Napf dc connections 12 sept 2011 v6 final with notes


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This is a presentation given by Jenny Davidson and Henry Tapper on September 12th to the NAPF DC connections

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  • Chairman introduces us both and the subject.To which we’d add that there many in today’s audience are “at retirement” experts. We aren’t- we are enthusiastic amateurs concerned that people get the pensions they can from the money they’ve saved in pension plans.So we expect and indeed implore you to butt in whenever you feel the need either to correct us, question us or just make additional points that can inspire debate as we go along and at the end.So…..We’re looking at what we can do better as advisers and managers.We hope you leave here better understanding the problems, the solutions and what we can do right now to set matters right.CHANGE
  • So let me set out the agenda we’ve set ourselves and our general argument!996 Orzag Orzag and Murtha- UK Pensions are effeceint and good value but “one size fits all- not suitable for those with short life expectancyCHANGE- ProblemBenevolent environmentHigh interest rates meant expectation of 1 for 10 Insurance company guaranteesMost people using s226 had with-profits with good market growth and frankly they had the life expectancySchemes regularly bought back DC pots in exchange for scheme pensionsInterest rates stuck at 0.5%Mortality improvementsYesterday's guarantees now look hopelessly optimisticPensions arising from group and personal pensions – many providers out of business (Lloyds Life, Target Life, Irish Life ,Libert Life. Allied Dunbar Abby Life and General Portfolio)– purchasers no longer professionalScheme Pensions a thing of the past?Move forward CHANGE- Market SolutionsCircs changed so have annuity products- enhanced- plus alternatives – collective DC?CHANGE – Delivery through the workplaceWhat hasn’t changed is the purchasing infrastructure. People still buying direct from insurance companies, lack of availability of advice and while most schemes offer some form of link to an IFA for broking , take up is worryingly low. We are losing the link between schemes and retirement and increasingly it is the internet not the pension manager who are the primary source of information for those at retirementOur call to action today is to re-establish the link between the workplace and what happens next- to get pre and at retirement planning onto the agendas of trustee and corporate boardsCHANGE But before we look at the details Jenny has some general comments
  • It is not news to any of us that the retirement population is growing due to the ageing of the Baby Boom generation. Those born between 1946 and 1964 are not surging towards the gates of retirement!– currently there is someone reaching age 65 in the UK every minute of every day... That is a staggering statistic – and there are more of those to come....And we are all living longer – as I will show you in a minute..And of course many employees are now starting to retire without the cushion of a guaranteed DB pension and that is going to accelerate with the recent closures of many final salary schemes in the UKThese 3 factors taken together mean we have a retirement crisis in the UK – but as an industry we should be looking at how we can give each individual retiring employee the right retirement opportunities and not a personal retirement crisis.
  • As we all know people are living longer – but have you actually seen how significant this is expected to be.....I am a 45 year old female so have an 18% chance of reaching 100, my daughter who is 10, however, has a 30% chance of reaching 100.Henry, who is 50 next month (hope you didn’t mind me revealing that Henry) has an 11% chance of reaching 100 and his son who is 13 has a 21% chance.
  • So very shocking facts, but what are the problems in the DC pensions market in the UK which are preventing us from responding to these external challenges........JENNY: Pick up champagne bottle and start pouring.HENRY: What are you doing woman?JENNY: I am showing the audience what our DC members are doing when they retire.HENRY: What are you talking about?JENNY: Let me explain – with some more statistics......
