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Bankhall Conference 2009 - Prudential

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Rethinking Retirement

Rethinking Retirement

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  • 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
  • Transcript

    • 1. Income Solutions from the Prudential Rethinking Retirement Bankhall Annual Conference 2009 John Bendall Dip PFS Business Development Manager
    • 2. Rethinking Retirement
      • In 2008 the median average defined contribution
      • (DC) pension pot when converted into an annuity
      • was about £15,000 – today generating a meagre
      • income of £920 a year.*
      *Source: Association of British Insurers (ABI), 2008
    • 3. 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
    • 4. 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
    • 5. 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
    • 6. 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?
    • 7. 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
    • 8.
      • Remaining compliant
      • Remaining profitable
      • Frequency and content of client review
      • Retirement Income Market Developments
      • Product suitability
      • Changing costs of Guarantees…
      • Managing risk
      • Future legislation changes
      R ethinking Retirement Adviser risks
    • 9. Rethinking Retirement Ongoing retirement advice is increasingly critical
      • 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
      • Develop a competitive and clear retirement planning proposition
        • Which may mean one purchase today with a plan to exit in future?
    • 10. Rethinking Retirement Legislation and Regulation
      • Should be based on how real consumers behave (we’re not all perfectly rational!)
      • Compulsory Annuity Age 75 rules should be independently reviewed
      • Equity Release regulations – greater consumer access to advice
      • Means tested benefits should be reviewed
      • Encourage pension saving
      • Critical success measured for the RDR should be
        • Increases availability of advice and guidance
        • Raises the level of engagement with consumers
      The final details of the Solvency II framework will not be known until end 2010/2011 after a very significant amount of industry consultation ahead of then. But…….
    • 11. Rethinking Retirement Product Providers - Product Innovation
      • 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)
    • 12. 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
    • 13. 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
      • Income guarantees
      • A low initial premium of only £10k
      • De risking Drawdown
    • 14. 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
    • 15. 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
    • 16.
      • Age Conventional ICA 6% Flexible Drawdown/ USP
      Source: Prudential, Oct 2009 ICA FLA 3.75% GAD Conventional OMO Best buy tables 11 th Oct 2009 Maximum Starting Incomes £100,000, single life, No Guarantees ASP 1) Clients with younger spouses 2) Gifting to Charity 3) Care dependents choices 4) Reviewed annually Rethinking Retirement Annuity income comparisons 60 6,246 7,224 6,643 7,080 65 6,992 7,909 7,340 8,040 70 8,024 8,891 8,350 9,360 75 9,538 10,389 9,895 £5,225 – £8,550
    • 17. Rethinking Retirement Options initiative 31 Days 2007 8 Days Av Q1 09
    • 18. Rethinking Retirement AIFA – Financial Planning Through Retirement
      • Venue Location Date
      • Thorpe Park Leeds 04-Nov
      • The Belfry Birmingham 05-Nov
      • Aztec Bristol 10-Nov
      • Hilton Tower Bridge London 25-Nov
      • Mercure Southgate Exeter 03-Dec
    • 19. Third Way Developments Enhanced Annuities Guaranteed Drawdown Asset Backed Annuities Exit Strategies For Drawdown Unit Linked Annuities Conventional Annuities
      • Take a look at the AIFA report “Financial Planning through Retirement”
      • Benchmark your business against AIFA “Good practice” Guidance notes
      • What is your exit strategy for Drawdown?
      • Ensure that quality decumulation-focused training is available to all your advisers
      • Retirement Planning
        • Growing and very attractive market – make sure your proposition is right!
      • Talk to the company who has all the options?
      Rethinking Retirement SUMMARY
    • 20. Rethinking Retirement
      • Thank you for your time
      Visit our stand to Investigate and Challenge our Solutions & Enter our Retirement competition If you haven't already

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