Platforms and Pension Freedoms
A new focus
All platforms are likely to start focusing on new ways to facilitate optimum cashflow and investment strategies to provide income or preserve and/or grow clients’ wealth. At its simplest, platforms should be able to facilitate a single income payment from multiple tax wrappers. Clients’ individual tax situations will dictate where best to take their income from, so consolidating multiple withdrawals into one payment is easier for all involved. It is always important to avoid the horrors of ‘pound cost ravaging’ when in drawdown and platforms can help advisers manage this by providing a single view of investments and ease of ongoing management and reviews.
Add to that the fact that holding multiple tax wrappers in one place will make it easier to transfer between them to manage clients’ tax liabilities efficiently, and that most platforms will offer a natural income facility across these wrappers to avoid eating into precious capital, and you can start to see why platforms should benefit.
Of course, it’s not just tax efficient income where platforms can help - the need to preserve and grow elements of the capital for the purpose of inheritance can be facilitated on a platform through multiple investment strategies within the same wrapper. This can be achieved on some platforms through clever model portfolio functionality where numerous portfolios can be held in single wrappers. Charges can also be reduced through ‘family grouping’ of accounts should it be right for the client to transfer assets before death.
Greater innovation
Innovation by our industry in the lead up to the freedoms has been patchy to date. This is largely due to the speed in which the reforms have been introduced, with the focus being on just getting ‘ready’ for April. The likely direction of post-April innovation will fall into two areas - tools to support adviser and client decision making and investment options, and providing investment solutions designed to manage risk and minimise portfolio erosion.
The investment offerings starting to emanate from fund managers revolve around various flavours of ‘mixed asset fund’. An increasingly popular flavour is investment trusts - the upcoming Woodford launch is a case in point. Several investment trusts have managed to provide an increasing dividend over extended periods and this will prove to be attractive in the new retirement world.
An interesting exception to a pure investment management strategy will be what Life Companies can offer. The news that Legal & General has given up the fight with their with- profits fund is disappointing. There are few models where some pooling of both investment performance and even longevity can be enjoyed by customers for mutual benefit. We should expect some clever
offerings from the remaining with-profits providers and the challenge is to find a way to make these work on platforms if their potential is to be maximised.
There has been much talk of ‘guarantees’, and notwithstanding their inherent complexity, the cost has historically always been prohibitive. Even with extremely low interest rates, a guaranteed investment vehicle plus adviser and platform charges can often start to look worse than cash. The challenge is to find a solution to this customer need at a cost that works for them. We may yet see the development of a ‘guarantee rider’ that can be applied to investments held on platform - this space will be interesting to watch.
We will see more derivative-based structured products in this space, too - again, they will need to function on platforms. History tells us that explaining the costs and benefits of what can be hugely complex products is not an easy task!
Developing adviser tools We have already said that choice can lead to increased complexity - and the sheer volume of options available to the client (many of which we’ve not even touched on in this article) means that the development of tools to help the adviser explain these choices to the client will be at the forefront of many platform and provider development plans. We can expect the life offices to develop their own toolsets, but platforms are more likely to integrate with ‘best of breed’. Such integrations can be costly though, and will add to the demands for some form of integration tool so that the cost can be shared.
And last but not least, one of the key benefits of platforms is client-centric reporting - we can expect platforms to develop clever and flexible reporting options to help explain investment performance, tax liabilities and optimisation of these various elements for individual clients.
Different challenges
There are many different types of platform in the UK and they can be broadly divided into four camps: the independents, the former fund supermarkets, the legacy pension providers and the D2C offerings, aka execution only. Each of these segments will face different challenges.
Independents. These are platforms like Transact, Nucleus, Ascentric and Novia, which have grown rapidly, largely, if not exclusively, through adviser introduction. Most existing clients were already opting for drawdown options at retirement, and the pot size tends to be larger than average (£150k on Ascentric). Such clients are now likely to adopt Flexi Access Drawdown, and use the ability to use different wrappers and investment strategies to minimise inheritance tax liabilities on death.
Former fund supermarkets. Typically Cofunds and Fidelity FundsNetwork. Historically, these businesses wrote ISA and GIA business in volume, coming to the pension party later than others. Their back book of pension business is therefore likely to be smaller than other platforms but we are already seeing the development of new pension propositions from these providers and it is possible that Cofunds will benefit from Legal & General’s maturing pension business. There is a risk, however, that smaller than average case sizes will result in higher incidences of non-advised client action and possibly more encashment.
Legacy pension providers. This segment includes life companies like Aegon and Aviva, but also Old Mutual, the ‘hybrid’ life company and funds supermarket. The vast maturing pension book for these providers will be a concern - especially where they are lower value. Historically, these will have gone into annuities and so alternative solutions will be required. Maybe we can expect to see the life company platforms providing ‘in house’ solutions for these clients?
Execution only. Hargreaves Lansdown is the obvious market-leader, and has very recently announced its intention to launch a non-advised drawdown option on their SIPP. There has been much debate about the wisdom of offering execution-only drawdown. I think the risks, in some cases, have been exaggerated and I am personally relatively relaxed. The primary reason for my confidence is the self-selection process. The very fact that the client is considering drawdown having discounted other arguably riskier options (encashment, investment in other less tax-efficient vehicles), means that the customer is already thinking about how to preserve their pension pot in the best way. Such clients are more likely to understand that drawing down income at 3% or 4% while the market may grow at 5% or 6% is a good thing. Existing execution- only clients tend to use the website more regularly and will therefore immediately see the impact of drawdown on their fund. Clearly, good website information, guidance and tools will help them achieve the best results - and the new Pension Wise service has a real responsibility to help execution- only clients understand their options.
In conclusion, the pension freedoms offer a huge opportunity to give more control to advisers and clients through platform solutions. The industry needs to be relentlessly client focused in the face of the changes - providing income and/or growth at the right time in the right way to facilitate the best client outcomes. And platforms are ideally placed to support advisers and clients through the journey.
Hugo Thorman is Chairman of Investment Funds Direct Group Limited, the regulated provider of the Ascentric Wrap Platform
22
Investment Life & Pensions Moneyfacts
®
Wraps and Platforms
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