Orphaned or empowered - pensions, protection and investments in 2012 and beyond

Orphaned or Empowered?

Disruption: a Cello Group Financial Services Conference

Andy Glazier Head of Consensus

Ron Wheatcroft Technical Manager

Presenter

Presentation Notes

Good morning. Lovely to see so many familiar and less familiar faces here …. For the next 20 minutes or so, Ron and I will be painting a broad canvas for you, touching on numerous issues impacting on the world of financial services at the moment. We’ll be talking about investments, protection and specifically the far-reaching changes we’re about to see in the world of pensions. The common thread is, not surprisingly, disruption. More specifically, we’ll be assessing how this disruption is impacting on UK consumers today and the every day choices we have to make. In light of this we’ll be assessing where we feel the opportunities lie for providers in this brave new world. For the first few minutes you have to put up with me I’m afraid, but don’t worry, Ron will be in the hot seat soon …………

2 Cello MoneyTalks Conference, September 2012

From a funds industry perspective, when I joined the company to run the retail division, 20% of business was direct to consumers. We had a hotline and crystal mark literature; none of this happens now however.

We’ve shifted our platform totally to business to business. We still love our direct customers and give them great service … (BUT)…they have been left alone too

much. The flag that we very much put up is the B2B flag.

I think that there is a big direct to consumer marketplace. I think there is a perfectly profitable sector which is under-broked at the moment.

MD, pre-eminent global money manager

It’s not in our plan however, to go back there.

The abandoned investor

Presenter

Presentation Notes

But why are we bothering with consumers at all? Let’s take the world of investments - I do sometimes wonder how this market has grown to the size that it has, given the almost complete lack of attention paid to the consumer over the years by providers. Granted this quote is a few months old, and the picture is starting to change, but this quote from the UK MD of a top three global asset management company is not atypical of the industry. The presence and potential offered by going straight to the investor is plain to see and well recognised, but even then, almost nothing has been done about it! We only have to think of the consumer-friendly, intuitive and easy-to-grasp names given to so many investment products over the years – OEICS, Absolute Returns, UCITS, SICAVs …… you get the point I’m sure …..


Sources: ITU / ONS

Why the interest in them now …. easy access ….

2012 - 84%

Approximate internet usage

Presenter

Presentation Notes

Why then, are we interested in the consumer NOW? What’s changing? Well, there’s so much changing, so many convergent macro-factors, it’s almost impossible to know where to start. There’s the relentless march of the internet and broadband, giving investors high-speed access to countless information sources. There’s a mountain of stats we could throw at you here … - according to Ofcom, in 2009 UK consumers spent an average of 25 minutes surfing the net, compared to 9 in 2004 - according to the British Banking Association, every 10 minutes, in excess of 35,000 people use the internet to check their bank balance or statement online. In fact, in our Investment Funds Survey last year, the proportion of active investors turning first to the internet for information on investments, overtook those turning first to an intermediary – for the first time in 27 years ….


Why the interest in them now … familiarity …

Presenter

Presentation Notes

And that ease of access has bought with it a raft of brands that have become household names …… from the beloved meerkats (NO FS Conference is complete without a mention of the meerkats) to the deity that is Martin Lewis. Now I’m not saying all these guys offer advice – sorry, I mean information – on SICAVs or any form of risk-based investment, but they are key in creating a feeling of familiarity and ease with hunting around ones self for the best offers on the market …..


Why the interest in them now … responsibility …

Responsibility: A detachable burden easily shifted to the shoulders of God, Fate, Fortune, Luck or one's neighbour. In the days of astrology it was customary to unload it upon a star. Ambrose Bierce, The Devil's Dictionary, 1911

Presenter

Presentation Notes

And of course that growing feeling of familiarity sits very nicely with what we all know is happening at the moment - the devolution of responsibility to the individual from the state. From Mr Cameron’s Big Society, the work of the FSA and the Money Advice Service, to PFEG and their work with the All Party Parliamentary Committee on Financial Education for Young People, the mantra is very clear. Ron will touch on this more in a few charts time, but we do appreciate this is happening, that ‘financial responsibility’ in particular is no longer a burden that can be easily detached and shifted to the shoulders of the State …..


0%

1%

2%

3%

4%

5%

6%

2006 2012 2009

Why the interest in them now … the market …

BoE Base Rate………..

Source: http://www.bankofengland.co.uk/statistics/rates/baserate.xls

Presenter

Presentation Notes

And I don’t really need to delve deep into the economic backdrop against which all of this is set. For those of us repaying mortgages, there’s a clear upside. For those of us looking for good returns on our capital however, it’s not so bright. We’re all looking around for something that can beat the unprecedented low interest rates on offer on the high street. And when you’re paying for poor performance, we of course throw another factor into the pot. Perceived high charges, in tandem with poor returns, are doubtless two of the factors behind the drop in people using wealth managers and private banks. The growing pressure on charges and margins throws this into even starker relief ………….


Why the interest in them now … regulatory pressure …

There will be a need for trusted advisers without a question in the future but RDR has shown that the IFA model is corrupt & what will spring up in its place is a new fee driven model for the mid-market.

