From April 2015, retirees will be able take their pension pot in full at age 55 to spend or invest however they choose. The reforms do away with the requirement to purchase an annuity at retirement and have sparked much discussion over which parts of the investment industry stand to benefit the most.
Last week, Hargreaves Lansdown head of research Mark Dampier (pictured) told FE Trustnet that trusts do not have capacity to replace open-ended funds as the likely destination of the inflows expected to come from the reforms.
“This idea that they can replace funds and be used instead of them on a wide scale in pensions and so on doesn’t make any sense,” he said. “If you look at the IT UK Equity Income there’s something like £9.2bn in there. That’s smaller than some single open-ended funds. There isn’t the capacity to cater for a mass move into the sector.”
Earlier this year, Citi analysts predicted that the UK asset management industry could see annual net inflows jump more than 20 per cent after the overhaul comes into force.
Research by the group “conservatively” estimated that around half of the £9.4bn a year that is expected to be withdrawn from pension pots and not used to buy an annuity will be reinvested into funds - which would equate to about £4.7bn of new inflows for asset managers.
Ian Sayers, director general of the Association of Investment Companies, says the investment trust community has never expected to be the main beneficiary of the pension reforms and disputes the idea that it lacks capacity for significant growth.
“There is plenty of capacity, but the idea of investment companies ‘replacing’ annuities and open-ended funds is not going to happen and no-one has said it should,” he said in his latest blog post.
Last week, the AIC published research showing that the average investment trust in the IT UK Equity Income sector has grown its income by an annualised 5 per cent over the past 20 years. This is above the pace of retail prices index inflation, which has average 2.9 per cent over the past two decades.
Over the same time frame, trusts saw their capital value rise by 122 per cent on average, which is also well ahead of inflation.
Sayers argued that this mix of strong capital and income growth could make trusts an attractive option for people wanting to find new investments once pension reforms allow them to take greater control of their retirement savings.
He said: “Of course, this type of investment is very different to buying an annuity. There are no guarantees and you are putting both your income and capital at risk. But for those who can accept the risks, these figures make a compelling case for investment companies to be considered as part of a long-term income portfolio.”
Commentators have argued that the only way investment trusts could meet the expected surge in demand is to launch a series of new vehicles, unlike open-ended funds which simply create new units.
But Sayers (pictured) argued in his blog post: “Investment companies don’t just have the option to meet increased demand through new launches. Existing investment companies can issue new shares, and have being doing so significantly in the last few years.”
Indeed, figures from the AIC show that £3bn was raised by the investment trust industry through initial public offerings during 2013, in what was a record year for new launches. However, existing investment trusts raised an additional £4bn by issuing new shares. With around six months to go until the pensions reforms come into force, the AIC has launched a campaign to encourage retirees to consider investment trusts as part of their portfolio.
As part of this drive, James de Sausmarez, head of investment trusts at Henderson Global Investors, said: “Investment trusts have long deserved a bigger slice of the pension pie offering.”
“They do not only provide the potential for an excellent means of growing capital while you save for your pension, but can also offer the possibility of a stable and growing income stream in retirement which can survive the peaks and troughs of the market.”
Simon Crinage, head of investment trusts, JPMorgan, adds that trusts are “well poised” to meet the investment challenges created by retirement.
“The closed-ended structure offers investors a number of advantages including flexibility in how investment returns can be turned into regular income,” he said.
“Dividends can be paid out of income or capital gains, and revenue reserves used to dampen volatility of payouts such as to produce a more predictable income stream.”
