FSA report says customers will demand greater flexibilty from products in retirement as market grows
The risks and opportunities of selling retirement-linked products such as long term care insurance and equity release were addressed in a recent report issued by the Financial Services Authority (FSA), which also pledged to review the competency of advisers selling retirement products.
The FSA report, Financing the Future: Mind the Gap, assessed whether firms are prepared for the risks and opportunities of an ageing population, looking at the risks of selling complex products, including long term care insurance, equity release and annuities to customers who do not fully understand them.
Sandy Johnstone, retirement and protection strategy manager at Norwich Union Healthcare, said: 'The key undertone of the report is that there will be a shift in emphasis of the role of a financial adviser. They have tended to target the younger population, but as the population gets older they will have to realign their thinking. More people will need advice on retirement including long term care.'
The report also proposes that measures should be taken to ensure consumers are made more aware of the risks of not preparing for old age.
Carol Sergeant, managing director of regulatory processes and risk directorate at the FSA, said: 'The consequences of an ageing population have not yet been fully appreciated. There are risks here, but there are also opportunities for innovative products and services that address the changing needs of consumers. It will not be enough for the industry simply to continue offering the products that worked 30 years ago.'
The introduction of innovative products will address the changing needs of the consumer, but education still needs to be maintained to promote the need for retirement planning for consumers.
Johnstone said: 'There is a financial gap between what people perceive retirement to be and what they are actually doing about it and people are not putting enough money into retirement planning.'
Owain Wright, head of The Care Funding Bureau, agreed: 'Many consumers do not have a retirement plan in place from a long term care point of view and many IFAs do not even look at it. There is a one in three chance that a person will have to pay up to £25,000 in care fees. We need to see more education from advisers as people need to understand the market.'
As the ageing population continues to expand so will the need for products such as long term care insurance. The report says the 'in-retirement' market is likely to grow rapidly over the next three decades, given the growing numbers of elderly people with increasing levels of self-provision.
This, it states, will lead to customers demanding greater flexibility with their financial arrangements in retirement, all of which will lead to increased opportunities for IFAs selling retirement products.
The report says: 'There are a number of very real opportunities for the industry to develop innovative and flexible products to meet changing needs.'
Oliver Page, director of the major financial groups division at the FSA, said: 'The opportunities for the financial services industry to rise to the challenge of an ageing population are clear. Staying in touch with the changing needs of customers makes good business sense. But the industry also needs to be particularly mindful of the risks they face in meeting this challenge.'
Risks outlined in the report included selling complex products to consumers who don't understand them and the mis-pricing of retirement products.
By not understanding a product fully before purchasing it, consumers could be putting themselves at risk. The report says that too many people are making crucial, often irreversible, decisions at retirement, which may affect their standard of living for many years ahead.
Sergeant added: 'Consumers must understand that they will face greater exposure to the effects of financial volatility. They have difficult but important decisions to make. There is a role here for the FSA, the Government and the industry itself to get this message across before it is too late and to help consumers meet the challenges.'
The FSA's six-point plan
• Encourage retirement planning and provide consumers with the tools to plan, particularly younger consumers.
• Raise consumers understanding of the risks associated with increasing exposure to investment risk and inadequate savings levels.
• Equip older consumers with the right questions to ask and relevant information to increase their understanding of the core decumulation products.
• Ensure firms take full account of the implications for themselves arising from the growth in the market for retirement products.
• Ensure firms respond appropriately to the risks to consumers when developing and marketing new and innovative products, particularly annuities and equity release.
• Encourage financial advisers to take account of the changing needs of consumers, in particular on the different wealth and debt profiles across different age groups.
Source: FSA