  • Firstly, only 2 in every 5 members of contract based DC schemes are using the Open Market Option. PauseHENRY Hang on though Jenny, surely a much higher proportion use the OMO when retiring from trust based DC plans>Jenny- well let’s ask the audience- hands up all those who think trust based plans get more of their members using the OMO than contract basedWell you’re wrong!, only 1 in 4 members of Trust based DC schemes appear to be using the Open market option.Now – I personally could not believe those statistics were correct when I say them - CSC operate both a contract based GPP and a Trust based DC Scheme – and we use an annuity service for all employees – I am sure many other companies do as well – so why so few members making use of the Open Market Option? Could it be Legacy?.......We have some of the companies who make up the PICA in the audience today so perhaps they would like to comment on what is behind these numbers when we get to the discussion session at the end of our presentation.Thirdly – although 40% of those retiring would actually qualify for some form of enhanced (perhaps impaired life) annuity – only 8% of pensions are actually set up on an enhanced basis. So – as I was showing the audience – every day our pensioners are “Pouring champagne down the drain” LINK One thing that’s clear is that people need quality information if not advice when they get to retirement........ CHANGE JENNY TO HENRY
  • DON’T TAKE THE FIRST OFFER YOU GETMr Ivor Pension, a 65 year old man with a pension pot worth £100,000, could typically get offered £6,000 a year when buying an annuity from his normal pension provider if it's the worst available. However, by going for the best open market option, he could buy an annual income of £6,900.That's a difference of £900a year, or a chunky £22,500 more income if he lives for 25 years after retirement.If enhanced annuities are 20% better than the best OMO that could be as much as a 40% differenceIndexation is such poor value for money would it be better to have no RPI Peter Shellswell tells me that the RPI break even point is his imputed point of death.Which suggests that RPI annuities are poor value and people who go for jam today aren’t as stupid as they look- which is an interesting point for anyone doing de-risking exercisesIts not that all people who have a pension are men, its just that the women tend to live longerTax-fee cash commutation?Is this a matter of poor decision making or could it be argued that by the provision of level annuities with no spouse’s pension we are creating a pseudo-advisory environment.LINK: Is this lack of member engagement or is it fiduciary negligence ?
  • I agree Henry, although at CSC we do offer an annuity service and they may get to discuss these implications AT retirement I would expect that they are unaware of all the things to consider until that very point in time.The majority of our staff do not have a clue that Their postcode (where they live) can influence their pension amountOr their health – we need to do more to get employees to complete medical questionnaires – or there are some good examples of at retirement telephone interviews with nurses which have a much higher response rate (75% on the telephone with a nurse compared to 10% if you are left to fill a form in).Nor have we arranged for our employees to take advice on the alternatives to purchasing an annuity – it is only those who are following Martin Lewis on (or some similar website) who are likely to have heard of any of the alternatives listed on this slide here.It’s a sad state of affairs when more of my employees are taking advice from Moneysaving expert than they are from us as an employer and I must just read you this quote from his website to show how he gets personalQuote” Scared? You’re meant to be , the pensions crisis is personal. Yet it’s possible to get a pension that pays thousands more just by buying it a different way.”
  • But there is much more to this problem than annuity rates or alternatives at retirement – it all starts well before retirement is even here.......Legacy! You will be hearing this a lot from us today. Thanks to Annuity Direct (and Katherine and Bob) for providing us with this insight.The average number of money purchase pots an individual has is 3 (that would include AVC pots) – How many have you got? Pause..I already have 3 so I am sure I will have more by the time I retire. Do employees know how to aggregate these when they get to retirement? Do they even know who they are with and how to claim them.We have in the UK about £20 BN of unclaimed pension benefits which are untraced .And then there is the whole area of life styling (which we are not going to even have time to cover today) but again a huge problem here is 85% of annuities purchased through Annuity Direct come from funds with over 60% invested in equities.And 90% of those retiring have made no adjustments to their investment strategy in the 10 years prior to retirement.CHANGE: So Henry why does it matter where we are invested when we reach retirement?
  • I’m showing this not as a case study because it brings into sharp focus the huge amount of unwanted in the months, weeks and days before annuity conversion.It’s small wonder that people are disillusioned when they approach the point of annuity conversion carrying more than 60% of their DC pot in equities!I can only echo what you’ve been saying Jenny. There are going to be around 450,000 people purchasing annuities this year and from the stats you’ve quoted only a fraction of those will have annuity protection.We’re going to come back to how we can make this better but let’s move on for a moment to some of the solutions in the market that have appeared recently and look at their suitability.
