Pension freedom Picking out the business winners and losers

April 2015: How your business can capitalise on a market that’s been thrown open.

www.pwc.co.uk/insurance

Introduction: Making sense of a new world of choiceThe new pension freedoms mean that millions of people now face more critical choices than ever before over how they fund their retirement.

In the lead up to ‘pension freedom’, we surveyed 1,200 consumers aged 50-75 to find out whether they’ve been getting the guidance they need to understand the implications of the changes and make sense of the options ahead.

There is more than 70% of the £12 billion annuity market now up for grabs, based on anticipated rates of annuity take-up in our survey. The survey reveals how consumers plan to fund their retirement and what would help businesses to capitalise on the opportunity.

Our survey dispels any notion that consumers plan to spend their pension pot frivolously. Yet without the guarantee of annuities there are greater risks for pension holders. Society as a whole could also face a high Income Support bill if people don’t have enough savings to fund their retirement, or make poor choices in its management. The companies that will come through as winners will be the ones who guide pension holders through the options, explain the risks most effectively, and develop the customer insight to provide the solutions that best meet consumer needs.

Drawing on the findings from our survey, this report looks at how your business can develop the market understanding, engagement and innovation to turn pension freedom to your advantage.

consumers surveyed

An estimated 70% of the £12bn annuities market is up for grabs

£12bn

1,200

What’s at stake?How people fund their retirement is one of the most important decisions they make. While some may question the returns from annuities, providers do give pension holders guarantees and bear the investment risks. Other options such as taking cash or drawdown might appear straightforward, but carry significant and varied risks, which won’t always be understood.

The question of investment risk is especially critical for consumers with low wealth (assets less than £300,000) and small pension pots (less than £40,000). As Figure 1 highlights, people with low wealth have fewer sources of retirement income than their higher wealth counterparts. As such, they’re more dependent on their pensions, and their retirement income is more vulnerable to movements in the market.

Yet as Figure 2 highlights, investment risk is much less of a factor in how lower wealth/pension savings consumers manage their pension pots (32%) than their higher wealth/savings counterparts (59%). While regulators are keen to promote simpler products to help customers understand the risks and rewards, the findings in Figure 2 show that simplicity is fairly low down pension holders’ list of priorities, including those with low wealth. Rather than product simplicity, the key to safeguarding consumers and making a success of pension freedom lies with effective guidance. Consumers will then have a better understanding of the risks and make better, more informed decisions.

The question of investment risk is especially critical for consumers with low wealth.

Figure 1: What sources of income do you intend to use to fund your retirement?

I will rely on my children or other family members to support me

financially

I haven’t thought about

it yet

Other

Source: PwC pension consumer survey 2015

State pension Savings and investments

Income from my or my partner’s

pension pot

Some form of employment

Income from an investment

property

I will release some of the

equity tied up in my home

76% 85% 59% 69% 51% 27% 34% 30% 9% 19% 15% 3% 9% 5% 4%0% 1%

Key: High wealth Low wealth

83%

£

Your life expectancy

Tax efficiency

Certainty of income

Source: PwC pension consumer survey 2015

Other

High wealth Low wealth High wealth Low wealth

Dependants’ security after your death

Simplicity of the product

Inflationary risks (e.g. rise/fall of inflation)

Your current health

Likely investment risks

46%

1%

29%

47%

45%

59%

61%

78%

68%

31%

2%

39%

37%

44%

42%

58%

62%

71%

20%

1%

38%

30%

48%

32%

50%

38%

63%

32%

1%

39%

38%

42%

47%

56%

66%

70%

Large pension pot Small pension pot

Figure 2: When deciding on how you will manage your pension pot, which of the following factors are important in your decision?

26%of small pot/lower wealth pension holders say they had received any communication or guidance.

45%need further advice from their pension provider.

Pension providers are expected to outline the potential risks that a pension holder should consider, even where they aren’t providing regulated advice. This includes signposting people to Pension Wise, the government guidance service, or to independent advice if needed. Guidance and information will be most important for those who don’t have access to regulated advice. This is especially true where there are interactions with tax bands, means-tested benefits or the pension holder is in poor health.

Are consumers getting the guidance they need?Given how much is at stake, it’s a cause for concern that nearly 60% of consumers in our survey say they hadn’t received any information or guidance from their provider about the pension changes ahead of April 6 (see Figure 3). It’s especially worrying that only just over a quarter of lower wealth/pension savings say they have received communication.

