In order to remain competitive in the brave new world of freedom and choice, the institutional finance sector must look to the retail world for inspiration

Traditionally the retail and institutional worlds have operated as separate silos, with little or no interaction between the two.

However, the freedoms announced in last year’s budget mean retirees are consider removing their hard-saved cash from the institutional world and putting into products like ISAs or buy-to-let mortgages.

Now, for the first time ever, providers will need to compete not only with each other but also with the vast array of retail products out there.

Learning lessons

With the increased competition, the institutional world is going to have to learn some quick lessons.

In the accumulation stage this will be harder than it looks. The charges cap, widely praised for shining a spotlight on value for money, will make it harder still for DC schemes to innovate in the search for better outcomes.

The institutional world is going to have to learn some quick lessons”

In the decumulation phase, there are lessons to learn from retail providers that have been offering drawdown products for a long time now.

The key challenge will be finding a way to broaden these offerings to create a low-cost solution viable for a wider audience, and all for less than 75bps.

Those companies that already have both retail and institutional arms may be best placed to do this, but we’re still not seeing a great deal of product innovation.

Perhaps the biggest lesson for the institutional world will be the concept of putting customer interests first. Traditionally, since the primary buyers have been employers, the institutional world has not always prioritised direct engagement with members.

Customer-engagement

Even the annuity world has relied on people defaulting into agreements without shopping around for the best deal, which is part of the reason why annuities have such a bad reputation.

Ben Preston, equity analyst at Orbis Investment Management, explains: “To survive and thrive in today’s more competitive world, managers will have to get used to putting themselves in their clients’ shoes instead of taking them for granted.

Perhaps the biggest lesson for the institutional world will be the concept of putting customer interests first”

“The successful managers of tomorrow will be those who focus on making a positive difference to clients, by delivering returns that meet their investment objectives and providing value for money.”

Of course, the retail finance world is not always a shining example of transparency – just look at the PPI mis-selling scandal. In fact, banking is one of the few industries that is even less trusted than the pensions industry.

However, there are lessons to be learned from the more general retail sector.

Look at the way that Amazon or Tesco Clubcard takes us by the hand”

Richard Butcher, managing director of PTL, gives the examples of the kind of customer experience offered by retail giants such as Amazon and Tesco. He says: “Look at the way that Amazon or Tesco Clubcard takes us by the hand through their processes so we’re led to an outcome. Now, that may be an outcome that they want, but it’s also a more satisfying place for us to be.”

He continues: “So I think we can learn from the retail market, I’m just not convinced we can learn from the retail financial market.”

If institutions, grab the bull by the horns, and see the freedoms as a chance to do something new, this could be a real turning point for the industry, says Tim Banks, managing director of sales and client relations at AB. ”Freedom and choice is a real opportunity for the pensions market to recast saving for retirement in a positive light. If you can get your hands on the money from 55, that makes consumers feel so much more comfortable.”

It’s more than enough time to make a very good start”

However, he is disappointed by the lack of innovation so far. ”If we’re not careful and the market doesn’t react a bit quicker… it does risk being categorised by the politicians as a market failure and an inability to react.”

He explains: ”I mean a year in one sense, is not a big amount of time to prepare an entire market, but on the other hand it’s more than enough time to make a very good start.”

Regardless of which industry the institutional sector looks to for inspiration, what is clear is that it must innovate quickly, and find a way to become more customer-centric, or it will run the risk of falling behind its retail counterpart.