  • So we’re talking here about restoring solutions and I’ll remind you of what I said at the beginning. Because we’ve lost the mechanisms to generate smoothed and guaranteed incomes which allow people to benefit from real asset both over time, we are now looking to restore those efficiencies- get back to where we were in the 70s ,80s and 90s.You’ll be rightly feeling a little uncomfortable about that because for every guarantee offered there needs to be a counterparty!CHANGE; much of what’s going on in the alternative annuity space is about looking for collective solutions which use mutuality as a counterparty proxy but WE ARE NOT THERE YET!
  • What this slide shows us is why people are getting more vocal about annuities.Explain chartThe need to explore enhanced annuities as an alternative to the pure OMO is greater than ever today.
  • Broadly speaking the external factors are driving annuity rates down while competition is keeping them keen (though to differing degrees)There are more factors driving annuity rates down than keeping them up and you can see from the previous graph there has been a detoriation in rates over the last yearExplain what Test-Achatsis as some in the audience will not know.So the situation is far from clear , even after using the OMO and exploring the opportunities of an enhanced annuity, many people will be left unsatisfied- looking for alternative solutions.To properly understand these solutions (just as with the pre-retirement decision) we feel that advice is needed.
  • Henry to speak about each of these alternatives in turnFlexible pensions (hedging your bets)Income (capped) drawdown – GAD ratesFlexible drawdown (MIR) Exec schemes- £20k Minimum income gteeScheme PensionsJust as a matter of interest how many of you manage or advise on DB schemes that still buy-back dC pots including AVCs in return for scheme pensions.And how many of you allow your members to commute you AVCs for cash?Unit-linked annuities- the sensible way forward – but little used (despite MGM and others best efforts.CHANGE
  • HenryI pulled this together as a summary slide which you can think about in relation to your won scheme and in particular your senior execs who are frankly the major beneficiaries of these alternatives.I’d better explain what tontine means- all closed pension schemes are tontines depending on the fund to meet the final pension paymentThe advisory issues are acute and very concerning-Is the advice going to be proactive or will it remain broadly reactive (execution only) relying on informed investorsOther than for senior execs is there really in a post RDR market, going to be capacity to meet demand if financial engagement does improve?Who or what will be the catalyst for increased financial engagement?AdvisersGovernmentEmployersTrusteesCharities
  • Technical issues suggest there is a huge win here.The Dutch have proved that Collective DC can (and is working)Why is there so little enthusiasm in the UK?CHANGE; The current market is inefficient – what will drive change?
  • HenryIs this a policy statement , a challenge or merely a statement of fact?The challenge is to get us back to where we were in DB landSo there is some light at the end of the tunnelThere are options to get good value from OMO and enhancedThere are options from alternativesAnd there is a chink of light at the end of the tunnel from CDCBut we lack the advisory capacity to implement individual decisions and seemingly the political will to implement collective decisions.LINK: I am now going to pass back to Jenny who is going to speak to us about what this means for delivering DC pensions through the workplaceand how we can restore some of these efficiencies we’ve lost
  • You may question why a current employer (or a set of trustees) should be doing any more than providing an employee with details of their retirement options from their own company pension scheme – why would an employer be at all concerned in helping employees aggregate all their legacy benefits – or find a suitable alternative to the annuity on offer.Or even help them with provision of Independent Financial Advice or holistic planning other than just communicate the Pension Scheme on offer from the employer.There are 4 reasons why an employer should look wider than just its own Company pension scheme .....
