By Catherine Doyle
Wednesday’s Budget announcement was a powerful reminder of the influence that regulators have over both the structure of the savings market and the kinds of solutions being proposed.
While many of the measures announced in the Budget incentivise scheme members to withdraw either their entire pension savings or part thereof early without apparently taking into account longevity risk, one of the main consequences and indeed an important message from the government is to provide pensions savers with choice.
One of the major repercussions of the financial crisis has been a protracted period of sub-normal interest rates which has been problematic for those approaching retirement on many fronts. The most flagrant challenge has been the historically low annuity rates available – annuity rates have roughly halved since the financial crisis as a direct result of quantitative easing – and the inability of pension investors to choose a course other than buying an annuity due to the limited average pot size and tax penalty.
The lowering of the minimum income requirement to qualify for flexible drawdown means that more pensioners will have control over their retirement pots without taking on risks that they have no control over and do not understand. Indeed, the flexibility and more favourable tax outcomes of pension savings should serve as an incentive to encourage defined contribution (DC) members to contribute more towards retirement and is likely to mean that fewer assets transfer directly to the bond market on decumulation, challenging the lifestyle solution of switching into these assets as individuals near retirement.
We know, however, from the studies conducted on the annuity markets that pensioners do not typically have the inclination or aptitude to shop around for better deals in respect of annuity rates and the Budget changes are unlikely to directly translate into increased engagement in effectively managing their income in retirement. Impartial guidance across the market with a focus on investment that provides pensioners with a desired level of retirement income while preserving capital in more stressed market conditions has an important role to play in the new post-budget world. Clearly the government is beginning to address this with the provision of advice around small pots but there is more to be done.
While the changes announced in the Budget do not represent the death knell of the annuity market which clearly has a role to play as a means of protecting pensioners against outliving their retirement pot, asset managers are centre stage in the need to rise to the challenge of developing appropriate investment strategies for the DC market. The winners will be those managers who understand the desired outcomes for members and pensioners, not just up to the point of retirement but also through retirement as well as the need for flexibility to accommodate shifting retirement targets.
Diversified growth strategies acknowledge such priorities, with their focus on achieving positive, above inflation returns with a strong focus on capital preservation, thereby improving the distribution of returns. Moreover the increased prominence of the need for income recognises the fact that, with increasing longevity, the retirement period may span many decades. This will be reflected in the kinds of products made available to pensioners, with equity and bond income funds occupying an important place.
Catherine Doyle is head of defined contribution, UK, BNY Mellon Investment Management
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