napf dc connections 12 sept 2011 v6 final with notes

AchievingA GOOD DCOutcome

Henry TapperBusiness Development DirectorFirst Actuarial

Jenny DavidsonDirector Comps & BensCSC

RETIREMENT OPTIONS 2 CSC Proprietary and Confidential

AGENDA

Annuities in crisis

THE PROBLEM

Restoring efficiencies

MARKETSOLUTIONS

DELIVERY THROUGHTHE WORKPLACE

Normal Service resumed?

CSC 20 November 2008 3

The Baby Boomers Reach Retirement!

Retirement Crisis

RetirementOpportunity

The population of pre-retirees and retirees is projected to

increase by 30 million by 2020

1450+ people turn 65 years old every day that’s about 1 every minute (UK ONS)

People are living longer…

…and are starting to retire without the cushion of a guaranteed DB pension


People are living longer


Agenda

Annuities in crisis

THE PROBLEM MARKETSOLUTIONS




The Problem

WE ARE POURING CHAMPAGNE DOWN THE DRAIN !!!

• Only 2 in 5 people annuitizing contract basedplans use the OMO (source PICA)

• Only 1 in 4 people annuitising trust basedbenefits use the OMO (source PICA)

• 40% of annuitants qualify for enhancedannuities but only 8% of annuities are seton an enhanced basis (source PICA)

PICA = Pension Income Choice Association


So Why Does That Matter?

• There is a 20% range between the best and worst rate on the OMO

• Enhanced annuities on average give a 20% enhancement on the best OMO rate

• Only 8% of those with a choice of indexation chose RPI/CPI ... NOPI – But Why?

• Only 1 in 10 annuities purchased have a spouse’s pension

(source PICA)

Is it Lack of Engagement ?


Why’s That?

The vast majority of those who purchase annuities are not aware of the

implications of

• Postcode

• Health

• Indexation

Nor have they discussed

– Unit-linked annuities

– Flexible pensions

– Scheme pensions

– Income drawdown

– Flexible drawdown



What is the problem - Pre-retirement ?

• The average number of money purchase arrangements aggregated by Annuity Direct is 3 – how many have you got?

• There are c£20bn of unclaimed pension benefits in the UK-the vast majority are DC benefits which are untraced.

• According to Annuity Direct c85% of annuities processed invested prior to claim in funds with >60% in equities

• 90% of annuitants had made no manual adjustment to asset allocations in 10 years before retiring


So why do at retirement transactional risks matter?

On Monday 9 August 2011, the intra-day variance between the low and high points of the FTSE100 was 899bps

• Annuitants on the day had no control of – The intra-day timing of disinvestment

– Any spreads or market dilutions on the price at which units were sold

• Think about the legacy


AGENDA

Annuities in crisis

THE PROBLEM

Restoring efficiencies

MARKETSOLUTIONS




Source MGM AdvantageAnnuities quoted level

The real return provided by annuities is narrowing

Why do alternative market solutions matter?


What is driving the conventional and enhanced annuity market?

External factors

The UK annuity market is under pressure from •EU Solvency II •Test-Chats •Falling gilt-yields •Mortality improvements

Competition• There are 9 competitive enhanced

annuity providers

• There are a handful of specialist providers of alternative pensions

• There are now 6 competitive standard rate lifetime annuity providers


What are the alternative solutions?

• Flexible pensions

• Income drawdown

• Flexible drawdown

• Scheme pensions

• Unit-linked annuities


What are the alternative solutions ?

Alternatives Suitability Guarantees Drawbacks Availability

Flexible pensions

Healthy retirees Yes Lower initial income Improving

Income drawdown

Fund of £150k + No Subject to markets and GAD rates

Mature market

Flexible drawdown

Fund of £500k+ Partial (£20k minimum income requirement)

Tax treatment of death benefits

Very limited

Scheme pensions

Potentially everyone ? ? Due a come back

Unit-linked annuities

The informed investor Partial - Tontine Income at riskLongevity risk

Limited

• There are only a handful of annuity bureaus geared to advise on these alternatives

– Is demand likely to increase and is capacity scalable?

– Is it suitable for the workplace?


Why is there so much talk about collective DC ?

• No issues with solvency II or Test-Achats• Increased exposure to “real assets”• Economies of scale• Mutual insurance using tontine

BUT• No counter-party for longevity risk• No obvious pool• Currently little political interest

“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”

RSA- Tomorrow’s investor 2011



What is the challenge?

Annuity type

From Age Joint or single

Increases Conversion rate

Conventional

60 Joint 50% spouse

CPI 28.1:1

Scheme(LTA current)

60 Joint 50% spouse

CPI 20 :1

GAD –reducing the Annual Allowance – Oct 2010

The Challenge is to find the outcome for each member with DC benefits towards 20:1


AGENDA

Annuities in crisis

THE PROBLEM MARKETSOLUTIONS




Why should this be sorted through the workplace?

• Employee Value Proposition

• Abolition of Default Retirement Age

• Cost effective (leveraging value of individual’s lifetime retirement savings)

• On tPR’s governance horizon – decumulation one of the 6 areas to improve DC outcomes


Technology encouraging career long holistic planning


Time for Action: A Company OR a Trustee Issue?

•Most DB members have DC

pots (not all of which will be

commuted)

•DC trustees need to be concerned that only ¼ of members use OMO

•This is in tPRs line of sight

TRUSTEES

•Only 1/5 annuities purchased (by value) arise from employee’s final workplace scheme (source Annuity Direct)

•Employee Value Proposition

•Using DC for commutation

•Easiest and cheapest means of facilitating retirement

COMPANIES

BOTH


How Can Companies/Trustees Get Engagement?

• Nudging starting well before “normal” retirement age

• Nudging through cost effective media - phones, social media and similar

• Engaging Communication - “Wake up packs and pension passports”

• Facilitated, part or fully subsidised advice


What can the NAPF do?

• Accelerate the importance of At Retirement assistance through PQM ?

• Encourage provision of at retirement service to all members (DB as well as DC) ?


What Can You Do?

• Put this on the corporate agenda

• Put this on your trustee’s agenda

• Research the market .com

napf dc connections 12 sept 2011 v6 final with notes

Education

dc benefits

source pica

alternative

vast majority

day

annuities

omo

pre