ILC-UK's Second National Retirement Income Summit

Second National ILC-UK Retirement Income Summit

Friday 10th June 2016

This event is kindly supported by#retirementincome

Welcome by Host

Laurence Baxter Head of Policy & Research, The Chartered

Insurance Institute


Welcome by Chair

Lawrence Churchill Trustee, ILC-UK


Members of the ILC-UK Partners Programme


Getting young people saving


Session chaired by

Jemima OlchawskiHead of Policy and Insight, The Fawcett Society

Future of Retirement Income


Michelle McGagh, Freelance Journalist

Kate Jopling, Freelance policy and strategy consultant

Helen Creighton, former ILC-UK Researcher

Claire Walsh, Chartered Financial Planner,Aspect 8 Brighton

Future of Retirement Income- Panel


Chip CastilleManaging Director, Chief Retirement Strategist,

BlackRock

Innovation at retirement.Lessons from the US,

opportunities and challenges


GLOBAL RETIREMENT INSIGHTS

CHIP CASTILLEBlackRock Chief Retirement Strategist

FOR PROFESSIONAL CLIENTS/ QUALIFIED INVESTORS ONLY – RSM-3839

Retirement systems around the globe are still evolving

There are 5 common themes driving retirement research, product development and commercial opportunity around the world.

Increased Regulatory Activity

Demographic Changes

Technology and Product Design

Shift to Defined Contribution

Focus on Retirement Income

We’ve explored these themes and built our community of retirement thought-leaders through the launch of an international Retirement Institute

10FOR PROFESSIONAL CLIENTS/ QUALIFIED INVESTORS ONLY – RSM-3839


Dramatic increases in life expectancy are having large implications for not only the workforce, but political, health and other social systems

Source: World Economic Forum, https://www.weforum.org/agenda/2016/03/167-years-of-the-us-age-demographic-in-one-chart?utm_content=buffer6b571&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

11


Demographic Changes





For illustrative purposes only

CHOICENetherlands: Reforms may move the Netherlands towards “pension freedoms” within DC system


Regulatory changes around the globe are causing retirement markets to converge towards a more similar approach

Demographic Changes





CAREUnited States: DOL just passed a new fiduciary rule for advisors providing retirement advice

12

COVERAGEJapan: Government expected to expand coverage of Individual DC (JIDC) nationwide

UK: NEST program promotes coverage, offering access to retirement savings vehicles outside an employer



Multinational organizations are increasingly interested in Defined Contribution solutions for global workforces


Demographic Changes




13

Local outcomes + global benefits may be achieved with the right Target Date

Fund platform

20 26 32 38 44 50 56 62 68 74 800%

25%

50%

75%

100%

United States Japan TaiwanMexico Sweden UK

AgeEq

uity

Allo

catio

n

Life Expectancy

Labor Market Wages

Capital Markets


For Illustrative Purposes Only

Retirement income remains a “highest need” across channels

14

Remain financially independent

Have enough moneyto last your lifetime

25%

41%

22%

18%

17%

12%

Most ImportantSecond Most Important

Individuals

Social Security claiming strategies

Income and expense planning for retirement

48%

65%

Advisors’ Most Requested Re-tirement Training Initiative1

Advisors Institutions

Income beats advisors’ next

area of interest by 17 points

1. LIMRA Secure Retirement Institute’s Retirement Income Reference Book 20152. BlackRock DC Pulse Survey, 2016

CLIENT’S MOST IMPORTANT RETIREMENT GOALS1

RETIREMENT INCOME DOMINATES

69%

…of employers need for retirement income solutions in

retirement plans2


Traditional wealth management tools only solve for part of the problem

There are still two issues people struggle with that prevent them from solving the retirement problem in income terms.

