Emma Wall: Hello and welcome to Morningstar Series, Ask the Expert. I am Emma Wall and here with me today is Simon Chinnery, Head of UK DC for JPMorgan.
Hello, Simon.
Simon Chinnery: Hello, good morning.
Wall: So, ever approaching all the pension reforms coming in April. As we get closer, we are getting a little more information for investors about what post-reform pension society will look like. What will it look like?
Chinnery: Well, of course, we don't know. And one of the things is that what is happening now shouldn't really be much of an indication for the future. For instance, we know that annuity sales have halved at least and certainly according to L&G and others that doesn't mean annuities are dead, there is an absolute place for them.
And there is more talk about people doing drawdown, the need for income in retirement clearly is absolutely paramount. But I think people feel great deal of uncertainty at the moment. They don't know really what to do. Personally I think that's a huge opportunity for the advisor community to engage not just at the point of retirement, but actually in the workplace as well.
Wall: You've mentioned that there has been some product launches. I think this is one of those things where there is so much information out there for investors it can be very confusing. Annuities have been tarred with the brush of evil, but I think it is important to remember that although compulsory annuity purchase being scraped is a positive thing – because one rule for everybody is never the right way – annuities can still set up a place in a post-retirement world, can't they?
Chinnery: Yeah, I mean, I think that the reality is as we move from a DB world, a defined benefit world to a DC world, the parts are going to be a lot smaller. DC hasn't been around in the U.K. as you know for that many years. And so I think the need to be able pay the bills and nothing else really has to be addressed through some level of security and the annuity may well offer that function.
We actually think that there is likely to be a mass market of defaulters effectively in retirement who still won't know what they want to do. They may need to continue to save, but with access to their money as well. But they're not going to engage, they're not going to suddenly become financial experts.
Wall: At the moment annuities are the only product that absolutely guarantees an income in retirement, but of course come April there may be a slew of other products that will be launched, that may be suitable for individuals.
Chinnery: Yeah, I think again, this is a great opportunity for the advisor market to kind of cascade down from where they are familiar, which is the high net worth end of the market towards kind of a mass market guidance, if not individual advice. And I think the opportunity here is that people will require income as I said before and I think the needs will be how can I make my money last, so I don't outlive it.
And that's the biggest challenge I think for everyone in the industry. How should we manage money for these people, so that they don't run out of money.
Wall: Well, I think one important thing is, as we look at the pension industry and pension changes as a whole, not just looking at pension reforms but also looking at auto enrollment, there's a lot more engagement in workplace pensions now. And I think that's an opportunity for the industry to not just zero in on those two years out of retirement, but actually take responsibility for the whole of the workplace savings journey.
Chinnery: Yeah, and I mean, it's very interesting in the U.S. that the advisor community is really the dominant force there. And they're dominant because they moved into workplace really very early on in a way that the investment consultants weren't involved and weren't engaged in. And they kind of grew up with these companies and the point here is that they actually do things like retirement readiness planning many years before somebody comes up to retirement.
And I think the advantage of that is that you have people more informed about what they're doing and perhaps also they're actually saving more. I mean, that is the other big challenge, of course, because we talk about what's going to happen when people retire. But the fact is that the biggest challenge over the next five, 10 years is going to get people to save more. So that they actually are in a position to be able to retire.
Wall: And that's good for the individual, but it also can be good for the industry because if you have someone who gives you a helping hand along the way at 30, when it comes to 60, 65, 70 and you're looking for advice, you'll remember that person.
Chinnery: Absolutely. And I think and I would say to the advisor community that that it is a massive opportunity they've got here. And the investment consulting world of the defined benefit, they're not asleep, they are already moving into this world.
So I think that, I think there is an opportunity to help fashion the way in which product might develop in the future as well because I think there's no point in us as an industry creating 101 variations on product, which will just confuse as you said early, a lot of people are uncertain. What is it that people actually want? They want income. They want some certainty. They want full certainty by an annuity. I think that a lot of people will just fall into drawdown and fall into something that just says, I want my money as and when and I want to invest in a tried and trusted source.
Wall: And make sure that they are educated to be able to make those decisions.
Chinnery: Yeah, and I think the big challenge that we have is that for many, many years, if you speak to any pension managers say, the biggest problem has been engagement. Certainly in DC, well because in DB you didn't to be engaged, did you. So and I think again, you look at how many people in company schemes in the default, 85%, 90% of people. That for us is really the starting point to say in terms of what we're trying to do is deliver as many people to at least a minimum income replacement.
So that they are at least able to retire and I think that the – as much as it's interesting to speculate about what will happen in the future in the retirement space. I think we mustn't recite the fact that there is a huge requirement for flexible dynamic management of people's assets through the time in the workplace.
Wall: Simon, thank you very much.
Chinnery: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
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