A change in the market
The FCA retirement Income Survey includes a chart on the number of DB to DC transfersi and the number of advisers active in this area. Both continue to decline.
Since the start of the survey in Q3 2018 till today , transfers have fallen from 32,364 to 14, 707 with numbers falling again in the last six months (down from 15,889).
Advisors active in thei market have shown a steady decline from 72 to 63, though this includes networks of advisors – so individual advisory firms will be more
The likely reasons for this decline include
- Pressure from regulators on advisors to raise standards (including the ban on conditional charging)
- Increased costs of conducting the business (especially in PI insurance which can often be unobtainable)
- A recogniton from consumers that transfers are not quite as much a “no-brainer” as they once seemed.
How insurance has benefited from the decline of defined benefit schemes
The insurers and SIPPs who benefited from the glut of DB/DC transfers from 2016 -2018 are now reporting a drop off in business in line with the FCA numbers.
Insurers are increasingly turning to annuity buy-outs and buy-ins for profit from occupational pensions.
But they have have around £80bn of assets from the DB transfer boom in unit-linked products which they hope to transfer to their balance sheets in return for providing those in drawdown with longevity protection.
Insurers near monopoly of “DB de-risking”
Andrew Tully of Canada Life makes very sensible comments on guatanteed pensions.
“Increased regulatory scrutiny on DB to DC transfers is clearly having the desired effect as activity is down by 25 per cent. Advisers have been stepping away from this market for a number of reasons but we know consumer demand is still there.
“While annuity sales are still down we can see an increasing number people are choosing to purchase one later in life. Perhaps following a hybrid approach of starting with drawdown then gradually de-risking to an annuity. This makes sense as annuity rates improve as we age due to life expectancy and declining health.”
The life insurance industry’s reaction to the extreme position taken by the Pension Regulator to the risks retained in a DB scheme, is to provide risk transfers both to its own balance sheet and to unit-linked savings products wheere the risk is taken by memebers
It sees the bulk annuity as its core de-risking product, targeted at employers and trustees. It is taking on huge amounts of assets through the buy-out of member benefits . At the same time, the insurance industry has taken huge sums into unit-linked products = through CETVs (a further risk transfer, this time to individuals who may or may not be able to manage the risk).
Finally it hopes to take risk back from consumers through individual annuity sales in laer life.
Will the insurer’s monopoly be challenged?
It’s a nice trick for insure’s to pulloff but it’s likely to meet stiff competition from Superfunds challenging its hegemony in buy-out and CDC which could provide an alternative to individual annuities in insuring extreme longevity.
Insurers will point to the capital they hold against the risks they take on as the quality of the covenant they offer to trustees and members. But the cost of bulk annuities, drawdown products and individual annuities is high. Unlike DC accumulation, these in retirement products have no cap on charges ; there is currently no way we can check the internal margins being achieved and we have to trust to a competitive market in our hope that we are getting value for money.
The opportunities for innovative new entrants such as pension superfunds , DB master trusts and the workplace master trusts, should make for a competitive market to manage the ongoing de-risking of DB schemes. The hegemony of insured buy-out looks set to be challenged by the likes of Pension Superfund and Clara.
The individual de-risking , through DB to DC transfers looks a decreasing market (despite consumer demand). CETVs are likely to fall as inflation drives discount rates higher . And the insurers may well find that the £80bn it has on its fund platforms is vulnerable to margin erosion from competiton and increased regulatory scrutiny of value for money.
We have a very strong insurance sector and there is no doubt it is doing good things both for the members of DB and DC schemes, but it needs to be challenged by disruptors who can provide alternative solutions through new ways of risk sharing and innovative products.
The gold mines that DB schemes have proved to be , may becoming harder for insurers to mine.