Magnus Spence from market data provider Spence Johnson looks at the transformation the post-retirement market has undergone.
It is clear that pensions in drawdown are now the first choice product for new retirees: sales exceed those of annuities, and assets under management are growing at more than 20 per cent a year.
Their forecasts suggest thatjust 9 per cent of schemes will target annuities in 2019
This growth in drawdown as a primary choice has led to changes in what defined contribution default options target. A majority no longer lead to annuities, and in the near future, drawdown or a ‘blended’ target with some mix of annuities, cash and drawdown, are expected to be the dominant choices.
The shift away from annuities that has arisen as a result of the pension freedoms is clear. Compared with the 62 per cent of schemes targeting annuities in 2015, 42 per cent of the respondents to our 2016 survey now target annuities.
The percentage of respondents targeting a blend of outcomes, cash or drawdown, increased 10 percentage points, 3 percentage points and 9 percentage points respectively.
Transformation of default options likely to continue
Analysis of the future plans of schemes indicates that the decline in the number of schemes targeting annuities will decrease further. Their forecasts suggest that just 9 per cent of schemes will be targeting annuities in 2019.
By then, 32 per cent of schemes are likely to be targeting drawdown, 20 per cent of schemes are planning to target cash, and 39 per cent expect to have a blend of outcomes.
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Looking just at the schemes which are currently leading members towards annuities, 25 per cent expect to be targeting drawdown in three years’ time, 17 per cent plan to target cash, and 19 per cent are expecting to target a blended outcome.
Twenty-three per cent of schemes were unsure as to what they would be aiming for in three years’ time, and just 17 per cent of respondents indicated that they would still target annuities.
Death of annuities started before pension freedoms
Data on drawdown sales by the Association of British Insurers suggest drawdown sales for its members grew by more than 100 per cent in 2015, for the second consecutive year. The data show that drawdown sales for its members totalled £5.3bn in 2015, up from £1.2bn in 2013.
Meanwhile, annuity sales continued to tumble in 2016. In 2015, there were only 82,000 annuity sales – down 56 per cent on 2014, and 82 per cent from their peak of 462,000 in 2009. The sales totalled £4.2bn, a fall of 39 per cent from 2014, and 70 per cent from their 2012 peak of £14.2bn.
The fact that the fall in sales began in 2012 illustrates that, although exacerbated by pension freedoms, a trend away from annuities, driven by falling interest rates and poor perceived value, started before 2014.
While initial data from 2016 suggest sales have begun to stabilise, the exit of many leading providers from the market could mean these products will continue to face headwinds – especially if, as expected, interest rates remain low over the medium to long term.
Magnus Spence is chief executive of market research company Spence Johnson