Either pension providers haven’t been getting in touch with their customers or the contact they’ve had hasn’t registered. Even among defined contribution pension holders who had purchased an annuity in the past 12 months and are therefore certain to have had some contact with their provider, only 36% report having had some information or guidance. This raises serious questions about the quality of interaction and guidance, though it’s important to note that April 6 is a start not a transaction date for these changes and providers therefore have a chance to raise their game.

Consumers who’ve had information or guidance rate the usefulness as 7/10 on average. This might sound acceptable and is in line with the ratings for other agencies we asked them about to allow for comparison, such as banks, utility providers and HMRC. Yet how to fund a pension is a life-critical decision that arguably merits a higher rating than this. The quality of communication delivered is paramount to regulators and providers will be judged on how they alert consumers to potential risks. Yet having been informed about the changes by their pension provider, two-thirds of consumers say they are no more or even less likely to need further guidance/advice.

Now that the changes are live, a lot of pension holders are going to be contacting their pension provider – 45% of the consumers in our survey plan to do so. If pension providers can’t cope with the influx of enquiries or the guidance they give isn’t up to scratch, they risk damage to their brand.

Questions over the impact and effectiveness of customer communication clearly open up the risk of regulatory sanction and reputational damage. But arguably even more important is the opportunity to engage with pension holders and forge trusted and enduring relationships in a market that’s opening up as never before.

Figure 3: Have you received any information, guidance or regulated advice from your pension provider on the options available to you following the changes on April 6th?

* Don’t know/Can’t rememberSource: PwC pension consumer survey 2015Note: Some percentages may not add up to 100%, due to rounding.

High wealth

Low wealth

High wealth

Low wealth

Weighted average

Defined contribution holder (purchased annuity in last 12 months)

48% Yes

37% Yes

4%*

5%*

49% No

58% No

36% Yes

26% Yes

5%*

11%*

59% No

64% No

36% Yes

36% Yes

7%*

8%*

57% No

56% No

Large pension pot

Small pension pot

Are consumers willing to pay for advice?When asked where they would go for further guidance, pension providers are still one of the preferred choices, suggesting that this is a relationship that is still theirs to lose.

Our survey shows that just over half of consumers would be willing to pay for pension advice. While market commentators have generally assumed that lower wealth/pension savings consumers are reluctant to pay, nearly 40% would be prepared to do so.

The respondents who said that they are prepared to pay for advice were asked how much they would expect to pay. The average figure they quote is £580. This is broadly in line with what some providers think is achievable within a streamlined service. Lower wealth/pension savings consumers say £340 on average and higher wealth/pension savings consumers say £800, with the differential reflecting their ability to pay and relative extent and complexity of their financial affairs.

It’s notable that consumers don’t rate the quality of face-to-face or telephone communication they receive from pension providers as much better than that received via email or the internet.

This could be a reflection of the constraints placed on what pension providers are able to say to customers. The fact that face-to-face and telephone advice from Independent Financial Advisers (IFA) rates much higher than email or internet advice would bear this out. Where guidance from pension providers is perceived as generic there is little value from personal communication. Given that digital communication is cheaper, this may be an area where insurers can reduce costs without impacting on the level of customer service.

The appetite for advice, and flexibility in how it’s provided, creates openings for a cost-effective advice model, combining internet and some phone and personal support. This would not only help consumers to gain a better understanding of the various options and their implications, but also help companies engage with consumers more closely.

What about those who are unwilling or unable to pay? While our survey reveals limited awareness of Pension Wise at present, its phone line has only recently got up and running. Pension Wise’s success is vital, as for a significant proportion of the population it will likely be the main way of accessing impartial, and free, guidance.

£580Is the average people would be prepared to pay for advice.

30%Just over 30% of consumers in our survey plan to invest some of their money.

How do consumers plan to use their pension pot?The question over what consumers plan to do with their money not only indicates what kind of products and solutions will be successful, but also what types of businesses are best placed to provide them. So how are they going to use the freedom?

Option one: Draw an incomeThree-quarters of consumers in our survey plan to start drawing an income for their retirement (see Figure 4). Among these consumers drawdown products are the favoured option (60% of those opting to draw an income and 45% of the participants as a whole), reflecting growth we’re already seeing in the market. Annuities are some way behind (37% of those opting to draw an income and 28% of the participants as a whole). But guarantees remain popular. There will be opportunities to rebrand annuities as an assured option.

