Their ability to turn a sum of money into a guaranteed stream of income for life led them to dominate the retirement market.
For generations, these titans of the insurance world provided certainty – if not necessarily financial security – for those that could afford it. The adoption of the old age pension in 1909 was an endorsement of the concept of saving for a time when one can no longer provide for oneself, although back then retirement, on average, lasted 2 years not the 25 years we find today.
Being well established for so long has its drawbacks. Much of the industry failed to see its world was changing and neglected to adapt to changing customer needs. The defined benefit pension schemes of the post-war era have come to an end, or at least stopped accruing further benefits (in the private sector at least) and as our society grows older, it has an expectation of working longer, whether out of choice or necessity.
Technology did play a part in taking these products to the mass market, but instead of continuing to invest in technology, in true war time fashion, the industry generally made do and mended what it already had.
It is little wonder that some firms have moved into platform-based and asset management business models in order to escape the millstone of increasingly unsupported technology.
Time for change
Those that remain must take action if they wish to avoid extinction. If they do take action, they may discover that there is a future for them, and a potentially bright one too.
That future must be for the life and pensions sector to focus on retirement income products, at least for the short to medium term. There are still a wealth of retirement assets to be serviced and converted into lump-sum benefits and retirement income streams.
There are good reasons to believe in such a project.
This industry understands risk like no other and risk is an ever present concern among people saving for the future. No investment product has yet replaced the certainty an annuity can provide, and this is why they are still sold in considerable numbers.
A slight change in interest rates is all that it will take to make annuities feel more like value for money and for those 75 or over, the mortality cross-subsidy is worth having.
That annuity market has become condensed since the pension freedoms, but it remains an important and lucrative market. The new default of income drawdown offers all the flexibility the freedoms’ progenitors believed consumers craved, but without any of the security. And that is what many savers require, at least until we have a new savings paradigm in which the new defined contribution (DC) regime generates meaningful income for those entering retirement.
Beyond the comfort zone
Retirement income was too cosy in the past. Innovation was often left to specialist players and new entrants, neither of which build confidence in a market that recognises age old brands. Many of the original ‘third way’ products were considered excessively priced, engineered, or both. While they were good products in many cases, they didn’t have enough of a hook for the consumer or their advisers.
Pension freedoms are here to stay, so there is an opportunity for life companies to look at how to make the balance between flexibility and security more appealing. It’s being done elsewhere. Deferred annuities – largely ignored except in the institutional market – are being blended with the equivalent of drawdown in places like the United States. Hybrid products offering an evolution towards annuities already exist in the UK market.
Life companies are simply best placed to service such products, as they have the people and track record to make it work. Who better understands risk and risk products than the life and pensions sector? Certainly not those who got out, or else they’d still be doing it.
That opportunity is potentially huge if you consider that the UK still has £2 trillion of assets that need to be managed. De-risking is no less of a concern to the institutional market, with hundreds of DB pension schemes looking to exit, which cannot, either because the scheme cannot find a way to bridge the deficit, or there is a lack of capacity in the market.
That capacity is set to be squeezed further as other life companies seek to offload their back books and as a result, there have been green shoots of recovery, with insurers looking to beef up or launch new offerings to serve this market.
Work smarter, not harder
Yet technology still holds back many life companies. The last decade has seen a procession of attempts to build the platform to end all platforms in order to consolidate their myriad of products, reflecting every legislative change and marketing opportunity. Not all of these cases have ended in disaster of course, but some have, and all those engaged have spent far more money trying to find the Holy Grail, when alternatives exist.
The asset management market’s response to saving is excellent at getting customers to the point of taking an income, but fails to offer options about how that fund can be turned into cash. And to an extent, that market doesn’t care how that happens, because in simple terms, that is not its problem.
Live long and prosper – if you can
Longevity is not a recent phenomenon. The old age pension was introduced in 1909 because we knew that society was ageing and that greater numbers would live in poverty without some provision being made. The cost of provision has spiraled and we are now feeling the full effect of that cost on affordability.
A century ago, people were living longer than their ability to work. Now we are living far longer, and far beyond what our society has made provision for in terms of long term care.
Our ability as a society to pay for the care of the elderly without a considerable shift in emphasis in funding at both the level of the state and the individual is lamentable. The market – and Government should not be omitted from this failing – has been slow to innovate in developing later-life products.
While improved saving helps, as will the contribution from products such as equity release and deferred annuities, it is income drawdown that is presented as the solution - to deliver a variable income that matches retirees’ changing needs. Often depicted as ‘U or ‘J’ shaped income in retirement curve to indicate a falling income need in healthy, but less active retirement, leading to increased income need in later, unhealthy, retirement. We have yet to see anything developed systematically for this burgeoning need.
For this reason, though life and pensions in the UK may look like an industry in decline, we believe that it has an integral role to play – one that will only grow in importance – over the next 150 years.