The pensions industry is continually changing in response to global market forces. ONS data shows that private pension wealth in the UK was £6.1 trillion between 2016 and 2018. Worldwide, assets exceed $56 trillion. In addition, the number of adults contributing to a pension fund has increased as more people reach retirement age.
In this article, we are going to look at the key trends affecting the pensions markets, which is something financial advisors need to be aware of before advising their clients. Read on to learn more.
Covid-19 Pandemic
The biggest impact on pension funds – and the economy in general – has been the Covid-19 pandemic. Pension fund providers and financial advisors have had to adjust their guidance in line with a very different economic outlook compared to two years ago. Many people have been forced to pause their pensions contributions in the wake of the pandemic. Job losses across multiple sectors have been brutal and the World Economic Forum estimates that around 114 million people ended up out of a job in 2020. No wonder people are saving less into pensions when the alternative is to go without food and other essentials. The linked article from Procentia covers the topic in more detail. Procentiaprovides software for pensions administrators, tech companies, and is a global leader in the pensions administration sector.
An Increase in Sustainable/Ethical Investing
Younger investors are increasingly looking for pensions that include ethical funds. Data from Statista reveals that investors in the 18-34 age group were increasingly concerned with investing in sustainable and ethical funds, and as these investors get older, the trend towards ethical and sustainable investments is likely to increase.
People are concerned about climate change, and funds that focus on climate-related investments are almost certainly going to be popular with younger and forward-thinking investors. Data indicates that the ethical investment market is predicted to increase by 173 percent by 2027. Financial advisors need to be aware of this trend, so they can provide options for clients wishing to put their money into ethical investment funds.
A Shift from Defined Benefit to Defined Contribution Schemes
There was a time when defined benefit pension schemes, also known as ‘final salary pensions’ were the norm. But times have changed, and employers are increasingly closing such schemes to further accrual and switching to defined contribution schemes instead. In 2006, 43 percent of defined contribution schemes were open to new members, but by 2015, this figure had dropped to 13 percent. Data from Aon reveals that in 2020, 68 percent of final salary pensions had closed to future accruals, an increase of 8 percent in 2019. As the pandemic continues to impact companies large and small, this figure is likely to increase in the next 12 months, and for the foreseeable future.
The main reason for the closure of many defined benefit contribution pension schemes is how much they cost to run. People are living longer, and interest rates are at an all-time low. There is an increasing amount of red tape surrounding such schemes and the cost of administering a defined benefit pension scheme is a huge burden to a company. All these factors have made defined benefit pension schemes no longer viable.
The Pension Scheme Act 2021
The Pension Scheme Act 2021 has had a big impact on the UK pension industry. Changes introduced by the Act, which came into force in February 2021, include the implementation of pension dashboards for people paying into a pension plan and a regulator with more teeth, who has the power to hand out fines and gather information from pension scheme providers.
This follows the disastrous deficits in pension schemes funded by BHS and Carillion. The collapse of BHS left a pension deficit of £570 million, which affected 19,000 former and current employees. Sir Philip Green eventually agreed to pay £363 million back into the fund, and it was later ruled that he had sold BHS to avoid having to pay the costs associated with the scheme, having previously extracted millions from the struggling business in the form of huge dividend payments.
How Can Financial Advisors Adapt to These Changes?
It can be hard for financial advisors to keep abreast of new trends in the pensions market, which is why so many have embraced new technology and practices. The latest pensions administration software makes it easier for advisors to keep in touch with clients; face-to-face meetings are no longer necessary when consultations can take place over video conferencing software.
Embracing new technology has made it easier for financial advisors to work with clients who they might not have targeted previously, such as less affluent investors. Technology makes onboarding and working with clients easier and more time-efficient, thus allowing consultants to offer an on-demand service.
The switch to technological interfaces is likely to increase over the next few years, as the impact of current economic pressures intensifies.