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The problems facing members of DC Schemes at retirement Henry Tapper- First Actuarial NAPF South East Group June 8th
Agenda Decumulation- DC’s dirty little secret Past The problems Overview Economics  and legislation Consumer awareness Our...
The way we were <ul><li>High interest rates hid inefficiencies of individual annuities </li></ul><ul><li>DB schemes confid...
Current state of play <ul><li>960,000 people reaching 65 in 2011 </li></ul><ul><li>33% of those annuitising from contract-...
What has gone wrong? Economics and legislation <ul><li>Low interest rates expose insurer’s costs and longevity loading </l...
What’s gone wrong? Distribution <ul><li>“ We find that selection effects account for the majority- perhaps one-half to two...
What went wrong Consumer awareness <ul><li>Annuities are difficult –  </li></ul><ul><ul><li>Would you advertise yourself a...
What went wrong – Product development <ul><li>No replacement for collective decumulators </li></ul><ul><ul><li>guaranteed ...
The future - stuff you can do right now! <ul><li>Promote the OMO as your Scheme’s default “at retirement” option </li></ul...
The future – collective DC? <ul><li>“… one of the reasons that individual DCs are expensive is because they are not pensio...
Want to know more? <ul><li>http://www.thersa.org   - Tomorrow’s investor </li></ul><ul><li>www.henrytapper.com  – Various ...
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Ht Presents Annuities To Napf South East Fin

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Presentation to the NAPF south easern group in July 2011

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Ht Presents Annuities To Napf South East Fin

  1. 1. The problems facing members of DC Schemes at retirement Henry Tapper- First Actuarial NAPF South East Group June 8th
  2. 2. Agenda Decumulation- DC’s dirty little secret Past The problems Overview Economics and legislation Consumer awareness Our approach to services Product Development Distribution Present Future
  3. 3. The way we were <ul><li>High interest rates hid inefficiencies of individual annuities </li></ul><ul><li>DB schemes confident to buy back DC pots </li></ul><ul><li>Insurers over-distribute through guarantees and bonuses </li></ul><ul><li>Longevity risk under-recognised </li></ul>
  4. 4. Current state of play <ul><li>960,000 people reaching 65 in 2011 </li></ul><ul><li>33% of those annuitising from contract-based schemes “shopped around” before purchase </li></ul><ul><li>25% of those annuitising from occupational schemes “shopped around” </li></ul><ul><li>OMO delivers 20% enhancement on “annuity index” </li></ul><ul><li>>90% of individual annuities are NOPI </li></ul><ul><li><5% of DC annuities are “asset backed” </li></ul>
  5. 5. What has gone wrong? Economics and legislation <ul><li>Low interest rates expose insurer’s costs and longevity loading </li></ul><ul><li>Accounting standards make employers wary of taking DC longevity risk on their balance sheets </li></ul><ul><li>EU Solvency II hamstrings insurers </li></ul><ul><li>Test Achats causes short-term underwriting turmoil </li></ul>
  6. 6. What’s gone wrong? Distribution <ul><li>“ We find that selection effects account for the majority- perhaps one-half to two-thirds -of the total annuity costs for the typical individual . The pure administrative cost loadings on UK annuities are relatively low.” Murthi, Orszag, and Orszag (1999). </li></ul><ul><li>Annuity broking is process driven, non-advised and pays relatively low commissions </li></ul><ul><li>Annuity bureaux have typically been sub-scale and inefficient </li></ul><ul><li>Some evidence of “inertia selling” by bundled providers </li></ul>
  7. 7. What went wrong Consumer awareness <ul><li>Annuities are difficult – </li></ul><ul><ul><li>Would you advertise yourself as an “impaired life?” </li></ul></ul><ul><ul><li>Would you admit to living in a “high-mortality postcode” </li></ul></ul><ul><ul><li>Would you value the present value of a 2% increase in your annuity rate? </li></ul></ul><ul><ul><li>Are you aware of how to get advice or even an OMO? </li></ul></ul>
  8. 8. What went wrong – Product development <ul><li>No replacement for collective decumulators </li></ul><ul><ul><li>guaranteed annuities </li></ul></ul><ul><ul><li>with profits annuities </li></ul></ul><ul><ul><li>scheme pensions </li></ul></ul><ul><li>No incentive for innovation </li></ul><ul><ul><li>Default annuity option profitable </li></ul></ul><ul><ul><li>Little consumer advocacy </li></ul></ul><ul><ul><li>Little interest within Government </li></ul></ul><ul><ul><li>Toothless regulation </li></ul></ul>‘ If it ain’t broke, don’t fix it’ mentality applies
  9. 9. The future - stuff you can do right now! <ul><li>Promote the OMO as your Scheme’s default “at retirement” option </li></ul><ul><ul><li>Get a top annuity bureau with both advisory and non advisory capacity </li></ul></ul><ul><ul><li>Make “at retirement” advice available to all relevant staff (whether in your scheme or not). </li></ul></ul><ul><ul><li>Understand the health and lifestyle demographics of your membership (DC and DB) </li></ul></ul><ul><ul><li>Make OMO take-up a key DC governance metric </li></ul></ul><ul><ul><li>Publish your OMO metrics in your accounts/newsletters etc. </li></ul></ul>
  10. 10. The future – collective DC? <ul><li>“… one of the reasons that individual DCs are expensive is because they are not pensions, they are individual savings accounts. Therefore, when a person dies, any residual is left in their estate. It is not available to pay others’ pensions. Research suggests that this adds around 10-15% to the cost of a pension” (David Pitt-Watson-Tomorrow’s Investor; RSA 2010) </li></ul><ul><li>We can encourage DC risk-taking through scheme pensions </li></ul><ul><li>Encourage collective draw-down </li></ul><ul><li>Consider bulk annuitisation from Target Dated Funds </li></ul><ul><li>Lobby DWP to take transfers to PPF and NEST and provide Scheme Pensions </li></ul><ul><li>Support and assist PICA and other lobbying groups. </li></ul>
  11. 11. Want to know more? <ul><li>http://www.thersa.org - Tomorrow’s investor </li></ul><ul><li>www.henrytapper.com – Various blogs </li></ul><ul><li>www.info.worldbank.org – Search Mike Orzag </li></ul><ul><li>And statistically the first place your members are likely to go for advice.. </li></ul><ul><li>www.forums.moneysavingexpert.com/forumdisplay.php?f=19 </li></ul>

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