Retirement Costs1 Life Expectancy2

1. Source: Goldstein, Daniel G. and Hershfield, Hal E. and Benartzi, Shlomo, The Illusion of Wealth and Its Reversal (January 28, 2014)2. Source: Society of Actuaries, 2011 Risks and Process of Retirement Survey; SOA UP 1994 Projected to 2011; Average of retiree and pre-retirees; Totals may not sum due to rounding

15

Underestimate Overestimate

60% underestimate longevity – Equates to underestimating the cost of one’s retirement

Inte

ntio

n to

Incr

ease

Sav

ings

(5 =

Hig

hest

inte

nded

incr

ease

)

Amount SavedPresented in income terms Presented in lump sum terms

Seeing retirement prospects in income terms vs. a lump sum

increases savings rates


Such a benchmark should incorporate the three risks that investors now must manage:

A benchmark for retirement income to solve for these shortfalls

Must help translate changes in assets into income terms

MARKET RISK

Must ensure enough assets to sustain efficient consumption over an unknown period

LONGEVITY RISK

Must understand retirement income costs to avoid a shortfall

LIABILITY RISK

2

1 3


A real-world method for estimating lifetime retirement income costs:

Introducing the BlackRock CoRI® Retirement Indices

Retirement

Increases as an investor approaches a chosen retirement date, then becomes less expensive1

Clear, intuitive translation: £1 per year for life with a cost-of-living adjustment to reduce impact of inflation

x

£250,000saved at age 55

£11,256estimated annual income

starting at age 65

UKCORI25 £22.211

Measure where you stand today Set a forward-looking strategic plan

17

1. CoRI Index levels are subject to change over time and are shown for illustrative purposes only. Source: BlackRock as of 31 March 2016. Past performance is not indicative of future results. Indexes are unmanaged and one cannot invest directly in an index. Data shown does not represent an actual investment or account.


£18

£19

£20

£21

£22

£23

Putting it together: What can CoRI ® tell us about the retirement income outlook for UK savers?

CoRI performance1 Impact to Retirement Income2

Needed £19.46 saved per pound of retirement income

18

Change in Income Potential: -12.21%

Needed £22.21saved per pound of retirement income

1. Source: Bloomberg, BlackRock; Data reflects CoRI Index 2025 performance since inception from 30 June 2015 – 31 March 2016. See prior slide for important information about the CoRI Indices.2. Source: BlackRock. Market performance reflects a sample 40/60 equity/bond investment strategy from 30 June 2015 – 31 March 2016.

The estimated cost of future retirement income for a 55-year-old increased 14% in the 9 months since launch:

Retirement Prospects for: 55-year-old investor £250,000 saved for retirement Expected retirement age of 65


Retirement Investing Framework: Saving phase

How much investor actually

has saved

How much investor needs

saved to fund income goal

15 years to close gap

For illustrative purposes only. Example does not represent an actual account.

Process allows for flexibility around how investor chooses to course correct


Retirement Investing Framework: Spending phase

For illustrative purposes only. Example does not represent an actual account.

Process includes flexibility to re-evaluate periodic spending goals by varying portfolio

Like pre-retirement, investor may incur volatility

How much investor

actually has saved

How much investor needs saved to fund income goal

Match assets for continued spending


Ability to wrap this in a technology that delivers a repeatable and actionable client experience

Assess client’s current savings and progress

towards meeting income goals

Build a savings and investment plan to help put clients on track for future income goals

Execute new investment portfolio decisions

Repeat next year and rebalance client’s plan as

markets or goals have changed


WEB DEMO

https://www.blackrock.com/investing/resources/tools/iretire/retirement-center-for-advisors?cid=vanity:iretire:landingpage

Where we’re going

Extending the framework for investors ages 60 – 84 who are currently in retirement and wrapping in a technology that will help to make decisions around various tradeoffs in retirement:

Can I spend more today?

What’s a sustainable

spending rate?

Should I annuitize a

portion of my income?

What investment risk can I take?

How can I ensure I won’t

outlive my money?

Should I work longer?

How do I protect against inflation?

Do I need to find other sources of

income?

Will I have enough in the

future?


Summarising ability to deliver on the global retirement themes

Robust process, advice driven models

Quantify wealth in retirement-income terms

Invest for longer life expectancy

Lifecycle investing, ability to manage outcomes

Tradeoffs and solutions managing toward retirement income goals


Demographic Changes





The following notes should be read in conjunction with the attached document:

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. Changes in the rates of exchange between currencies may cause the value of investments to go up and down. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Mandates we manage may be exposed to finance sector companies, as a service provider or as counterparty for financial contracts. In recent months, liquidity in the financial markets has become severely restricted, causing a number of firms to withdrawn from the market, or in some extreme cases, becoming insolvent. This may have an adverse affect on the mandates we manage.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

This material is for distribution to Professional Clients (as defined by the FCA Rules) and should not be relied upon by any other persons.