Option two: Invest itJust over 30% of consumers in our survey plan to invest some of their money. The favoured options among respondents looking to invest their income highlight strong opportunities for online platforms and brokers (46% of high wealth consumers would look to use one) and property investment. The relatively low proportion (20%) of those looking to invest through a pensions or life insurance provider underlines the challenges these businesses face and the need to shift or expand their commercial focus.

Nearly 20% of those planning to invest some of their pension pot want to buy an investment fund through an IFA. This would create opportunities for asset managers, though it’s notable that only 6% of consumers in our survey would currently look to ‘other financial institutions’ (which includes asset managers) for guidance and advice. Moreover, asset managers face a loss of revenue from managing annuity funds.

Many life insurers are gravitating to a model that emphasises fund management over risk protection and income guarantee; a move that the contraction in annuity take-up could accelerate. In a market that is becoming more crowded and competitive and in which platforms offer increasingly similar products and fund ranges, the challenge is how to create an appealing and differentiated customer journey.

Option three: Spend it Over a quarter of consumers in our survey plan to spend some of the money. Nearly three-quarters of these would use it for general expenditure and 70% would treat themselves. Less than 25% would carry out home improvements, pay off their mortgage or pay off unsecured debt. Only 1% of consumers in the survey as a whole would exclusively spend their pension pot on treating themselves.

Figure 4: How do you intend to use your pension?

Source: PwC pension consumer survey 2015

High wealth

Low wealth

% of all question respondents

Start drawing an income for your retirement

80%

70%

60%

50%

40%

30%

20%

10%

0Invest the money Spend the money Save the money Other

32%

27%

18%

3%

75%

Winning strategiesPension freedom will provide the catalyst for a rethink of retirement funding options among consumers. So how can your business turn the shake-up to your advantage?

Use cost-effective guidance and advice to cement engagementQuality guidance and advice is an opportunity to strengthen customer understanding, engagement and trust. Openings include the development of interactive online financial advice (with some personal and phone support) that helps customers to understand their needs and the options to meet them. Your business can then build solutions around this interactive engagement and customer data.

Use digital to strengthen customer understanding Investment in consumer profiling (with the latest developments in digital interaction and insight at its heart) will enable your business to design and deliver targeted cost-effective products and a superior experience for your customers.

Sharpen product innovation and choice There are opportunities to develop new products and solutions targeted at consumers with different pension pot sizes and wealth.

Drawdown products are being redeveloped for the mass market with simpler investment choices and lower costs. Demand for these products will increase significantly. Combining the flexibility of drawdown with the certainty of guarantees under annuities may represent an attractive option for many customers.

Product design and marketing needs not only to appeal to different customer segments, but also assure regulators that the targeting for particular customer groups is appropriate.

Consumers want customised solutions and are prepared to pay for themRather than simplicity, most consumers want solutions that reflect their particular circumstances and aspirations. This would open up opportunities to align advanced customer profiling with greater customisation.

Embrace direct-to-consumer distributionSelling through IFAs is no longer always economically viable or even the preferred option for many consumers. Direct-to-consumer digital distribution across all product lines would enable your business to reduce costs and reach out to markets that are under-served by IFA channels. These include younger and less affluent consumers.

Many consumers still want guaranteesWhile the annuity market could contract, a lot of people still like the certainty of guarantees. The keys to success are managing your capital, distribution and running costs well enough to offer a combination of affordable products, competitive returns and the peace of mind of guarantees, along with being able to articulate the benefits of the risk/return trade-off.

Shift the focus from products to outcomesPension freedom could provide the catalyst for new models that shift the focus from products to outcomes – true customer-centricity. A good example of how this might work would be helping customers to understand and balance the trade-off between how much they want to live off now and their desired standard of living when they retire. Product boundaries would become redundant within comprehensive solutions that could embrace mortgages, equity release, tax and inheritance planning, as well as pensions and life cover.

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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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Design Services 29051 (04/15).

Jonathan Howe UK Insurance Leader+44 (0)20 7212 5507jonathan.p.howe@uk.pwc.com

Michel Abbink Partner +44 (0)20 7804 0919 michel.abbink@uk.pwc.com

Lee Clarke Partner+44 (0)20 7213 3945lee.clarke@uk.pwc.com

Steve FolkardDirector +44 (0)20 7213 8464 steve.j.folkard@uk.pwc.com

Contacts

www.pwc.co.uk/insurance

How can your business turn the shake-up to your advantage?

About the surveyThis research was carried out for PwC by Opinium in March 2015. 1,201 respondents aged 50 – 75 were surveyed. The sample is represented by household wealth and pension pot size, and the results adjusted to be nationally representative.