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UK - Actuarial Advisory Firm of the YearUK - Pensions Advisor of the Year
January 2015
Agenda
Changes to DC pensions
Product innovation
Engagement innovation
Global lessons
Market structure changes
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Benefit access from 6 April 2015
Income drawdown (flexi-access drawdown)
Taking a single or series of lump sums from uncrystallised funds (UFPLS)
Buying a lifetime annuity
Scheme pension
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Previous DC investment focus
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Growth phaseInvestment choice and engagement
focused here
Protection phaseCommon destination point of
purchasing an annuity
Growth phaseMay need to simplify choice in the growth phase so that more of the
governance budget can be re-directed to the protection phase
DC investment focus now
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Protection phaseGovernance budget focused on
designing strategies based on how members are expected to retire
Protection phase – in reality
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Growth phaseMay need to simplify choice in the growth phase so that more of the
governance budget can be re-directed to the protection phase
Protection phaseGovernance budget focused on
designing strategies based on how members are expected to retire
Investment framework
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Drawdown innovation – wish list
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Provides sustainable level of income
Provides inflation protection
Growth-seeking but with a capital preservation focus
Drawdown innovation - launching
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Price cap friendly DGFs• diversified beta funds?
Focus on downside risk• low volatility DGFs• volatility management (e.g. cap overlay)• ‘hedge your bets’ investment option
Developments in the annuity market
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Biggest unknown is life expectancy
Consistently underestimated
Biggest risk is running out of
money
•Annuities benefit from the pooling of longevity risk allowing for health status
•Deferred annuities? Temporary annuities? Variable annuities?
No ‘default’ default
Membership specific
Pot size specific
Analysis needs to evolve with the membership
Needs of those retiring now different vs those retiring in 15 years
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The engagement journey
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Key messages:
Stay InAge 22 - 30
How much?30 – 50
How and when to take this benefit
50 – SRD & beyond
Growth Shape Access
Innovation in communication
Good member communications need to accompany innovative investment products
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Key challenges
Administration systems
Legacy issues
Pressure applied by ‘all’ schemes trying to be ready by April
Communication issues (e.g. double defaulters)
Investment strategy agreed now will need to change (mitigated somewhat by future-proofing)
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What can we learn from others?
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Insight from Australia
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• Mandatory DC – introduced in 1992
• 81% coverage
• Employer contributions subject to annual cap of $50,000
• Average employee rate of 3%; Mandatory employer contributions currently 9.25%
• Were legislated to increase to 12% by 2020 … now will be frozen at 9.5% for 7 years
• Minority invest outside of default • Typical: ‘Cautious’, ‘Balanced’, ‘Adventurous’
– Lifestyle to 100% cash • Growing interest in US-style TDFs • Collective memory of capital loss – move to
low volatility / hedging and guaranteed investment options
DC formula
DC 2020
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Master TrustTrust
Contract
Summary
Step-change in DC pensions
DC innovation requires more than just clever investment products
Some early innovation; more to come
No immediate need to appoint first movers
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Regulatory Information
The information in this presentation is based on our understanding of current taxation law, proposed legislation and HM Revenue & Customs practice, which may be subject to future variation.
This presentation is not intended to provide and must not be construed as regulated investment advice. Returns are not guaranteed and the value of investments may go down as well as up.
Barnett Waddingham LLP is a limited liability partnership registered in England and Wales.
Registered Number OC307678.
Registered Office: Cheapside House, 138 Cheapside, London, EC2V 6BW
Barnett Waddingham LLP is authorised and regulated by the Financial Conduct Authority and is licensed by the Institute and Faculty of Actuaries for a range of investment business activities.
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