Subject to the express requirements of any client-specific investment management agreement or provisions relating to the management of a fund, we will not provide notice of any changes to our personnel, structure, policies, process, objectives or, without limitation, any other matter contained in this document.

No part of this material may be reproduced, stored in retrieval system or transmitted in any form or by any means, electronic, mechanical, recording or otherwise, without the prior written consent of BlackRock.

© 2016 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylized i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

• UNLESS OTHERWISE SPECIFIED, ALL INFORMATION CONTAINED IN THIS DOCUMENT IS CURRENT AS AT APRIL 2016

Disclaimer


The CoRI® tool is based on the BlackRock CoRI Retirement Indices (CoRI Indices), which are designed to provide individuals aged 55 to 74 with an estimate of what it will cost today for each pound of annual income you want in retirement. Each CoRI Index seeks to track the changes over time in the estimated cost of lifetime retirement income for individuals who turn or turned 65 in the year specified in the Index. So for example if you turn 65 in 2019 you should use the CoRI Index 2019 as the index to calculate an estimate of your retirement income potential. Future income estimates are expressed in today's pounds, and like any index, the CoRI Indices change daily. The CoRI Indices reflect one metric that investors can use to think about their future retirement goals and plans.

We remind you that CoRI does not provide an estimate of the returns of your individual savings and investments. It is not designed as a pension calculator and should not be relied upon for that purpose. Your CoRI number is provided for illustrative purposes only to provide a generic estimate of the cost of an annual income in retirement in today's cash terms. There are no guarantees that these estimates will be realised. You cannot invest directly in CoRI. Actual investment outcomes will vary and may be subject to taxation. The CoRI Indices are subject to change.

FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY

Disclaimer

Break


Where next for adviceand guidance?


Dr Cesira Urzì BrancatiResearch Fellow, ILC-UK

The importance of financial capability


The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change.

What Financial Capability?

Theory, Facts and Misconceptions

Cesira Urzì Brancati, ILC-UK


What we talk about when we talk about Financial capability

Financial Education: the process by which financial consumers/investors improve their understanding of financial products and concepts and, through information, instruction, and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being. Economic Cooperation and Development (OECD, 2005)

Financial Literacy: basic understanding of personal finance, and financial behaviour, such as saving and investing. It is a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial wellbeing (Lusardi and Mitchell, 2006)

Financial Capability: a person’s ability to manage money well, both day to day and through significant life events, and to handle periods of financial difficulty. (MAS, 2015) Individual develop more than just knowledge and skills, they als gain access to financial policies, instruments, and services (Johnson and Sherraden)


Financial Capability: Why it Matters for Retirement Income

• The responsibility for an adequate retirement income is increasingly being placed on individuals?• Are we saving enough to top up the State Pension for

retirement?• And once we enter retirement, can we make sure our

money doesn’t run out too soon? • Or rather, can we balance our consumption needs with our

desire to protect ourselves from the risk of outliving our assets?

• Many economists would argue that No, we are not saving enough, No we don’t really know how to make sure our money doesn’t run out, and No we are not very good at self insuring.

• Behavioural biases aside, we are not very good at any of those things because we are financially illiterate!


Financial Literacy Levels Very Low• Only 1 in 4 English persons aged 50+ can perform a simple calculation to

compound interest • 1 in 3 men and 1 in 6 women• And younger people know more than their older counterparts

Let's say you have £200 in a savings account. The account earns ten per cent interest each year. How much would you have in the account at the end of two years?

Proportion of men and women who gave a correct answer

Source: Own elaborations using ELSA (2008/9 to 2014/15)

Men WomenAged 50 to 60 40.5% 23.4%

60-69 31.5% 15.7%

70-79 19.4% 8.6%

80+ 13.3% 7.4%

Total 33.2% 17.8%


Who Understands Percentages?

If the chance of getting a disease is 10 percent, how many people out of 1,000 (one thousand) would be expected to get the disease?

1 in 10 older men and 1 in 5 women got this wrong


What about Fractions?

A second hand car dealer is selling a car for £6,000. This is two-thirds of what it cost new. How much did the car cost new?

68% of older men and about half the women got this right

Note: About 1 in 12 answered £18,000…


Maybe Simple Divisions?