Director of a market intelligence/ consultancy for the asset management industry

Presenter

Presentation Notes

And another convergent factor is of course, the impact of regulation, in particular the RDR. Just how the RDR is set to shake up the investment market is something on which pretty much every stakeholder has a view, but we certainly seem to be agreed that it is going to shake things up. What has been a commonly held view is touched on here, another interview I conducted as part of our Investment Funds Survey. The suggestion is that the fee-driven model could potentially ‘orphan’ sizeable numbers of smaller portfolio investors. In fact in an online survey of 16,000 IFAs conducted last year by Dunstan Thomas, almost 70% of IFAs consider independent financial advice to the mass market to be unaffordable following the new qualification and training requirements demanded by RDR. The adviser view may not be as extreme or as gloomy as this today, but there is still a great deal of sentiment out there similar to this.


Why the interest in them now … opportunity …

Presenter

Presentation Notes

And all of this creates real opportunity …. Up till recently, it would have been fair to think of Hargreaves as having an open road in the consumer platform arena, in spite of the presence of other well established brands. Now however, there’s far greater breadth and depth of competition, whether it be from IFA brand platforms, fund manager owned platforms, execution-only stockbrokers, life and pension providers, banks and building societies and a whole range of niche players.


A little over 1 in 2 people in the UK have savings or investments

Of these, around 1 in 2 have risk-based investments

The active investor market is substantial …

A little under 1 in 2 are actively involved with those investments

This gives us approx 6 million active investors in the UK

Presenter

Presentation Notes

And the point is, the market really is substantial. We recently added some questions to a consumer omnibus and worked through these approximations: - around 55% of consumers today have some form of savings or investments - half of these, give or take, have what we might call a form of risk-based investment - half of these again, so around 13% of UK consumers all in all, are ‘involved’ to some extent in these investments i.e. do not absolve all responsibility to a third party, an intermediary. That presents us with 6m people and an awful lot of invested or investable wealth.


52%

36%

13%

Interested in investing -happy to spend time on it

Get involved, but don'tget much pleasure from it

Find investing confusingand complicated

All Active Investors

… and for many, investing is not much fun …

Source: Consensus IFS Active Investors Monitor

Which one of the following most closely matches the way you think about investing?

Presenter

Presentation Notes

And would you beleive, 1 in 2 of those actively involved in investing do not get much pleasure from it or actually find it confusing and complicated. This data is from our own Investment Funds Survey, and when we looked at it more closely, we found that even of those who take care of their own investments entirely, 1 in 4 claim to not get much pleasure from it. I’m going to shamelessly pinch an analogy my friend and colleague Mr Camp made when we were discussing this - we have a mind-set for an awful lot of investors that is not a million miles from how countless people probably think about their garden: they don’t much enjoy the digging or weeding, or even the more pleasurable aspects of gardening, but get their hands grubby all the same, when they could feasibly pay someone else to do something they simply do not enjoy doing. What this means to us is that there’s an awful lot of opportunity out there, and it doesn’t stop for investment providers, it stretches way beyond that into the world of protection ………..


Whose responsibility is it today?

80%

63%

63%

55%

47%

2%

12%

4%

16%

12%

10%

16%

22%

21%

32%

8%

9%

11%

9%

9%

Nursing care for the very old

Income during long-term illness

Rehabilitation

Income after redundancy

Income in retirement

Government Employer Individual Don't know

Swiss Re UK Insurance Report 2011, ‘O Shaped Recession’

Presenter

Presentation Notes

Consumers recognise that the world is changing ��Who should be responsible now? ��In ten years time?


35%

31%

27%

27%

23%

2%

7%

3%

8%

6%

45%

44%

52%

47%

55%

18%

17%

19%

17%

16%

Nursing care for the very old

Income during long-term illness

Rehabilitation

Income after redundancy

Income in retirement

Government Employer Individual Don't know

Whose responsibility in 10 years’ time?


Presenter

Presentation Notes

In ten years time?


In the event of long-term illness, disability or death, how would your household be financially positioned?

27%

44%

18%

9% 3%

8%

30% 28% 24%

11%

Well positionedfinancially

Reasonablypositionedfinancially

Might strugglefinancially

Would struggle &be in financial

difficulties

Don't know

2009 2011


Presenter

Presentation Notes

The challenge is now to turn greater awareness into action. What do I need? What do I do? Who do I talk to?


Which statement best describes why you might or would struggle?

26% 28%

13%

27%

6%

Not enoughsavings

State won'tprovide enough

Not enoughinsurance

No one else toprovide for me

Other



Some challenges facing the pensions market

More downward pressure on pension costs, in face of media and political comments, both informed and ill-informed

More government/regulatory meddling

Consultancy charging – how will it work in practice?

Will RDR lead to the growth of the financially excluded small business?

Will NEST emerge as a threatening competitor to other pension providers?

Political pressures to remove some of the constraints on NEST

Should we ditch pensions as a term given the greater use of ISAs in retirement planning?

