Top 400: Mass market – a brave new world
Investment managers have been the last link in the fragmented pensions value chain for some time. Much of the investment management industry has focused on the management of wealth accumulated by baby boomers preparing for retirement.
However, the market is changing and the industry can no longer assume that meeting the end customer’s needs is someone else’s responsibility. The baby boomers are retiring and finding it more complex and multi-phased than envisaged. Meanwhile, this latest generation is more informed; it expects transparency and demands greater levels of service.
While these developments are challenging traditional investment models, they are also an opportunity for managers to innovate.
An ageing population, combined with low birth rates, low savings and higher levels of debt, is creating a growing retirement burden, which is increasingly shifting to the individual. In many markets, including the UK, this has been evidenced by the steady transition from defined benefit (DB) to defined contribution (DC).
The recent abolition of compulsory annuitisation in the UK DC pension market means full flexiblity. For retirees this is an opportunity to take funds as cash or draw down assets flexibly. Investment managers potentially have access to a great deal of capital that would previously have been locked-up in annuities.
An unprecedented volume of assets will be released into the market, a significant proportion of which will be invested outside legacy insured investment products and in newer off-balance-sheet solutions. This includes tax advantaged retail savings such as individual savings accounts, where the industry anticipates a potential increase in use for long-term savings.
In countries with well-developed pension systems, problems include increasing dependency ratios, low saving rates and high levels of consumer mistrust and disengagement. Engaging a more diverse, younger consumer base will be essential in solving this growing social imperative. In response to these market changes, investment managers need to develop products that:
• Offer an incentive to save;
• Provide certainty of outcome;
• Help consumers make decisions – this may be advice, guidance or a combination;
• Offer clear value for money;
• Recognise that retirement is no longer an event, but a phased process;
• Establish trust with the consumer.
The key question is how the investment management industry can meet customer needs. Will it be the design and launch of a radically different type of pension in the accumulation or decumulation phases? Or will it be more subtle innovations that make the current offerings more effective, less costly and more transparent?
There are two major approaches investment managers can take to transform their business models and capitalise on these new market opportunities.
First, investment managers should develop investment solutions that replicate the certainty of outcome previously available from annuities, but that also meet the need for value for money, transparency and accommodate phased retirement planning.
Investment solutions that are evolving to meet this need include target-date funds and other multi-asset solutions that seek to reduce the risk a customer is exposed to over time. However, thinking is required on how to adopt these for retirements that no longer focus on a single date, but still offer a degree of risk sharing and certainty of outcome – as opposed to focusing on a financial return.
For instance, in the UK, driven by the new pension freedoms, we can expect to see a significant increase in individuals entering drawdown. This gives investment managers an opportunity to consider what fund structures or approaches are appropriate at the decumulation stage – in particular, where a customer continues to contribute to their retirement savings, where their drawdown solution is being used in combination with other sources of income such an annuity, or where customers are looking to benefit from the flexibility of drawdown, while remaining secure from running out of money early.
Careful consideration needs to be given to how to extend the traditional ‘at retirement’ product marketplace to help older generations fund their retirement.
Finally, investment managers need to promote trust in the industry by demonstrating responsible execution of their fiduciary responsibilities through clear, ethical brand values, well-governed mandates focused on the end consumer and transparent reporting.
The second approach is for investment managers to adopt a direct-to-consumer strategy, in addition to developing investment solutions. Investment managers that adopt this approach are choosing to leverage platform technology to aggregate their own and other fund managers’ investments, within a range of pensions and other products.
The advantage is a greater share of wealth across the value chain, as well as the ability to influence the customer to save more, consolidate funds with a single provider and remain invested for longer. Successful entrants to the direct-to-consumer market will be those who use digital technologies to engage with customers at the front-end, supported by strong back-end systems to maximise customer engagement while keeping costs low.
There are, however, a few considerations to note. With this approach, investment managers must be especially mindful of managing their conduct risk – in particular, when offering a guided or advised sales process, as well as ensuring the suitability of wrappers and funds on offer.
Finally, and perhaps the biggest direct-to-consumer risk for investment managers, is the potential conflict with advised clients as well as platforms. Despite this risk we have seen many firms taking the decision to operate both traditional ‘manufacturing’ and direct-to-consumer models.
We are in a brave new world of evolving pensions. There is an opportunity for investment managers to capitalise on this change if they can become more customer focused and develop products that are relevant throughout the lifetime of a customer.
Andy Masters is UK head of savings and wealth management and Richard Clarke is UK head of investment management at KPMG