If 5 people all have the winning numbers in the lottery and the prize is £2 million, how much will each of them get?

69% of older men and only 45% of women got this right


More correct answers = more savings

0 Correct Answers

1 Correct Answers

2 Correct Answers

3 Correct Answers

4 Correct Answers

5 Correct Answers

£0

£10,000

£20,000

£30,000

£40,000

£50,000

£60,000

£70,000

Average Household Savings

Note: 45% gave 4 or more correct answers. The results hold even if we account for age and gender.Source: Own elaborations using ELSA (2008/9 to 2014/15)


More correct answers = more likely to have planned for care

Note: 45% gave 4 or more correct answers; Planning for care includes: taking out insurance, consulting a financial advisor, started savings, bought property, other. Source: Own elaborations using ELSA (2008/9 to 2014/15)

0 Correct Answers

1 Correct Answers

2 Correct Answers

3 Correct Answers

4 Correct Answers

5 Correct Answers

0%

5%

10%

15%

20%

25%

Has taken action to plan for long term care


Ok, so people cannot count. But does it matter?

The more correct answers people give, the better their outcomes on many financial domains:

1. Are better able to manage their finances2. Shop around for the best financial products

– Choose cheaper mortgages– Buy better annuities

3. Plan for retirement4. They are more likely to participate in the stock market

– Hold better diversified portfolios, do not suffer from home bias etc.5. Are less likely to be over-indebted6. Many more…


The long road from Literacy to Capability• Numeracy is just one aspect of financial capability• OECD recently working on new ways to measure financial

capability (which they call literacy…)• Survey includes questions on:

˗ Financial Knowledge (numeracy, basic concepts related to inflation, interest compounding, risk/return, diversification etc.)

˗ Financial Behaviour (shopping around, paying bills on time, set long term goals etc.)

˗ Attitudes (short term vs. long term) • All aspects are strongly correlated• But measuring access to financial policies, instruments, and

services is trickier…


Can Financial Capability be Learnt?• Many critics argue that high financial capability is nothing but an

indicator of higher innate ability or other personal characteristics (like a taste for financial matters).

• But the impact of (measured) financial capability on financial behaviours is ambiguous• In other words, people save more and can give more correct

answers simply because they are smarter…• Or maybe people have saved more/invested better and so

they have learned the working of compound interest (etc.), rather than the opposite.

• So, do financial education programmes work?• As usual the answer is: depends…


Financial Capability: What Works?• Three large meta-analysis have concluded that:

˗ Financial education can affect some behaviours (including savings and record keeping), but not others;

˗ ‘Just in time’ interventions are more effective;˗ Courses that last only a few hours are less effective;˗ Workplace interventions or career counselling are more

effective. • There is still a lot we do not know – the UK has launched the

Financial Capability Strategy to find out what works.• But what works for some groups, may not be enough for others

˗ We have a forthcoming report on ‘What works for Older People’ …


Three Key Take-aways• A large proportion of people lack the

most basic financial capability – women and older people are especially disadvantaged

• Higher financial capability translates into better preparedness for retirement

• Increasing financial capability is possible, but we need to know what interventions really work



Financial Literacy is Good for Sex!!

Younger than 60 60-69 70-79 80+ All Ages0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Had sexual activity in the past year

0-1 Correct Answers 2-3 Correct Answers 4-5 Correct Answers


Many thanks

Cesira Urzi BrancatiInternational Longevity Centre - UK02073400440

Michelle CracknellChief Executive, The Pensions Advisory Service

(TPAS)

The future of pensions guidance


Claire Walsh, Aspect8, Brighton

Jackie Spencer, Money Advice Service

Michelle Cracknell, TPAS

Dr Cesira Urzì Brancati, ILC-UK

The Advice Debate- Panel


Lunch


Welcome by Chair

Baroness Sally GreengrossChief Executive, ILC-UK


IFoA research on pension freedoms and the views and uptake by consumers

Rebecca DeeganPolicy Manager, Institute and Faculty of Actuaries

(IFoA)


Public attitudes to freedom and choiceRebecca Deegan, Policy Manager

10 June 2016

Objective

• Following the one year anniversary of the implementation of the freedom and choice reforms we commissioned an opinion poll to assess:– Awareness of the reforms– Whether people thought the reforms were a good or bad thing– Whether people are comfortable making retirement income decisions– How confident people are that their pension income will last a lifetime

2 May 2023 52

Awareness of the reforms

2 May 2023 53

In April 2015, the Government introduced new rules that mean you can now access your defined contribution pension savings from the age of 55, and you no longer have to buy an annuity. Were you aware of these new rules?