  • EVP – bit of HR jargon but this means the psychological contract between an employer and its employees/ The Employer Brand – why would someone want to work for CSC when they can work for any of our competitors? The greater the level of “Trust” or “engagement between the employee and the Company the “greater the intent to stay” the more committed the employees will be to the Company and there is lots of evidence to show this links directly to customer service and tangible business results. Employees “Trust” their employer more than the financial services industry and therefore they are in a prime position to influence employee savings behaviour by improving education and awareness of these issues we have been discussing today. CSC are up for an award at the Pension Schemes of the awards on Thursday for our communication of DC benefits.Default Retirement Age – with the removal of the default retirement age there is an expectation that we will all be employing older people and it is not as easy to manage employees out of the business – and that will be compounded if the employee believes they cannot afford to retire. If we can increase the outcomes from DC schemes by upt o 40% as Henry was mentioning earlier then we will have more employees who can afford to retire.Cost effective/leveraging – It is not just he employer’s purchasing power in obtaining lower charges and fees in the DC world but it is also much more cost effective for an employer to provide access to education or financial advice in the workplace – many of the providers are now looking at providing some of this via technology on their wealth platforms – such as the mymoneyworks portal that many of you in the room will know we have been developing with Scottish Widows – and I will show you another example on the following slide.Finally, this is on the Pension Regulators horizon in their recent report on “achieving good member outcomes from DC “- appropriate decumulation decisions - which makes all of us take note!Henry to Jenny- can I ask you if you think there is any risk of trustees being sued for not exercising their duty of care. Jenny’s response’ litigious society -= only it only takes one test case and the flood gatres could be open. There is a potential legal issue here as serious as personal pension mis-selling and I’m sure there are plenty of lawyers in the audience who’ll have something to say on this/
  • {Part of culture- my money worksLink to moneysaving expert .com where pensions are integrated into general planning. This is about getting people to save adequately and sets a general context.The whole industry needs to help increase engagement in this area – and I believe we can do this through more holistic lifestyle planning – not just talking about pensions! It needs to be web-enabled and engaging to both young and old. This is just one example where if you think in pension terms of having assets and liabilities – We will all have a number of assets not just our pension when we come to retire - whether that be a house, savings, or ISAs. And throughout our life we also have liabilities which we need to pay for our mortgage, school fees and/or university fees, credit, holidays.We may have retirement plans but how realistic are they when we take into account the other outgoings we will have before we retire and how that impacts on our retirement assets as a whole and when we can actually afford to retire.Then you will notice that this modelling does not stop at retirement age: there are different income needs in retirement and these are not smooth or certain either – there will be a time early in retirement where an individual is likely to be more active and need a higher income, this may then dip and as they become less-active they may have a lower income need but at some time it is likely (especially as more of us are going to live to 100) when we will need residential long-term care and a much higher income need.We need to continually re-set our retirement plans and this should be an ongoing process and not just a couple of years before we retire.Summarise, its not just about the company DC its getting people to look hoilistically at all their assets and liabilities. It’s about constantrlyrecallibrating.Plenty of help at outset but little ongoing help and far too little help at retirement. Chronic and acute issue of pouring champagne (money) down the drain
  • But is this just a Company issue? – I would argue that it is also a Trustee issue Many DB members also have DC – either AVCs or legacy – can the Trustees allow this to be commuted first so they are not buying an annuityAs we have seen not enough DC members are using the OMO – is this being communicated to deferred members as well as the current actives?-How often are these issues making it onto the agendas of trustee meetingsOn the company side- don’t forget that though your employee may have only been with you a couple of years- it’s their entire history of pension savings that’s being annuitized and you could be the difference between them retiring or not..
  • We need to start helping our employees (or members) to be more pro-active about thinking through their retirement plans WELL before Normal retirement age – like the example I gave a couple of slides ago.We will only get them to take notice if the communication is engaging and using the media which they are using every day – whether that be iphone, facebook, internal intranets/discussion forums at work.There are many good examples of employers producing engaging communication to increase the take up of the pension scheme in the first place – with some great stories of increases in take up rates – and also now much more communication on investment risks and investment choices with the “attitude to risk” tools which are on offer – but we are not doing enough with helping employees plan their retirement once they have actually joined and chosen their initial investment fund.Delivery is as important as content and it needs to get to all employees in a way that suits them. (CSC example discussion forum C3)And then there is the whole question of advice being facilitated through the workplace and whether that should be paid for or subsidised by the employer (or Trustees perhaps).
