The shock overhaul of the pension system in the Budget potentially offers a huge opportunity for fund and wealth managers.
In what was dubbed the biggest pension overhaul in living memory, chancellor George Osborne said people would no longer be forced to buy an annuity on retirement, while the income required for flexible drawdown was cut from £20,000 to £12,000.
While the news has major implication for life firms, which took a hammering on the stockmarket in the aftermath, it could be a big positive for specialist fund and wealth managers.
In a detailed note on the sector, Bank of America Merrill Lynch (BoAML) said that while it does not think the £12 billion annuity market will fall to zero, it is inevitable that a portion of assets will move to managed assets.
‘By and large, we suspect that people will be more tempted by more risk-managed products, such as multi-asset or balanced funds, or possibly some type of hedge product,’ BoAML analysts Philip Middleton and Jonathan Richards said in their note.
‘Typically, the default fund of a defined contribution (DC) scheme would be some kind of multi-asset or balanced product. We would guess a typical retiree might consider a less volatile version of one of these.’
The duo added: ‘This would reward providers who have high quality multi-asset/risk managed/balanced products as well as strong brands.’
Meanwhile RBC analyst Peter Lenardos reiterated outperform ratings on Jupiter, Henderson and Schroders. ‘We believe asset managers with exposure to UK retail investors should benefit most,’ he said in a note.
He also points out that Aberdeen’s acquisition of Scottish Widows Investment Partnership (Swip) now looks to be a particularly shrewd move, with the firm becoming a top player in the UK retail market.
‘The Swip transaction give Aberdeen the diversification it needs: exposure to UK and European equities and sterling fixed income, greater scale in property, access to retail investors, and a substantially reduced reliance on emerging markets and Asia Pacific equities,’ Lenardos said.
‘In addition Aberdeen becomes the ‘exclusive service provider’ to Lloyds Wealth as there is an investment services agreement with an initial term of eight years.’
Fund managers got an additional Budget boost from an increase in the ISA limit from £11,520 to £15,000 and their repackaging as New ISAs (NISA)
While ISAs represented around 10% of UK fund sales in 2012 and 2013, Middleton and Roger describe this as a ‘modest positive’ for fund managers with large UK businesses, highlighting that the higher limits for cash NISAs may attract more people to this type of product.
‘According to the IMA, the 10 largest market shares are Invesco Perpetual, M&G, BNY Mellon, Threadneedle, Schroders, Jupiter, Fidelity, Henderson, St James’s Place and Legal & General. These would, presumably, be potential beneficiaries from the higher limit.'
In a statement following the Budget, Jupiter chief executive Maarten Slendebroek welcomed the wide-ranging changes.
‘This is the first Budget for some time that has savers’ interests at its heart,’ Slendebroek said.
‘The measures to simplify ISAs and the increase in the overall limit to £15,000, together with the substantial reforms announced to the pension system, will transform the long term savings landscape, giving savers the flexibility to plan appropriately for the future at a time life expectancy is increasing.’
Bridging the advice gap
Meanwhile news the government was making £20 million available over the new two years to counter the growing advice gap is potentially a lucrative development for wealth firms.
As part of his pensions overhaul, the chancellor said those with DC schemes would be offered free impartial face-to-face advice - a move that will be enforced by law.
'The government will ensure that, from April 2015, all individuals with defined contribution pension pots are offered free and impartial face-to-face guidance at the point of retirement and will make available up to £20 million in the next two years to develop this initiative,’ he told parliament.
BlackRock's head of UK retail Tony Stenning welcomed the plan.
'It is great to see that the government plans to give people with defined contribution pension pots free and impartial financial advice. We all know that we are living longer, but planning and factoring the effects of this into retirement means that the need for advice has never been so strong.'
He added: ‘Only 20% of 65 – 74 year olds currently receive professional financial advice. But almost a third of this age group [29%] said that they would encourage people starting to save for retirement to seek professional financial advice, and an overwhelming 98% of those who took advice were satisfied with it.’
Middleton and Richards described the initiative as ‘extremely important’ one, favouring those companies which can offer advice.
‘[However], this is a complex topic, and many investors, especially those with larger AUM and more complicated affairs, may welcome significant additional throughout their retirement period,’ the pair said.
‘So wealth managers, private banks and other retail advisers are likely to have an opportunity to offer new planning services as result of the changes.’