This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Jasper Berens, head of UK Funds at J.P. Morgan Asset Management discusses the impact of pension reforms on the financial advice industry.
UK advisers are going to have to step up to much more comprehensively advise clients on how they take their capital and income from maturing pension pots and furthermore how this works in the context of using their other accrued savings pots or their property to support their changing lifestyles, situations and requirements during retirement. The announced retirement freedoms may create as much as £9 billion market flow in 2015, equivalent to an approximately 40% increase in UK open ended net flows.
That scale of change is going to have enormous impact on how advisers conduct business. Given that more than 91% of current drawdown assets are currently adviser intermediated, IFAs are right at the heart of this. Early consumer surveys suggest that roughly 32% of defined contribution assets will be money-in-motion, either entering drawdown wrappers, ISAs or going into annuities which are not overseen by the pension scheme or trustees.
Advisers will have to raise their expertise to meet a newly opened market, requiring them to gather significant context across capital markets, investment strategies, and financial planning – not to mention no single client will have the same set of circumstances as the next individual. To be equipped, financial advisers have to think about client needs at all stages of the retirement journey. It’s important that advisers have a well-grounded framework for substantial, informational conversations in their toolkit.
Greater investor autonomy around how they direct their retirement savings means financial advisers need to be ready. As an industry it’s critical that we get this right and quality financial advice has never been more important.
Looking at the long-term impact of the pensions shake-up, we expect that the total at-retirement market may treble by 2023, in line with the growth of defined contribution assets and driven by rising levels of auto enrolment. 2015 may be an outsized year as the changes go into effect, but a likely lasting impact may be that investors who would have bought annuities will instead be well served by multi-asset income funds that are easy to understand, accessible and lack complex and expensive guarantees.
In short, with greater flexibility comes greater challenges for retirement investors. Advisers will need to be poised to help clients navigate their options in the new investment landscape. They need to carefully manage risk to prevent against the potential loss of future wealth, whilst at the same time accessing competitive market returns to grow their assets in order to sustain their lifestyles through retirement. Given the basic need for sustainable income throughout retirement, there is a desire for solutions able to provide compelling risk-adjusted returns, balancing the provision of sustainable income and management of downside risk with a strong focus on capital appreciation. These multi-asset income solutions offer the potential to build and preserve wealth, beat inflation and reduce the risk of outliving one’s assets.
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