Time was when people regarded a pension as an insurance against getting old, right now insurers compete with master trusts and SIPPs for the nation’s retirement saving and the staple features that made them indispensable seem increasingly irrelevant.
Distribution
Let’s start with distribution. Insurance companies reached parts of the public like no other institution. Men from the Pru, Pearl and many others were as much a feature of housing estates as ice-cream vans and news paper boys. But that stopped when savings moved to standing orders and direct debits and the new kids on the block were Hambro and Abbey Life and a host of imitators. Insurance turned introduced savers to investment and opened the door to a world where we aspired to a “capital reservoir” not an “income for life”.
Progressively, distribution moved from retail insurance to workplace saving, the RDR did for the salesman and auto-enrolment did for the financial advisor – until advisors re-emerged as wealth managers, but by then insurance was a dirty word.
The sole remaining dependency , the retirement saver had on insurance was the annuity, when pension freedoms severed that umbilical connection , insurance became a “legacy product” – in terms of distribution – no financial adviser would regard themselves as selling insurance (even if protection products remain an important part of the job). Pensions are not sold as insurance full-stop.
Products
For the last two decades, indeed since the demise of Equitable Life, insurance companies have been looking for ways not to guarantee savings rates. The capital requirements on them make insured saving through with-profits uncompetitive with alternatives available.
A friend of mine reminded me this week of attending a focus group with Frank Field on stakeholder pensions. The group was of lower income and non (privately) pensioned .
The women wanted their money run by Richard Branson. Men wanted Nationwide. No one wanted insurers. None.
Insurance company products have become deeply unfashionable partly because of their brand image and partly because there are more exciting alternatives. From Virgin to Pension Bee, from Hargreaves Lansdown to Nucleus,. the attraction of not having to use an insurance company is highly attractive to the public.
For a time , insurance companies tried to reinvent themselves as banks or mortgage brokers and eventually they realised they had a job to do buying out the pensions of the corporate occupational DB schemes , most of which were run as under-capitalised and badly managed insurers themselves. Almost every insurer (Royal London being the exception) active in pensions is now focussing on buy-out and for all the noise about wanting a slice of auto-enrolment, insurers are now non-essential players accumulating workplace pensions. The large insured master trusts exist now as competitors for occupational DC plans looking to hand over the reins under the cosh from DWP and TPR.
Most people saving with an insurer are doing so by accident – because of decisions made by employers and trustees – not by them. And given half a chance, they will jump ship and take their money either to their bank or to a non-insurance company like Pension Bee or a funds platform (like Hargreaves Lansdown).
What future for retail insurers?
I am not sure that many insurers want to reinvent themselves for the retail savings market, they will continue to compete on rate for the reformed individual annuity market but they will get very little of the old high margin inertia business that arrived because the saver couldn’t be arsed to broke their annuity.
As regards the burgeoning drawdown market, this is increasingly owned by advisers who use the technology they can purchase or rent from the likes of 7IM (I got the demo last week).
Their best hope (and I see firms like Just and Standard Life toying with this), is that they decouple their annuity offerings from insurance guarantees and find a way to offer collective pensions on a non-guaranteed basis. Here they have what advisers do not have, the capacity to process underwriting and pension payments to hundreds of thousands if not millions of customers.
It would take a leap of faith for the above mentioned, Canada Life, L&G and the few other players in the individual annuity market to offer non-insured equivalents – but my bet is – given half a chance – they would.
I think the whole post is born from a misconception, capital versus income.
In reality this does not exist. Money (capital, income etc) are “labour” which we get when we are working. We spend them on goods and services which represent the “labour” of other people. Money have value because it was traded for products of labour. Every bit of capital (machinery, factories, even a brand etc), represents past labour.
People save for retirement, do not spend all of their labour on goods and services, and postpone some of that consumption for the time when they cannot work anymore. They buy means of productions (shares in businesses) instead, or bonds (promises to be paid in the future a certain amount). As they cannot comeback to work in the future, it is normal to want to share risk with someone else (insurer, Government, monastery, children etc), to reduce the potential of being destitute from the moment they cannot work anymore. Through the purchase of index-linked, they share with the Government the risk that if inflation goes about an expected value, the Government will pay the added inflation.
The most riskier situation is to be owner of means of production, where at least diversification could help, but also could bring other problems. Overall markets go up because of increases in productivity. This is what ultimately what sends stock markets up, and makes investments in equity more valuable than long duration bonds. So far, in the last 200 years we have been lucky to have an increase in productivity, and also in demographics and as a result, investments in equities paid enormously well above bonds. Before that for 2000 years, due to stagnant productivity and low demographic increases, this was not the truth, in fact reading English economists like Smith and Ricardo did not know the concept of “equity premia” and believed that bond holders and equity holders should have more or less the same investment return.
Insurers have a role in decumulation, because they can take care of some of the risks: longevity, and inflation. It was the same with giving your capital to a monestery which agreed to take care of you in old age.
On the same time, people would not buy any form of “income”, without knowing how that will look at the beginning: this is why third party products died (with profits annuities, Metlife products etc).
For us, we are believers in factor investing where we usually take advantage of investors behaviour and not increase in productivity. But this should be subject of another post. We could have a decade or two with stagnation, but we would still have behavioural investors.
Taken from the blog…..”Most people saving with an insurer are doing so by accident – because of decisions made by employers and trustees – not by them. And given half a chance, they will jump ship and take their money either to their bank or to a non-insurance company like Pension Bee or a funds platform (like Hargreaves Lansdown).”
When the British Steel Pension Scheme was closed to future accrual in March 2017, it was replaced with the new TATA Steel workplace pension which is run by Aviva. As well as the employee’s contributions, TATA also pay a percentage into the scheme on behalf of the employee.
I have to say, this is an excellent DC scheme which also has other employee benefits built into it. Also, the Aviva website is very well presented and easy to use.
At this point in time, I have no intention of jumping ship and taking my money elsewhere.
“I am not sure that many insurers want to reinvent themselves for the retail savings market…”. Perhaps not – but insurance companies have the size, technical know-how and potential product range to make them one of the ideal candidates to provide some sort of automated advice. The problem the so-called robo advisers have is client acquisition. But maybe the insurers already have the clients and know about them? At least they have the size that allows economies of scale, so that the cost of on-boarding and managing relatively small amounts of saving/investment should potentially be profitable. Maybe they can do what Nutmeg is struggling to do? But this is water into which they seem reluctant to dip a toe…
Eugen makes some very good points. As an IFA, I very firmly recommend the ‘safety-first’ approach of an RPI-linked lifetime annuity where the product fits into the context of the individual’s personal circumstances. RPI-linked annuities are a very small part of the UK pension annuity market, but I’m very glad that many of my clients have bought these, on an entirely rational basis, over the decades. To my knowledge, no-one has ever regretted doing so.
I am, however, increasingly interested in Moshe Milevsky’s research into a modern ‘tontine’ and wonder when such an option might gain traction in the UK?
I’m with the Georgian’s and Victorian’s in that financial wealth should be expressed in terms of income, not notional net worth.