Perception of freedom and choice

2 May 2023 54

Generally speaking do you think these new rules are a good or bad thing?

What has stopped people accessing the freedoms?

2 May 2023 55

• “My pension is for retirement not now and should be protected for that time”

• “I want to have as much available as possible when I'm no longer earning”

• “It's foolish”• “It's pretty clearly a VERY bad idea”• “Many will regret the change as they get older”• “Would perhaps be better off ignoring it”

Whether people are comfortable making retirement income decisions

2 May 2023 56

The Government is offering a free 30 minute guidance session for people aged over 55 before they access their pension. People can also choose to pay for regulated financial advice. Do you understand the difference between guidance and advice?

(Answers shown as % of respondents)

How confident people are that their pension income will last a lifetime• Only 21% of respondents felt their pension income would be enough for

them to live on for the rest of their life. Again, social status, age and gender appear to be influencing factors:– 26% of middle class respondents felt savings would last compared to

13% from the working class– More people age 55-64 are concerned that their pension would not last

a lifetime (23%) compared to those age 65+ (12%)– Males (28%) also tended to be more confident than females (15%) that

their savings would last for the rest of their life– Surprisingly only 3% anticipated using their housing wealth to fund their

retirement

2 May 2023 57

Long term care

2 May 2023 58

Source: Rickayzen, B. (2007) An analysis of disability-linked annuities’, Actuarial Research paper No. 180, Cass Business School, London

Conclusions• One year into the freedom and choice reforms, awareness of the reforms and

confidence in making decision about retirement income are high amongst the respondents. Yet views on whether these reforms are positive are mixed.

• Understanding of the difference between the free guidance session provided by Pension Wise and regulated financial advice was not universal. It is important that those who opt to take either guidance or advice understand the difference, and have appropriate expectations of what they can gain from accessing either of these services.

• Only 4% of respondents have made plans to meet any potential long term care costs, this is a concern where the number of people with care needs is rising.

• Differences in attitude and action between age groups, genders and social status’ suggest that targeted approaches for each segment of the population could be more effective than a ‘one-size-fits-all’ approach to improving awareness and understanding.

2 May 2023 59

Retirement today,retirement tomorrow


Ben FranklinHead of Economics of an Ageing Society, ILC-UK

The future of retirement income



The question is………..What does good look like?

Ben Franklin, ILC-UKFollow us on twitter: @ilcuk @bjafranklinEmail: [email protected]

mailto:[email protected]


Key takeaway: What good looks like will be markedly different for different stakeholders

• Politicians

• Policymakers

• Older person

• Regulators

• Industry


Towards some sweeping generalisations


Politicians care about:

• Getting elected.



• Getting elected.• Freedom and choice as an end in itself.



• Getting elected.• Freedom and choice as an end in itself. • Ensuring it was in place before election.


Civil servants care about:



• Delivering on ministerial agenda.



• Delivering on ministerial agenda.• Implementing freedom and choice reforms under

time pressure.


Retirees care about:



• Having choice.



• Having choice.• Having a fun aspirational retirement.



• Having choice.• Having a fun aspirational retirement.• Avoiding poverty and destitution.


Regulators care about:



• The stability of the system.



• The stability of the system.• Ensuring the stability of firms.



• The stability of the system.• Ensuring the stability of firms. • Avoiding mis-selling scandals.


Industry cares about:



• Staying afloat.



• Staying afloat. • Raising revenue through products and

services.



• Staying afloat. • Raising revenue through products and

services.• Ensuring continued revenue in new era of

retirement freedoms.


We need to develop a way of framing the debate that is consistent with these competing views and which has, at its heart, the consumer.

Mission statement


How do we do this?One way through the mire might be to consider what poor outcomes look like:

Government reverses freedoms due to poor consumer outcomes.

As a consequence, civil servants and regulators need to firefight in the face of an about-turn.

Retirees increasingly confused and distrusting of govt, regulators and industry.

