 By Tom Murray, Head of Product Strategy, Exaxe, www.exaxe.com
New Bank of England Governor, Mark Carney, kicked off his new regime with an impressive innovation; the arrival of forward guidance, which gives a long term view of where and when the Bank of England intends to move interest rates. It also provides a clear view of the Bank of England’s monetary strategy that will benefit consumers and professionals alike. No longer will financial planning be at the mercy of the herd mentality of the financial media, who have a tendency to fill up empty space on slow news days by forecasting changes to the interest rates, presumably on the basis that, similar to the man who predicts rain every day, if you do it often enough, you will eventually be right.
Instead financial advisers will now be able to work on the basis of a proper understanding of the medium term strategy of the BoE, which they can incorporate into their holistic planning of their client’s financial futures. This will obviously help them to achieve better outcomes for their clients and, as a bonus, it will also remove an excuse for bad planning; no longer will IFAs be able to claim that a sudden change of policy from on-high has driven the clever financial strategy they worked out for their client off-course.
That being said, there was a downside in the actual guidance given this time, at least for those approaching pension age. The Banks’s guidance that interest rates will remain at their current minimalist levels until unemployment drops to 7% means, by most estimates, that there will be no upward movement in rates for the next three years. For would-be retirees holding out for annuity rate rises, this means that their hopes have now been dashed and that they should proceed with annuity purchases now rather than hold on in the false expectation that some relief is on the way. No doubt, financial advisers are busily responding by directing people into annuities now, or into income drawdown, depending on their individual needs.
However, it is clear that the current product set available for potential retirees is not sufficient for the needs of those retiring in such a low-rate environment and that recent speculation of a rise in annuity rates that would rescue potential retirees from a poverty-stricken retirement is now shown to be without foundation. Annuity rates at the current level are not sufficient to provide a decent income in retirement, particularly for those with smaller pension pots, and not everybody can afford, or is prepared, to run the risk of the equity markets via the income drawdown route. There are a number of combination products such as with-profit and variable annuities but these are merely a compromise between the two main product sets and don’t offer a major alternative.
What’s required now is more product innovation in the at-retirement market. It is in this regard that the new forward guidance approach is such a boon for providers. Life and pension companies can now plan new product strategies safe in the knowledge that a quick change in the bank strategy will not happen. The environment that they will be working in for the next three years is now far clearer.
One of the biggest risks of product development has always been that the time taken from the initial brainstorming to releasing the fully tested product onto the marketplace has been so long that the conditions that underpinned the unique selling points of the product change. The result is that the eventual release of the product is an expensive flop that undermines the value of innovation in the company and tends to foster a conservative approach to new product development in the boardroom.
The demand is there from consumers for more innovative solutions to the problems facing the at-retirement market and it will grow exponentially as increasing amounts of the workforce reach their retirement date over the next decade. Stagnation in annuity rates seems the most likely forecast for the market and not everybody wishes to shoulder the risk level inherent in income drawdown solutions. This means that the market is wide open for new and innovative products that can attract those on the verge of retirement by providing a higher income-stream for life. Investment in innovation is a far better bet for life and pension companies who can have the confidence to sink more money into developing more suitable alternatives for the customers who are left without a decent offering. Given that this market is growing steadily as the population ages, the opportunity for companies is clear.
There has been much criticism of the BoE’s stance, based on its effect on retirees amongst others. But the transparency of the monetary strategy provides a huge opportunity for creativity whilst reducing the risk inherent in creating new products. For the companies that take advantage of this, Mark Carney’s new open approach could herald the start of a major expansion in their own business strategy. This is an opportunity waiting to be grasped by an innovative provider that wants to be the at-retirement trend setter for the next decade.
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