Macro trends: Five big themes driving strategy

AGEING POPULATION

The world is getting greyer

Baby boomers born just after the war are now in their late 60s. Looking forward to 2030, 20 million people, or 27% of the UK population will be over 60. On average, 72% of UK men currently aged 60 and 80% of women, could reach their 80th birthday. Most corporate (DB) pension schemes are currently in a deficit position.

Our response is to help de–risk corporate pension schemes through our innovative product solutions. We’re also developing new ways to help people manage their retirement income.

WELFARE REFORMS

The state of welfare

Angela Merkel, the German Chancellor, pointed out that Europe today accounts for just over 7% of the world’s population but has to finance 50% of global social spending. The UK government still has an annual deficit between income and expenditure of just under £100 billion, despite five years of austerity. In the 2013-2014 tax year the UK spent £47 billion on sickness and disability benefits and £5 billion on unemployment benefits. Real wages have fallen by around 10% since 2008, generating less tax revenue to fund welfare payments.

Our aim is to help people supplement state provision with affordable insurance and pension benefits. We want to encourage people to take responsibility for their own provision with pensions auto-enrolment and greater take-up of insurance.

RETRENCHING BANKS

Fast money, Slow money

Before the financial crisis banks invested widely in the UK’s infrastructure. Now that’s no longer the case and the nation is suffering from under investment. The shortage is especially severe in housing, where Shelter’s CEO, Campbell Robb said: “We’re building less than half of the 250,000 homes needed each year just to keep up with demand.”

Our response is to use our ‘slow money’ to invest in long term infrastructure, like housing, student homes, care homes and urban regeneration.

GLOBALISATION OF ASSET MARKETS

Global markets

According to PwC’s ‘Asset Management 2020’ report, global assets under management (AUM) could increase by 2020, from $64 trillion now to around $102 trillion. We have the opportunity of building scale in the estimated $33 trillion North American markets. Important growth areas internationally are likely to be passive funds and emerging markets such as Asia and the Middle East.

Our response is to diversify our business using our home-grown skills to expand in the US, Europe, Asia and other emerging markets.

DIGITAL LIFESTYLE

Connecting the world

The UK is a global leader in embracing digital technology. 73% of UK adults are online on a daily basis and 57% use tablets or smartphones to access the internet. 93% of adults in the UK personally use a mobile phone and mobiles account for 52% of all traffic to UK retail websites, so it’s no surprise that 32% of consumers buy via their mobile at least once a month.

Our response is to build digital platforms for investments, workplace pensions and protection creating the infrastructure for customers to engage with us throughout life in any digital medium they choose.

Political background

There are significant potential political risks, with the next five years being a time of likely change. Elections are due in the UK, Europe and the US in the next two years. A referendum on the UK’s withdrawal from the EU remains a distinct possibility. Further devolution of powers away from Westminster is likely. We’re also aware of the risk of deterioration of geo-political stability, especially in the Middle East and eastern Europe.

Economic overview

Our two main markets are the UK and the US. Over the last year, global economic data has been mixed. The UK economy saw steady growth, driven by the services sector. The US economy rebounded strongly during 2014 and economic indicators continue to signal a broad based upturn in activity. Looking forward, the fundamentals for the world economy have improved, which increases the chance of a period of stronger growth. Inflation is expected to remain low through 2015, but central banks in the US and UK are signalling an eventual shift towards a tightening of monetary policy, the full effects of which are difficult to predict. Continued weakness in the Eurozone and political risks, present a degree of uncertainty for a sustained UK recovery.

Regulatory pressures

The regulatory landscape is still challenging for financial services. In the UK the FCA and PRA are still evolving distinct approaches to regulation. The PRA is committed to implementation of Solvency II on 1 January 2016, but there is material uncertainty over the practical outcome. (See: ’Risk based capital model’). The EU structure of harmonising directives across Europe threatens to limit UK regulators’ ability to introduce more proportionate regulation. In particular, the Markets in Financial Instruments Directive 2 (MIFID 2) and Packaged Retail products affect our investment management business.