CA Summit – No obvious answer to investment conundrum – Cazalet

Cazalet Consulting CEO Ned Cazalet, speaking at the CA Summit yesterday said finding investment products for middle Britain customers who will live for 25 years in retirement, with 10 years in poor health, will be “hugely challenging and take time.”

He predicted the at-retirement post-April 2014 would be chaotic and could bring negative press to the financial services sector. He said: “Let’s hope it doesn’t look too much of a shambles. There’s no obvious option.”

Annuities were looking increasingly unattractive as rising longevity and RIYs that worked out at 2 to 3 per cent per year meant individuals were much more likely to question their value for money and whether they would survive the pay back date.  One insurer had reported IRRs of 25 per cent on the annuities they sold in the first half of 2014, he said.

“People don’t buy annuities because they aren’t value for money.  A 65 year old male with a £100,000 purchase price, buying a 3 per cent index linked annuity, would have received £30,000 less than someone purchasing a level paying annuity by age 83 – his life expectancy – and would have to survive to 101 to get his money back.”

He said individual underwriting is already the norm, with Just Retirement expecting the whole annuity market to be medically underwritten soon, so that cross subsidies will become unviable.

Cazalet said people will annuitise later, with immediate annuities and deferred annuities becoming possible candidates. Longevity insurance, as sold in the US, whereby the customer pays an insurer $100,000, but does not receive income payments until age 85, was a way of cutting tail risk.

He feared advisers will shy away from DB to DC transfers advice and that “brown-trousered advisers will be turning people away” because of fear of regulatory repercussions.

As for asset mix, 10 year gilt yields were currently yielding 2.5 per cent, generating a negative return net of inflation, whereas the average long term return on equities from 1900-2013 was 5.3 per cent was volatile. 

‘Bucketing,’ a US investment practice, involving draining different investment pots, could become prevalent in the UK he said, suggesting some providers were already looking at this. A bucketing strategy might see 15 per cent cash for three-year spending, 35 per cent bonds with a 7 year horizon and 50 per cent equities no to be touched for 10 years. Bucketing sees investors draw from these pots in strict order, and is supposed to protect against early equity erosion, although Cazalet said it had resulted in clients’ asset risk exposure increasing with age.