  • As we said at outset we are enthusiastic amateurs who want us all to make a difference together.Perhaps accelerate the importance of at retirement assistance via the Pensions Quality Mark?And Encouraging this focus not just for DC schemes but for DB members as well who are likely to have DC pots either due to AVCs or legacy arrangements.
  • So in conclusion, what can you do when you leave this room and get back to the office Think about what you or your clients are doing for their employees and put this on both the Corporate and the Trustee Agendas...And research the alternatives we spoke about to see if any would be appropriate for your Scheme or clients.So, myself and Henry would like to thank you very much for your attention and we would now like to here from you – so perhaps chairwoman we could open the session up for discussion.....Thank – You.
  • Napf dc connections 12 sept 2011 v6 final with notes

    1. 1. Henry TapperBusiness Development DirectorFirst Actuarial<br />Jenny DavidsonDirector Comps & BensCSC<br />Achieving<br />A GOOD DCOutcome<br />
    2. 2. AGENDA<br />THE PROBLEM<br />MARKETSOLUTIONS<br />DELIVERY THROUGH<br />THE WORKPLACE<br />Restoring efficiencies<br />Normal Service resumed?<br />Annuities in crisis<br />
    3. 3. The population of pre-retirees and retirees is projected to increase by 30 million by 2020<br />Retirement Crisis <br />RetirementOpportunity<br />The Baby Boomers Reach Retirement!<br />1450+ people turn 65 years old every day that’s about 1 every minute (UK ONS)<br />People are living longer… <br />…and are starting to retire without the cushion of a guaranteed DB pension<br />
    4. 4. People are living longer<br />
    5. 5. Agenda<br />THE PROBLEM<br />MARKETSOLUTIONS<br />DELIVERY THROUGH<br />THE WORKPLACE<br />Normal Service resumed?<br />Annuities in crisis<br />
    6. 6. The Problem<br />WE ARE POURING CHAMPAGNE DOWN THE DRAIN !!!<br />Only 2 in 5 people annuitizing contract basedplans use the OMO (source PICA)<br />Only 1 in 4 people annuitising trust basedbenefits use the OMO (source PICA)<br />40% of annuitants qualify for enhancedannuities but only 8% of annuities are seton an enhanced basis (source PICA)<br />PICA = Pension Income Choice Association<br />
    7. 7. So Why Does That Matter?<br />There is a 20% range between the best and worst rate on the OMO<br />Enhanced annuities on average give a 20% enhancement on the best OMO rate<br />Only 8% of those with a choice of indexation chose RPI/CPI ... NOPI – But Why?<br />Only 1 in 10 annuities purchased have a spouse’s pension<br />(source PICA)<br />Is it Lack of Engagement ?<br />
    8. 8. Why’s That?<br />The vast majority of those who purchase annuities are not aware of the implications of<br />Postcode<br />Health<br />Indexation<br />Nor have they discussed<br />Unit-linked annuities<br />Flexible pensions<br />Scheme pensions<br />Income drawdown<br />Flexible drawdown<br />CSC Proprietary and Confidential<br />RETIREMENT OPTIONS8<br />
    9. 9. What is the problem - Pre-retirement ?<br />The average number of money purchase arrangements aggregated by Annuity Direct is 3 – how many have you got?<br /> There are c£20bn of unclaimed pension benefits in the UK-the vast majority are DC benefits which are untraced.<br />According to Annuity Direct c85% of annuities processed invested prior to claim in funds with >60% in equities<br /> 90% of annuitants had made no manual adjustment to asset allocations in 10 years before retiring<br />
    10. 10. So why do at retirement transactional risks matter?<br />On Monday 9 August 2011, the intra-day variance between the low and high points of the FTSE100 was 899bps<br />Annuitants on the day had no control of <br />The intra-day timing of disinvestment <br />Any spreads or market dilutions on the price at which units were sold<br />Think about the legacy<br />
