Lucinda Hallan, Director, Financial Services Advisory at Grant Thornton UK LLP said:
"Freedom of action at the point of retirement and the increase in ISA flexibility and limits mean there are now some genuine alternatives to the pension-plus-annuity route, which has not offered best value – particularly for smaller pots – for a while.
"This is exciting news for consumers – and definitely offers the government both short term reputational gains and the prospect of additional tax receipts - but it also poses some interesting longer term risks and questions, including:
- How will this bold re-introduction of ‘caveat emptor’ by the government sit with the more protective, interventionist agenda at the FCA?
- How will a free advice model be made sustainable and who will really pay for it?
- Where will levels of UK annuitisation settle in the future – are we headed for low take-up along the lines of Australia (only 50% in 2012) or the US (even lower)?
- Can the market for enhanced annuities sustain recent growth, even if the market as a whole is shrinking?
- Will the potential impact of these changes on the value of gilts have a negative knock-on impact on DB scheme funding gaps, even though the new changes don’t extend immediately to DB schemes?
"A key determinant in answering some of these questions will be the practical reaction of the insurance industry to the changes.
"Although share price drops for the high profile annuity players following the announcement were partly the result of surprise, the changes do put the strategic model of some of the big names into question – and they do this at a point where the regulator is challenging the industry to prove the credibility and sustainability of business models generally.
"We believe the Chancellor’s announcement will have at least four major impacts on the industry over the coming year:
- It will force retirement product providers to move now on a long overdue and radical overhaul of not just annuities, but their whole “at retirement” offering – rather than waiting to see what comes out of the FCA’s annuity market study in 2015, or tinkering round the edges of their current product set or conduct approach
- It will also force a number of players to re-focus their investment and product innovation on the mass market, rather than on the mass-affluent and High Net Worth segments, which have been the focus for much of the industry for the last decade or so. The alternative is the potential loss of the approximately 25% of the annuities market that sits below revised trivial commutation limits
- It will challenge insurance companies to re-think and re-validate the flows of cash and economic value between their different lines of business – which could have some interesting knock-on effects for both FCA strategic business model analysis and Solvency II preparation
- Lastly, it’s possible that these changes may drive an additional wave of outsourcing, consolidation and market exits, as the industry re-assesses the long term viability of the annuity market
"Overall, we need to remember that freeing up regulations won’t immediately alter customer behaviour. Consumers will still need to be incentivised and enabled to save more than they do now. They will also continue to find taking retirement funding decisions confusing and potentially nerve-wracking – meaning they will need help and education to get it right.
"Industry providers who remember this and can build cost-effective retirement solutions which are genuinely customer-centric, will find a way to navigate the brave new world of retirement successfully."