John Walbaum, Head of Investment Consultancy explains what could be on the horizon for investment, and what changes he’d like to see: “There are some pretty good signs of a period of sustainable global growth, albeit modest. That said, most markets are expensive with little looking cheap or a compelling buy; the industry has been cautious for quite some time and today’s uncertainties mean that caution is not going away at present. Brexit and the impact on the UK economy will remain one of the big issues in 2018, particularly the impact on the future path of interest rates and inflation. However, it is important to remember that markets and opportunities for investment are global, and to not just look through a somewhat gloomier UK lens.”
“The challenge of finding the right, attractive assets to invest in when much looks fully valued, if not expensive, is considerable. It’s important our clients are hedging their liability risks in case of policy mistakes or general setbacks to growth that lead to lower rates for longer. It has become a growing struggle to advise clients when rates are so low and they fear buying at the bottom although this is a problem schemes have been facing for at least 15 years. In Defined Contribution we will continue needing to see far more cash being invested to give future generations working in the UK the chance of a decent retirement.”
“We’d like to see some positive news on UK economic growth and more clarity on the Brexit settlement that will hopefully lead to a positive outcome for both the UK and Europe. A mellowing of the rhetoric surrounding the US and North Korea, allowing the region to become less of a risk to global security and for Environmental and Social Governance (ESG) issues to become a genuine focus for investment rather than something to which only lip service is paid.”
Paul Waters, Head of Guided Outcomes identifies the main themes in the year ahead for DC Pensions and how the industry can rise to the challenges it will face: “We expect to see savings rates continue to improve across the UK in 2018. In DC pensions we are likely to see consumers benefiting from lower charges as governance and investment product pricing improves. There will also continue to be a high degree of innovation in workplace savings and benefits technology, from which there will be a few winners but also lots of failures.
“Robo-advice will do nothing in terms of closing the advice gap in 2018. The current robo-advice solutions in the market are too complicated to use and too narrow in the way they can help people. Until these are developed to help the masses in what matters to them, not just the elements which are sufficiently lucrative to the providers they will remain too niche to solve the growing advice gap in the UK.
“The biggest challenge is, as always, to help consumers make sound financial decisions. To achieve this, employers will need to be able to access the sort of technical and financial products that people need in a form that meets their objectives. These will be wide ranging, from debt management to savings to accessing the finance to enable their lifestyle choices. We know the consequences of poor financial decisions can be severe, the challenge is to help people effectively in the areas that matter most to them.
“The industry can rise to this through continued investment in simple technology and leveraging scale to deliver solutions. For example, developing simple savings products that can be accessed without the need of advice through a platform or app, and mass distribution through the workplace, allowing attractive products to be offered at a low cost to the provider, at a price that is attractive to enough consumers. By being ruthlessly focused on what matters most to people, such as simple products with clear communication and transparent pricing, and not compromising on the delivery. It’s important not to opt for the “least bad” close fit solution that is easy to implement.
“On our new year wish list for 2018, we’d love to see the abolition of the Lifetime Allowance and at the same time an increase in the Annual Allowance. It would also be great to see strong new entrants in the lifetime savings markets to challenge established market participants. Generally, a benign economy with sound UK growth would be a great benefit for all.”
Calum Cooper, Head of Trustee DB looks to the year ahead and the potential for consolidation within DB Pensions: “2017 will mark the end of the beginning for DB consolidation, in all its guises – whether master trusts, asset platforms, fiduciary, insurance vehicles or innovations in the non-insured space. 2018 will see lots of energy focused exclusively on saving cost in order to attract assets under management. At its heart, consolidation is about realising the cost benefits of scale: improved governance bandwidth, broader investment opportunities, lower investment costs. And it has a big heart. But what does the head say? Many schemes of all shapes and sizes are run on a lean, simple and effective basis and with great governance (tPR’s 21st century trustee campaign is helping here). For others, cost savings should be addressed at a measured pace. In the context of the risk schemes are running to the certainty of member outcomes, it is unlikely to be the top priority for many. Consolidation should, however, be a priority where it is identified as the best way to reduce the risk of not paying pensions in full.
“For example, one form of consolidation that makes a meaningful step forward in managing risk and cost is in risk transfer. Overall we expect 2018 to break prior records. We also expect to see unprecedented transaction innovation. This reflects that on the supply side, many insurers and re-insurers have now caught up with the recent slowdown in longevity improvements, and insurers sourcing a broader range of higher yielding illiquid assets, we anticipate risk transfer pricing to continue to be very attractive next year. This is further supported by international appetite for UK longevity risk. We also expect one or two new entrants to the market in 2018. On the demand side, in the last 12 to 18 months, solvency shortfalls in UKDB have dropped by around £200bn making risk transfer more affordable still.
“For those schemes that do not realistically expect to make it to the insurance world in later life, a significant minority, I predict that the biggest innovation in DB will be a flavour of risk and cost reducing consolidation: non-insured risk transfer, or enabling Trustees to exchange uncertain covenant for additional cash and capital. We will see fully fledged, shovel ready, propositions available to help DB schemes. The PLSA consultation outlined an example of this that would require regulatory change. The reality is that it can be done within the current legislative and regulatory regime. Where paying benefits in full via an insurer is unlikely, this could make a big difference to member outcomes. Watch this space.”
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