July 2007

Identifying the aims

How has the retirement planning industry evolved in recent years?

The growth of the internet has had a significant impact on the industry from a tools perspective. With broadband coverage increasing tools have become more sophisticated and things such as stochastic modelling have really developed and we can do increasingly complex calculations in a realistic time frame.

The advent of A-Day has also brought more complex retirement planning strategies into the mainstream and so tools have had to evolve to cater for them. Previously planning tools were aimed at the accumulation phase as people aimed to build up the biggest pot possible but now there is a much greater emphasis on more post retirement planning that also needs to be done once income needs are being taken.

Where are the main growth areas for these modelling tools?

One area is in the post retirement market - that will be a big growth area with third way products coming into the market. The asset allocation piece is also a huge potential growth area as we move from defined benefit arrangements towards defined contribution pensions. As an increasing number of people move towards using drawdown there are also assets to deal with in the post retirement phase so that means that stochastic modelling is really coming to the fore there as well.

What impact do you think third way products will have going forward?

In my opinion it's still early days for the third way products. The survey said that they would have an impact though many IFAs seemed to suggest that the impact would be quite small. Certainly there is an interest in them because the dilemma for the adviser is whether to choose annuities or drawdown - it's a difficult one to judge and so the third way bridges that gap pretty well.

Clearly the American companies bringing them here have had success with them in the States so I think they will have a significant impact over here but only time will tell how much.

Are advisers becoming more comfortable with the idea of staying invested in the market post retirement?

I think they are. There has always been criticism about the lack of investment flexibility that comes with being locked into an annuity so allowing people to go into drawdown clearly gives some comfort.

However, the risk element of drawdown does still cause clients some concern. This is where the third way products come in as they often underpin investment growth with some kind of guarantee.

What impact do you think that ASP will have on the retirement planning market?

Obviously there has been so much confusion which hasn't helped the industry. I feel that ASP is a good idea and is the right decision for a lot of people.

However, to not have ASP as it was originally introduced is a real shame because what the industry needs to do is encourage people to save for their retirement in a pension vehicle. However, the confusion that has surrounded ASP up until now hasn't helped this.

Are there any gaps in the market that you think product providers or the government need to take a look at?

Personally I think means testing acts as a big disincentive to save in a pension and the government needs to look at that. Under means testing, many people don't get any tangible benefit from their pension savings because of the absence of tax credits. I also think certainty should come into the government's mind more because there is more emphasis on the individual as we move towards a defined contribution pension model.

Uncertainty around pensions doesn't help and I think the government needs to work hard to encourage people to put their trust in the pensions industry again.

However, looking at the survey it is heartening to see how many advisers see their pension business growing. If we link that to the fact that around half of advisers questioned believed that people are taking more responsibility for their retirement planning then I think there is some really positive news there.

The only other thing the survey highlighted was with regards to barriers to adequate retirement provision. I was surprised to see that the biggest barrier was lack of understanding as to how much needs to be saved rather than not having enough money. It's a clear indication of the kind of value proper retirement planning can bring to people. Advisers need to reiterate these messages when dealing with clients and demonstrate to them their role in helping people identify and then meet their retirement planning goals going forward.

Rob Childs
Senior Analyst
DST International