The UK government’s recent reforms and rapid market changes, coupled with other changes such as the move away from defined benefit plans, have left the UK facing a potential crisis in its retirement income market, according to a report by Cass Business School’s Pensions Institute.
The report sets out to update the findings of a landmark report issued by the institute in November 2015, called The Meaning of Life, which came just after the UK’s so-called pension freedoms legislation came into force, and which, as reported, called for “an urgent cross-industry debate on the future of the life company, and its business model in relation to the changing needs of the private sector pensions market”.
The Meaning of Life 2, as the update is called, is subtitled The UK life company business model in the context of dramatic changes to the political landscape and the investment and private-sector pensions market.
Among its findings is that the UK government is issuing “conflicting policy signals”, as it “on the one hand [encourages people] to save for retirement, via auto-enrolment, and, on the other hand, [has given them] the freedom to withdraw funds from age 55 with no obligation to secure a life-long income”, David Blake, director of the Pensions Institute, notes in an introduction to the report.
“The pensions reforms introduced in 2015 have had the effect of reducing consumer choice over retirement products – the individual annuity market appears to be dying, and there is a dearth of new products that offer both flexibility and guaranteed income,” Blake adds, noting that the report highlights that the freedom and choice reforms thus far have delivered “freedoms, but little by way of choice”, while making “decisions more complex”.
The Phoenix Group, a London-based, LSE-listed consolidator of closed life and pension funds, sponsored this year’s update of the Pension Institute’s report.
Its chief executive, Clive Bannister, said in a statement accompanying the release of The Meaning of Life 2 that the two years since the initial report was published had seen “unprecedented change, both within the life industry and in wider
society”, ranging from Brexit to the roll-out in the UK of the pensions freedoms and the implementation, across Europe, of the Solvency II regulations.
“These dynamics are set to have a profound effect upon the shape of the market,” he added.
“It is vital the industry works with policymakers to ensure the best possible outcomes for consumer protection and the
sector’s own future.”
The report’s key findings include:
- A combination of both consolidation and divergence in the UK life and pensions market is having a major impact on the future health of the retirement income market, with consumers set to suffer as a result
- A dearth of new products that offer both flexibility and guaranteed income now exists in the market, resulting in a potential crisis of provision and consumer protection
- With too few consumers seeking advice, sub-optimal decisions are being made by consumers, which could damage their retirement provision
- A fragmented approach to regulation in the UK by the government is undermining the spirit of pension saving; the current policy is giving with one hand (auto-enrolment and
pensions freedoms), while taking away with the other, and conflicts with the policies of other OECD nations
- The life industry is bifurcating, with one group of companies retaining the traditional risk-based model, and the other group is moving to an asset management structure,
which is less capital intensive, in order to avoid the increased capital costs under Solvency II, which is triggering faster industry consolidation while also reducing choice in
the retirement market
To read and download the 46-page report, click here.
In its first report, the Pensions Institute predicted that a massive consolidation in the UK’s life company sector over the subsequent five years would create a “premier league” of between five and seven major pension providers – or around half the number of major providers then in the market, which was said to be around 15 firms.