Presenter

Presentation Notes

There will be more downward pressure on pension costs and we have probably all seen some of the media and political comments, both informed and ill-informed. ��The timetable is tight for AE and far too few employers are beginning to deal with it. ��Consultancy charging!!! ��Will the RDR lead to a market where we have financially excluded smaller employers as well as consumers? �NEST may become a serious competitor - what happens if take up is disappointing -we have already seen comment about relaxing the rules regarding transfers in and out and the limits. Could NEST become one of the "new" brands on the block? For many consumers, it may well be the only brand they associate with pension saving. ��


Pensions and risk benefits

AE could increase the take up of workplace protection sales Death in service and, to a lesser extent, group income protection

entitlement often conditional on scheme membership Will employers offer risk cover to all, including those they auto-enrol? Research for Group Watch suggest positive for group life (average cost

per member across total market is £103, compared with £286 for group income protection)

Product design for income protection increasingly towards limiting benefit payment term to between two and five years

Increase of flex and voluntary risk cover business – transferring responsibility back to the member

Should auto-enrolment remain a pensions issue – how do organisations dependent on pensions business manage the lack of diversification?

Presenter

Presentation Notes

AE could increase the take up of workplace protection sales. Often, death in service and, to a lesser extent, GIP, are conditional on pension scheme membership. Increase the membership through AE- do you then give them risk benefits? Research for Group Watch suggest positive for GL which is cheap ( £103 per member across the total 8m market compared with £286 for GIP). ��Some risk that employers could seek to hold costs by withdrawal of risk benefits - we would expect greater risk to be that there is more downsizing of IP by switching to limited payment term products. ��Employers could have a key role to play in simple products. For IP, at least it should be possible to have consistency about how long any one employer would continue payments for. The role of the employer is changing slowly from one of provider to facilitator. It is now, measured by PI, around 10% of all in-force. �


Insurance needs to be honest, clear and jargon free.

Providers need to be seen to be working with you, providing a product where both of you would get some value out of it.

Presenter

Presentation Notes

What are consumers looking for from the market? Time and time again they ask us to make it simple. Regulation doesn't help (allegedly) but we can do better. How many consumers understand an annuity? And of course we all know that neither a fixed term annuity or a variable annuity is not an annuity, don't we?


9%

11%

11%

14%

19%

20%

5%

12%

18%

28%

35%

36%

41%

45%

44%

14%

15%

17%

30%

29%

22%

16%

18%

14%

13%

11%

70%

69%

63%

42%

37%

26%

19%

19%

18%

11%

11%

11%

12%

13%

14%

14%

15%

19%

15%

13%

12%

13%

Facebook

Youtube

iPhone app

High street department store

Supermarket

Doctor

Employer

Solicitor

Internet / website

Financial adviser at bank or building society

Independent adviser

Very comfortable Fairly Not very Not at all Don't know

How comfortable would you be buying life or protection insurance through the following sources?

Presenter

Presentation Notes

And where will consumers go for this - well, funnily enough, consumers see what we offer as pretty serious. I must agree that banks are potentially in a great place. Despite all the negative publicity, a high street presence and the fact that they dissociate their relationship from what they read and see in the media, mean that for many, the bank is the obvious port of call. And although, independent sits on the top, few people we researched could name an independent organisation (Slide eight) ��And they are well perceived too. Despite 20 plus years of promotion of the value of independence, when asked, consumers still see the bank as independent ( our research findings for 2009). Independent/restricted likely to become less relevant anyway - will the younger consumer really want to go through a couple of hours analysis and then another meeting. my kids wouldn't! �


The view from employers

“It's quite different to say buy this critical illness plan and then it does not pay” Senior industry figure

I would be prepared to allow an insurance company to offer protection products to employees at the workplace

6% 19% 25% 17% 22% 11%

Strongly agree Slightly agreeNeither agree nor disagree Slightly disagreeStrongly disagree Don't know/ refused

Presenter

Presentation Notes

Employers research well too - the slide shows that well over 50% of those who expressed a view were very or fairly likely to consider buying protection through the workplace. I don't think this is a product question - it is a matter of trust. I don't see this as employers giving advice - its more about helpful information in conjunction with a provider. Peer behaviour may help grow take up too


So, what now??

The world is changing ………… More than ever before, our financial fate is in our own hands And as much as we may not like it, we do know it’s happening .....

If only we could simplify our products and our terminology, then surely many more of us would feel confident enough to take matters into our own hands ….. But this is a big ‘if’ ……

So where does the opportunity lie? Make the most of existing relationships Surely the time is now for banks in particular, with their brand clout, high street

presence and deep-rooted relationships? And what about affinity brands? We’ve seen it in insurance already, with the Tesco

Bank’s of this world prospering for the very same reasons – familiarity, relationship

As much as it seems we’ve been hell bent on making enemies over the last few years, the day of the consumer-friendly financial services brand is here

Presenter

Presentation Notes

- How do we see this changing? Where are the opportunities???

Disruption: a Cello Group Financial Services Conference

Andy Glazier Head of Consensus

Ron Wheatcroft Technical Manager

Orphaned or Empowered?

Presenter

Presentation Notes

Economy & Finance

Orphaned or empowered - pensions, protection and investments in 2012 and beyond