How retirement products evolve (and revolve).

industrial agrarian financial services


There are three drivers that shape the evolution of financial products – supply, demand and Government intervention.

Between the mid 80s and today Britain has seen a Financial Services Revolution that has been no less dramatic than the agrarian and industrial revolutions that preceded it.

British Financial Services has gone from family owned stockbrokers, local bank managers and bicycle clipped insurance agents to the behemoth that today drives the British economy. In terms of Pension Policy the approach has been to sit back and watch the market forces play out.

For insurers, asset managers and advisers, the last 30 years have been a great success. Success has been linked to light touch regulation and (to a degree) has come at the expense of the consumer. Government intervention, when it has come , has primarily been to sort the mess out; it’s been tactical rather than strategic and involved crisis management (pension mis-selling, Maxwell, Equitable Life and exorbitant product charges)

Auto-enrolment- the first strategic intervention in retirement savings

There has been no strategic intervention in the way we save for the future – that is until the last five years.

Putting aside Stakeholder Pensions which we can now see were “too little too late”, it wasn’t till the introduction of auto-enrolment, that Government made a concerted attempt to change long-term savings behaviour in the UK.

At the same time as tackling the savings-gap, it at last intervened to reform the ailing State Pension System which had been withering on the vine after successive cuts from 1987 onwards.

In the absence of any Government intervention for nearly twenty five years (the legislation permitting personal pensions was enacted in 1987), the balance between supply and demand needed some attention. Workplace pensions , as they had evolved, had fallen into such disrepute prior to the introduction of RDR in 2012 that the larger proportion of them will have to be re-written or wound up following the imposition of minimum standards by the DWP in 2015.

Abolition of commission  and minimum standards was a consequence of auto-enrolment

These changes to workplace pensions will not effect the fundamental dynamics of how we save for later life. We will continue to use equities to protect the long-term savings of workers from inflation and provide funds for old age in a form better suited to provide cash and income when needed.

Auto-enrolment was the game-changer, RDR and the Minimum Standards- followed.


The 2014 budget was a revolution for pensions

The intervention from the Treasury that will result in a revolution in financial products is the withdrawal of HMRCs restrictions on how the proceeds of approved pensions can be drawn. This will lead to a lot less money being invested in gilt-based annuities, a lot more money being invested in equity based drawdown products and more money being cashed out and spent or kept on deposit.

In terms of product evolution, this is going to be much more of an accelerator. In introducing the DWP reforms, Steve Webb explicitly referred to the need to re-balance the interests of consumers and the financial services industry.

Put bluntly , once auto-enrolment had solved the distribution issue, there was no reason for financial products to be loaded to pay for distribution. The DWP reforms are simply tidying up after RDR and AE and are as such evolutionary.

George Osborne’s Retirement Reforms are revolutionary, both in terms of their explosive impact and in the circularity implied by “revolution”. They  take us back to a time prior to the introduction of personal pensions when the savings vehicle paid the pension.

Looked at logically, the disruption  at what HMRC call the “crystallisation event” (the point when tax-free cash is taken ) has never been easy to explain. In an era when the lines between “retired” and “working” are blurred by 50 shades of semi-retirement, the all or nothing dichotomy of pre and post crystallisation simply didn’t make sense. Try predicting your “selected retirement age” and you’ll see what I mean.

Personal pensions always made sense in terms of the cash element, but what should we do with the 75% of the proceeds we couldn’t cash-out? Historically there was no such question, you saved with an insurer, the insurer paid you a pension (SEDA or RAP), you were in an occupational scheme, the scheme paid you a pension.

Individual  annuities were an interim measure to fill a vacuum.

We only saw mass-market for the individual annuity because firms like Allied Dunbar, Abbey Life and other unit-linked insurers would not offer pensions through with-profits deferred annuities.

What individual annuities replaced is set to make a return (the revolution)

Ironically, the with-profits deferred annuity looks like making a re-appearance  as part of the product revolution driven by the Osborne Budget reforms. It will reappear – hopefully- in rather better shape than it disappeared and will be re-named collective defined contribution (CDC).

A sweet irony of the Government’s legislative program is that the Bill that announces changes in pensions law to allow CDC to (re) emerge, also legislates for the introduction of the Guidance Guarantee.

The Guidance Guarantee is only an interim measure

Much has been made of Guidance as a means for individuals to make sense of their retirement options, but in the context of pensions evolution, I would accord it a very small (though important) role.

The Treasury sees the market for the Guidance being all those approaching retirement with a pension pot (rather than soleley a guaranteed pension from state or defined benefit scheme). There are some 18m of us, arriving in cohorts of between 3-400,000 a year and right now, these people have no obvious way to invest the proceeds of their retirement saving.

Annuities are unattractive, income drawdown expensive and unpredictable, cash is tax and investment inefficient.

After 25 years of financial products chasing limited consumer demand, we now have too much consumer demand for the financial products available.

Over the 25 years between 1987 and 2012, personal pensions evolved from looking like de-risked retirement annuity contracts to the alternative to a Trust-Based occupational DC scheme. In the process  it moved from being an advised product to being pretty well non-advised. Investment in GPPs is now pretty well always on a default or “self-select” basis.

The urgency of the revolution created by Osborne’s tax reforms means that 25 years worth of evolution of the personal pension will have to be squeezed into a couple of years product development.

Nature abhors a vacuum and consumers abhor no obvious answer to the question “what should I do”.

Annuities had been that answer but fell from grace. Advised income drawdown will never be that answer as it requires too much care and maintenance- it is not a default solution. Cash is not an answer for the majority of people who get that they need reliable  income more than invested capital in retirement.

So the Guidance is merely an interim product brought in till a new default evolves. The current array of choices requires guidance but when the new default arrives, the need for guidance will fall away.  Currently – with no alternative but annuities and cash- the need for advised products has never been greater, advisers should fill their boots as in the longer term future they will not have the rub of the green that they have now.

The interventions by the DWP, auto-enrolment and the introduction of minimum quality standards are their first meaningful reforms in the long-term savings market since A-Day in 1987, the interventions by the Treasury in the Budget 2014 mark the end of a 25 year experiment with individual annuities.


The creation of a new “in retirement” default product is inevitable

“Man is born free but everywhere is in chains” , claimed the philosopher, “mankind cannot stand too much freedom” said the poet TS Eliot. The reality of freedom and choice will not be personal financial empowerment but the evolution of new products capable of providing a default solution for the savings of millions of us.

These products will synthesise the transparency and engagement of personal pensions with the predictability and collectivity of earlier products. Without this development in product evolution we will be left with the mess we have today – and Guidance


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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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