% believe platform charges are also continuing to fall and 22.6% believe retail investment product provider charges are still falling. 39% also believe fund manager charges are falling as the impact of charges transparency and platform regulation associated with RDR continues to be felt amongst providers and distributors alike.

Chris Read, chief executive, Dunstan Thomas, commented on the findings: “Provider reaction to seismic at-retirement reforms dropped on them by the Chancellor in this spring budget has been more muted than one might expect given the dramatic impact it is likely to have in specific product areas like annuities. We believe that the industry knew that reform was badly needed and these changes, like AE, open up a real opportunity to re-engage current and future generations of retirees in building well-resourced saving pots for retirement. This is something which is desperately needed if we are to avert a looming retirement savings catastrophe.  “The development of more interactive, blended online retirement illustrations and scenario planning tools, will be one aspect of a kaleidoscope of positive changes which will emerge from the rubble of market reforms being forced on the market over the next year.”

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