Pandemics

Covid-19 is the third pandemic that has hit the UK during my career. The first was in 1968/9 and was called “Hong Kong Flu” as it seemed to have originated from there. It killed 30.000 people in the UK. The number killed globally is unclear but is estimated to be over one million and less than three million. I don’t remember it.

 

The next pandemic was in 1999/2000 and killed 22,000 people in the UK. By then, I had left the industry and was a Director in KPMG Consulting. I recall many “Millennium Bug” projects but I don’t recall the pandemic at all. There were over 80 life insurance companies back then but networks had emerged to attract successful direct sales people offering higher commissions and access to the products of all insurance companies. Many of the new unit-linked life companies ceased trading and those that survived were no longer selling their own investment funds but offering open architecture propositions

 

Of course, the next big deal was the Retail Distribution Review in 2012. It was designed to provide greater clarity about different types of financial services available and improve transparency around the costs and fees associated with financial advice. It also demanded higher qualifications for advisers and banned commissions on investment products. The market viewed this development with trepidation but the ability for fees to be facilitated by products and platforms mitigated most of the downside. In fact, most people seem to believe that the RDR was a positive force.

 

That is enough about the past: What about the future? To quote Vladimir Lenin – and I guess this is the first time anyone has quoted Vladimir Lenin in Money Marketing – “There are decades where nothing happens; and there are weeks where decades happen”. I think we  have just experienced those weeks.

 

Covid-19 is in a very different league to the previous two pandemics and the current social and economic impacts are huge. Of course, It is too soon to think about how these impacts will resonate in the long term. But, in the meantime, I think there are some potential short-term impacts for the long-term savings and investment market. And I’m sorry to say that there seems more downside than upside; particularly in the “Retirement” space”

 

Suitability letters: I wonder how many contain a sentence such as: “And, as I explained, the value of your drawdown fund may reduce by 25% or more at any time”. For clients, particularly those who have transferred from a defined benefit scheme and were not warned of this possibility, the Covid-19 impact on even well diversified portfolios might provoke some challenging questions and, of course, some potential complaints. Perhaps many complaints.

 

I’m not an expert on funds which offer smoothing, although the performance of the Standard Life GARS performance has made me quite sceptical. But what I do know is that the Prudential and Royal London smoothing propositions appear to have been successful in attracting very substantial funds from advisers advising on DB to DC transfers in 2019. I hope that the clients whose transfer values that have been invested into these companies’ propositions understand how they work. I don’t. I hope their advisers do!

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