16Jun14 - Retirement Income: Risks and Opportunities

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Speaking in the 2014 Budget, the Chancellor of the Exchequer, George Osborne MP announced plans to “legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots”. He said that “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits”.

In the Chancellor’s Budget Statement he stated plans to “introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution pensions will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have.” Since the Budget, “advice” has become “guidance”, but the commitment to a better informed consumer remains.

Over the next year, ILC-UK plan to undertake a range of activities to explore the impact of the changes announced by the Chancellor. Through research and a series of events, we will explore the risks inherent in the announcement made and highlight the opportunities. We will explore and model potential future scenarios and look to seek solutions which mitigate risks to the consumer whilst maximising the opportunities.

ILC-UK began our work in this area by launching, with the support of Prudential, a discussion paper, Freedom and choice in pensions: risks and opportunities, which outlined the Government’s proposals to reform the market and highlight the types of choices that people will face and the support that might be available. Our analysis considered the possible implications of the reforms by looking at the take up of different products across different countries (including US, Denmark and Australia). We also incorporated a discussion of the vast array of literature on the so called “annuities puzzle” – the puzzle of why people fail to annuitise even if it represents the best option.

Our paper considered how people currently use the lump sum option in the UK and how this differs by socioeconomic characteristics. Such analysis of how people use the lump sum could act as a rough proxy for how they will react under the proposed reforms, though the reality may prove different. Our paper also highlighted how we think people could react in the face of the new reforms and make some recommendations about what policy measures need to be developed to address the downside risks.

At this event, chaired by Josephine Cumbo (FT), Ben Franklin (ILC-UK Research Fellow), summarised the planned reforms and set out the findings of our discussion paper. Dean Mirfin (Key Retirement Solutions), Tim Fassam (Prudential), Andew Tully (MGM Advantage) and Tom Boardman (NEST) gave short perspectives on challenges and opportunities. Following a discussion, Jane Vass (Age UK) and Michelle Cracknell (TPAS) concluded the event with their perspective on the debate.

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16Jun14 - Retirement Income: Risks and Opportunities

  1. 1. Retirement Income: Risks and Opportunities Monday 16th June 2014 This event is kindly supported by Prudential #risksandopportunities
  2. 2. Welcome Josephine Cumbo Pensions Correspondent Financial Times This event is kindly supported by Prudential #risksandopportunities
  3. 3. Tim Fassam Head of Public Affairs Prudential This event is kindly supported by Prudential #risksandopportunities
  4. 4. Ben Franklin Research Fellow ILC-UK This event is kindly supported by Prudential #risksandopportunities
  5. 5. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Freedom and choice in pensions Risks and opportunities Ben Franklin, International Longevity Centre – UK @ilcuk
  6. 6. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. What am I going to cover?  What are the reforms?  What are the key factors likely to drive decision making and their associated risks?  Economic context.  Products and advice.  Personal/household behaviours and characteristics.  Legislative agenda and regulatory oversight.  Summarising the risks and opportunities.  What key measures are needed to ensure success?
  7. 7. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. What are the new freedoms?
  8. 8. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. The old tax system Source: HM Treasury
  9. 9. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Where have all the boxes gone? The new tax system...to be implemented in April 2015 Source: HM Treasury
  10. 10. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Key factors likely to drive decision making and their associated risks
  11. 11. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. The economic context…lower for longer
  12. 12. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Hoping for a significant reversal in monetary policy any time soon is like clutching at straws Recoveries from various recessions
  13. 13. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Implications for consumers…  The search for yield will shape decision making.  Could result in savers channelling pension wealth into unconventional products.  Lead to exposures on Buy to Let? Equity markets?  Or, alternatively, individuals could opt for big ticket items.  Many will also use pension savings to pay down debt.
  14. 14. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Debt will remain a key part of the picture
  15. 15. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Products and advice  Potential for innovation in products:  Drawdown for mass market.  U shaped annuites.  Property.  Other products… But…increased choice will mean consumer engagement and advice critical…
  16. 16. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. A quick word on property Safe as houses? Inflation adjusted house prices can take time to regain losses in value
  17. 17. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. The need for advice…  One-off guidance could leave people with more questions than before.  The “advice gap” – only around 30% of population has ever taken financial advice (source: CII)  Typically high net worth individuals  But what about the rest of us?  Need a mass market solution…  Otherwise risk of poor consumer decisions and apathy in face of complexity.
  18. 18. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. The advice gap
  19. 19. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Personal behaviours and characteristics  Immediate rewards are hard to resist.  People consistently underestimate their life expectancy.  Low levels of financial literacy.  Tendency to buy low sell high.  All could result in sub-optimal decisions and underline need for guidance and advice.
  20. 20. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Underestimation of life expectancy Average individual life expectancy
  21. 21. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Legislative agenda and regulatory oversight  Both will continue to shape the landscape for retirement.  Issues about coordination between FCA and TPR.  Possible differences between the legislative agenda and the regulatory one.  Timeframes to prepare for the new freedoms are tight.
  22. 22. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Summarising the risks and opportunities
  23. 23. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Summarising the risks and opportunities Opportunities: Reforms result in consumers better able to meet changing income needs throughout retirement: Consumers can optimise investment strategies. Room for innovation in financial products to meet consumer needs. Opportunity to create advice models for the mass market. Consumer risks: Reforms result in consumers having less income in retirement. This could be because: Consumers unwittingly becoming exposed to high risk investments and products. Consumers decide to spend it all today. Consumers are apathetic in the face of complexity and do nothing.
  24. 24. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. What needs to be done to maximise the opportunities?  Effective innovation in products and services.  Increased consumer engagement in advance of retirement.  Guidance to address behavioural biases.  Advice models for the mass market.  Regulatory approach to welcome innovation but wary of the economic and behavioural risk drivers.
  25. 25. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Many thanks Ben Franklin Research Fellow International Longevity Centre - UK benfranklin@ilcuk.org.uk 0207 340 0440 Twitter: @ilcuk
  26. 26. Dean Mirfin Group Director Key Retirement Solutions This event is kindly supported by Prudential #risksandopportunities
  27. 27. Andrew Tully Pensions Technical Director MGM Advantage This event is kindly supported by Prudential #risksandopportunities
  28. 28. Tom Boardman Deputy Chair NEST This event is kindly supported by Prudential #risksandopportunities
  29. 29. Discussion and Q&A This event is kindly supported by Prudential #risksandopportunities
  30. 30. Jane Vass Head of Public Policy Age UK This event is kindly supported by Prudential #risksandopportunities
  31. 31. Michelle Cracknell Chief Executive The Pensions Advisory Service (TPAS) This event is kindly supported by Prudential #risksandopportunities
  32. 32. Discussion and Q&A This event is kindly supported by Prudential #risksandopportunities
  33. 33. Retirement Income: Risks and Opportunities Monday 16th June 2014 This event is kindly supported by Prudential #risksandopportunities

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