I don’t think I need to inform anyone in this room that the public has an ambivalent relationship wit the subject of retirement and pensions. Most people look forward to the day when they finish work – on the other hand, many have little understanding of what they will need to live on after that day Couple this with a seemingly endless stream of facts & figures about: Ageing workforce Ageing population Average life expectancy Cost of living Retreat of the welfare state It is little wonder that people switch off when it comes to retirement planning. This has resulted in part in stark facts such that on this slide.
Leaving the role of legislation and regulation to one side, I’d like to Focus on the role of you and I, product providers and advisers. IFA’s There are a number of factors that are expected to drive up the demand for advisory services: Increased numbers of individuals approaching retirement and in retirement Complexity of personal circumstances (eg lots of pension pots) The role that housing has to play in meeting retirement needs The limited numbers of advisers currently qualified and liscenced to provide such advice (especially in respect of issues like ER) Assistance in achieving optimal income throughout retirement
4 April 2001 4 Prudential April 2001 20 Prudential However low inflation is, given peoples longevity the decision to buy a level annuity should be concidered wisely when you look at how long people will actualy survive in retirement. 1 in 3 people will live to age 90 Most clients under estimate how long they are going to live
In respect of the latter, understanding the changing customer journey must be at the heart of what both providers and adviser do. Our own research indicates at least 5 stages of this journey, each of which requires advise and support .
However many stages exist, although each will have a different expenditure pattern and therefore different income needs, ongoing retirement advice is increasingly critical and it is important that advisers: Take a view of a clients assets and potential income needs that look across the full span of their likely/possible retirement Regularly review client’s positions to ensure they are using their overall resources in ways that are most likely to meet their needs Take a more holistic view to retirement planning Consumer requirements are not being looked at in a holistic manner, e.g. two individuals may have the same size pension pot, but may have considerably different other circumstances, e.g., health, marriage, investments, property, etc. Therefore what may be applicable in terms of directing them down a specific avenue based on pension pot size won’t generate the most appropriate outcome for both of them Develop a competitive and clear retirement planning proposition
Moving onto Product Providers I’d like to focus on two areas – product innovation and future focus Product Innovation Increasingly recognised that products in the decumulation market have to work a long time – it is therefore essential consumers have confidence that they can deliver on their promises .The introduction of flexible annuities and more recently 3rd way products has provided more choice – but there are some concerns that some are costly and unproven. This has been compounded by concerns about whether some companies will be around as long as their products.
The introduction of flexible annuities and more recently 3rd way products has provided more choice in the middle market – but there are some concerns that some are costly, complex and unproven.
An example of this kind of innovation is we believe our recently launched Income Choice Annuity
It is against this background that Prudential sponsored the June 2009 AIFA landmark study “Financial Planning Through Retirement” that outlined the changes required by Government, regulators, product providers and IFAs to help consumers successfully ‘decumulate’ at retirement the wealth they have accumulated during their working life. During the course of developing this paper, views of different participants in decumulation markets were sought, to ensure this landmark study reflected the markets overall perspective of the challenges and issues. Included in this research were: Government and regulators Product Providers Trade Associations Consumer groups Advisory Firms The general view across the different organisations was that decumulation has typically been viewed on a silo basis rather than on a holistic basis – both in terms of products that are available and by advisers, where only a few have developed a specific decumulation proposition. If you would like a copy of this report you’ll find it on the AIFA website or on www.pruadviser.co.uk . Alternatively if you would like to attend one of the joint AIFA/Prudential workshop currently taking place the remaining dates are as follows.
Our objective today was to stimulate and to a degree challenge. When you leave this event you might like to consider some of the following actions, some of which may be appropriate to your business.
If you would like to discuss anything we have touched on during this brief presentation, please come and see us on the stand in the Business Exhibition area. Thank you for listening
Income Solutions from the Prudential Rethinking Retirement Bankhall Annual Conference 2009 John Bendall Dip PFS Business Development Manager
*Source: Association of British Insurers (ABI), 2008
Rethinking Retirement Demand for advisory services will increase
Increased numbers of individuals approaching retirement and in retirement
Complexity of personal circumstances (eg lots of pension pots)
The role that housing has to play in meeting retirement needs
The limited numbers of advisers currently qualified and licensed to provide such advice
Assistance in achieving optimal income throughout retirement
Rethinking Retirement Market History Drawdown Launched FUTURE? No Crystal Balls However you need to be prepared whatever the outcome? RETHINKING RETIREMENT 1000 2000 3000 4000 5000 6000 7000 8000 FTSE 100 (right hand scale) Annuities (left hand scale) 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 01/05/90 01/05/91 01/05/92 01/05/93 01/05/94 01/05/95 01/05/96 01/05/97 01/05/98 01/05/99 01/05/00 01/05/01 01/05/02 01/05/03 01/05/04 01/05/05 01/05/06 01/05/07 01/05/08 01/05/09 Gilt yields (left hand scale) Annuity rates: £100k Annuity Rate male 65, guaranteed 5 years as income, monthly in advance Gilt yields: Bank of England UK instantaneous nominal forward curve, Maturity years 19 Data up to the 15/09/2009
Rethinking Retirement Customers do not understand their longevity risks 39% 1 in 3 will live to age 90 14% Distribution of deaths: Male 60 Source: "PCMA00u2008 (future improvements mid-cohort)" ANNS10683
R ethinking Retirement Inflation risks Average pensioner inflation reached 5.4% in January 09‚ significantly higher than the 0.5% rate average rate for non-pensioners Source Age Concern Annual Inflation 5 years 10 years 15 years 25 years PURCHASING POWER OF LEVEL INITIAL INCOME OF £1000 4.00% £821 £675 £555 £375 6.00% £747 £558 £417 £233 Could you afford to live on 50% of your income in 12 years time?
Rethinking Retirement Customer Journey The retirement journey can be split into a number of distinct phases Income requirements here are often the greatest? (20%) Pre-retirement Transition First Flush Slowdown Final Years
Essential consumers have confidence that providers can deliver
Consumers are attracted to guarantees – but?
The market needs choice – but not costly and unproven
Innovation needs to work for all
the consumer (easy to understand),
the adviser (clarity around pro’s and con’s)
the provider (profitable)
and the regulator (TCF/RDR etc)
Rethinking Retirement The market needs choice MIDDLE MARKET Shares Income Drawdown Unit Trusts & OEICS PEPs & ISAs U-L Bonds WP Bonds High Low Low Longevity Risk High Investment Risk Home Annuities Occupational & State Pensions
Rethinking Retirement Product Innovation in the ‘middle market’
Potential to have Higher initial Income
Ability to alter income levels every 2 years
Annual remuneration options
A low initial premium of only £10k
De risking Drawdown
Rethinking Retirement Comparing income choice and income drawdown Assumes: Male 65 £100k net TV £6k pa income (monthly in advance) 100% Managed Fund – 1.3% AMC 3% Funded Initial Commission +0.5% Trail Commission 5.6% 65 Difference Income Choice Required Smoothed Return Income Drawdown Type B Critical Yield Contract Age
Rethinking Retirement Comparing income choice and income drawdown Assumes: Male 65 £100k net TV £6k pa income (monthly in advance) 100% Managed Fund – 1.3% AMC 3% Funded Initial Commission +0.5% Trail Commission 1.7% 3.9% 5.6% 65 Difference Income Choice Required Smoothed Return Income Drawdown Type B Critical Yield Contract Age