London, 20 November 2017: Recent government reforms and rapid market changes have led to reduced consumer choice over pensions products, leaving the UK facing a potential crisis in the retirement income market, according to a major new study published today.

‘Pensions Freedoms’ introduced in 2015 allowed those over 55 to withdraw funds but there has been a dearth of new products that offer flexibility and guaranteed income launched since, with the industry also struggling to adapt to regulatory and technological change, said the Pensions Institute report at Cass Business School.

This is the conclusion of industry report The Meaning of Life 2: The UK life company business model in the context of dramatic changes to the political landscape and the investment and private-sector pensions market. The report updates the findings of the Pensions Institute’s November 2015 independent investigation into the UK’s life company business model.

Report author Pádraig Floyd, said: “The industry faces a number of challenges, which are highlighted in this timely report. There are conflicting policy signals coming, on the one hand, from the encouragement to save for retirement via auto-enrolment and on the other, from the freedom to withdraw funds from age 55, with no obligation to secure a life-long income. As the report details, in a few years’ time there is the real prospect that there could be no private-sector providers of longevity risk cover. This will result in the state having to bail out those who outlive their pension assets and could severely damage future intergenerational solidarity.”

Clive Bannister, Chief Executive of the Phoenix Group, the sponsor of the report, said: “The intervening years between the two Meaning of Life reports has seen unprecedented change both within the life industry and in wider society. These range from Brexit to the roll-out of pensions freedoms and the implementation of Solvency II. These dynamics are set to have a profound effect upon the shape of the market. It is vital the industry works with policymakers to ensure the best possible outcomes for consumer protection and the sector’s own future.”

The report’s key findings include:

• A combination of both consolidation and divergence in the UK life and pensions market is having a major impact upon the future health of the retirement income market with consumers set to suffer as a result. There is a dearth of new products that offer both flexibility and guaranteed income resulting in a potential crisis of provision and consumer protection within the retirement income market. There is ‘freedom’ but little choice, making decisions more complex. With too few consumers seeking advice, sub-optimal decisions are being made by consumers which could damage their retirement provision.
• A fragmented approach to regulation in the UK by the Government is undermining the spirit of pension saving. The current policy is giving with one hand (AE and pensions freedoms), while taking away with the other (LTA, AA, MPAA and taper), and conflicts with the policies of other OECD nations. The author calls for the government to address all retirement product regulation in a more holistic fashion.
• The life industry is bifurcating with one group of companies retaining the traditional risk-based model and the other group is moving to an asset management structure, which is less capital intensive, in order to avoid the increased capital costs under Solvency II. This process is triggering faster industry consolidation but also limiting choice in the retirement market.
• Life companies that remain have switched resources to the Bulk Purchase Annuity (BPA) market where buyouts and buy-ins are helping companies hedge the longevity risk in their pension schemes. Whilst pricing has remained competitive, there are clear tensions between regulatory scrutiny and commercial decision making at life companies.
• Technology is the key to scalability and achieving necessary critical mass on platforms. Many institutions have been building platforms but few have achieved the scale to be profitable. The quality of platform systems is mixed and the technology lacks a coherent approach to industry data standards. The report recommends that current programmes, including the pensions dashboard, should look to replicate broader technology standards, such as those used in the Open Banking Project, which will transform and improve the customer experience.
• Consolidation continues and is expected to accelerate over the next two years, as predicted. The 2015 report predicted that by 2020, 90% of auto-enrolment savings would be held as assets under management by a select group of financial institutions, with certain high street/household names withdrawing from the market. We have already witnessed considerable consolidation among life companies with overseas parents, as well as consolidation among some smaller mastertrusts.
• The description of a back book should be changed. The author suggests that the back book market should now include the Bulk Purchase Annuity (BPA) market, private-sector closed DB schemes and legacy DC schemes with Guaranteed Minimum Pensions (GMPs) and other guarantees.

- Ends - 

A copy of the report will be available from 11am Monday 20 November on the Pension Institute’s website: www.pensions-institute.org/reports/MeaningOfLife2.pdf and Phoenix Group’s website

For more information please contact:

For Phoenix

Sundeep Tucker
Maitland 
0207 379 5151/ 07557 480987
stucker@maitland.co.uk

Shellie Wells
Head of Corporate Communications
Phoenix Group
020 3735 0922 / 07872 414137
shellie.wells@thephoenixgroup.com

For The Pensions Institute

Pádraig Floyd
Author
psafloyd@moneyjourney.net

Professor David Blake
Director of the Pensions Institute
d.blake@city.ac.uk

Notes to editors

The Pensions Institute
The Pensions Institute at Cass Business School is the first and only independent academic pensions research organization in the UK: http://www.pensions-institute.org

Phoenix Group
The Phoenix Group is the UK’s largest specialist consolidator of closed life and pension funds with over 6.1 million policyholders and £75 billion of assets held by the Group’s life companies, including the acquired AXA Wealth, SunLife and Abbey Life businesses. www.thephoenixgroup.com