    11. 11. AGENDA<br />THE PROBLEM<br />MARKETSOLUTIONS<br />DELIVERY THROUGH<br />THE WORKPLACE<br />Restoring efficiencies<br />Normal Service resumed?<br />Annuities in crisis<br />
    12. 12. The real return provided by annuities is narrowing<br />Source MGM Advantage<br />Annuities quoted level<br />Why do alternative market solutions matter?<br />
    13. 13. What is driving the conventional and enhanced annuity market?<br />External factors<br />The UK annuity market is under pressure from <br />EU Solvency II <br />Test-Chats <br />Falling gilt-yields <br />Mortality improvements<br />Competition<br />There are 9 competitive enhanced annuity providers<br />There are a handful of specialist providers of alternative pensions<br />There are now 6 competitive standard rate lifetime annuity providers<br />
    14. 14. What are the alternative solutions?<br />Flexible pensions<br />Income drawdown<br />Flexible drawdown<br />Scheme pensions<br />Unit-linked annuities<br />
    15. 15. What are the alternative solutions ?<br />There are only a handful of annuity bureaus geared to advise on these alternatives<br />Is demand likely to increase and is capacity scalable?<br />Is it suitable for the workplace?<br />
    16. 16. Why is there so much talk about collective DC ?<br />No issues with solvency II or Test-Achats<br />Increased exposure to “real assets”<br />Economies of scale<br />Mutual insurance using tontine<br />BUT<br />No counter-party for longevity risk<br />No obvious pool<br />Currently little political interest<br />“Estimates vary, but it is our belief that for no additional cost, pension outcomes could be improved by 50% or more, compared to a typical DC pension which might be offered today”<br />RSA- Tomorrow’s investor 2011 <br />CSC Proprietary and Confidential<br />RETIREMENT OPTIONS16<br />
    17. 17. What is the challenge?<br />GAD –reducing the Annual Allowance – Oct 2010<br />The Challenge is to find the outcome for each member<br /> with DC benefits towards 20:1<br />
    18. 18. AGENDA<br />THE PROBLEM<br />MARKETSOLUTIONS<br />DELIVERY THROUGH<br />THE WORKPLACE<br />Normal Service resumed?<br />Annuities in crisis<br />
    19. 19. Why should this be sorted through the workplace?<br /> Employee Value Proposition<br /> Abolition of Default Retirement Age<br /> Cost effective (leveraging value of individual’s lifetime retirement savings)<br /> On tPR’s governance horizon – decumulation one of the 6 areas to improve DC outcomes<br />
    20. 20. Technology encouraging career long holistic planning<br />
    21. 21. Time for Action: A Company OR a Trustee Issue?<br />BOTH<br />COMPANIES<br />TRUSTEES<br /><ul><li>Only 1/5 annuities purchased (by value) arise from employee’s final workplace scheme (source Annuity Direct)
    22. 22. Employee Value Proposition
    23. 23. Using DC for commutation
    24. 24. Easiest and cheapest means of facilitating retirement
    25. 25. Most DB members have DC pots (not all of which will be commuted)
    26. 26. DC trustees need to be concerned that only ¼ of members use OMO
    27. 27. This is in tPRs line of sight</li></li></ul><li>How Can Companies/Trustees Get Engagement?<br />Nudging starting well before “normal” retirement age<br />Nudging through cost effective media - phones, social media and similar<br /> Engaging Communication - “Wake up packs and pension passports”<br />Facilitated, part or fully subsidised advice<br />
    28. 28. What can the NAPF do?<br /> Accelerate the importance of At Retirement assistance through PQM ?<br /> Encourage provision of at retirement service to all members (DB as well as DC) ?<br />
    29. 29. What Can You Do?<br />Put this on the corporate agenda<br />Put this on your trustee’s agenda<br />Research the market .com<br />