Reputational damage for the industry negatively affecting business volumes.


Some principles for developing the system Any changes must work with grain of freedom and

choice.

But consumer protections must be enhanced to reduce risk of poor outcomes.

...Australia as a cautionary tale.

Waiting for evidence on consumer outcomes before taking action like closing the gate after the horse has bolted.

But outcomes should be monitored in order to improve the system over the long run.


What this means in practiceShort term measures:

• Default financial guidance (a conversation) before retirees take action.

• Development of default retirement income products for high risk groups who do nothing.

• Development of improved systems for monitoring and communicating consumer choices and outcomes.

Long term measures

• Whole of life financial guidance not just at point of retirement.

• Simplification in communicating retirement options including products and services.

• Building a regulatory framework to weed out the pension scammers.

• Improved access to financial advice supported by visual online tools and aids.


Final thought: All work and no play makes Ben a dull boy…

uncrystallised pension fund lump sum…uncrystallised pension fund lump sum…uncrystallised pension fund lump sum…uncrystallised pension fund lump sum…uncrystallised pension fund lump sum…uncrystallised pension fund lump sum…uncrystallised pension fund lump sum…uncrystallised pension fund lump sum…uncrystallised pension fund lump sum…uncrystallised pension fund lump sum…


Many thanks

Ben FranklinInternational Longevity Centre - UK02073400440Twitter: @ilcuk @bjafranklinEmail: [email protected]

mailto:[email protected]

Baroness Jeannie DrakeMember of the Pensions Commission 2002 to 2006

and a board member of the Pensions Protection Fund from 2004

The Pension Commissionten years on


Break


Professor David Blake Professor of Pension Economics, Cass Business

School

We Need a National Narrative: Building a Consensus around

Retirement Income


92

Independent Яeview of Retirement

Income

We Need a National Narrative: Building a Consensus around Retirement Income

David Blakewww.pensions-institute.org

[email protected]

June 2016

http://www.pensions-institute.org/

93

Agenda Introduction Contributing to national narrative:

The pensions industry The national media The regulatory system The political system Pension tax system and level of pension savings

Conclusion Key elements of a national narrative

Introduction Making decisions about retirement income are

the hardest financial decisions people ever have to make because risks involved in the generation of

retirement income are so poorly understood. Getting it right requires a national narrative about

what pensions are for. Everyone in Parliament – whatever their political

affiliation – and industry has to sign up to this narrative just as they did with auto-enrolment.

94

Key risks involved in the generation of retirement income

Investment risk Inflation risk Interest rate risk Longevity risk

95

96Source: 100% PNMA00 medium cohort 2007

Age

25%25%

Life expectancy

= 86.6

Most likely age

at death = 90

% d

eath

s at

eac

h ag

e

Random Variation Risk

Random Variation Risk

0

1

2

3

4

5

65 70 75 80 85 90 95 100105110

Expected distribution of deaths: male 65

Idiosyncratic risk %

dea

ths

at e

ach

age

Expected distribution of deaths: male 85

Life expectancy = 91.6

Most likely ageat death = 86

0123456789

10

85 90 95 100 105Age

1 in 3 will reach 93 and 5% will reach

100Idiosyncratic risk

Variability in life times

1 in 1000 chance of living twice life expectancy at age

65

1 in 10 chance of living twice life expectancy at

age 85

97Sources: O’Brian, Fenn, and Diacon, 2005, self-estimated life expectancy compared with GAD forecast life expectancy; own analysis.

INDIVIDUAL UNDERESTIMATES OF LIFE EXPECTANCY BY AGE

Number of years by which consumers underestimate life expectancy

WomenMen60-69

50-59

40-49

30-39

20-29

0 2 64 8 10

Age

Individuals consistentlyunderestimate how long they will live

98

Contributing to a national narrative

Contributing to national narrative 1: The pensions industry

Providers, advisers, investment managers and insurers

Serious fissures in relationships between these four groups, in particular between investment managers and insurers

over assets providers and advisers

over clients Yet all these parties are needed to provide

appropriate, effective and good-valued retirement income solutions.

If commercial airlines can do it….

99


‘Freedom and choice’ could be a disaster if these matters are not addressed.

Particular segment of the market most at risk is mass market DC customers with pension assets between £30,000 and £100,000

Such consumers are unlikely to pay for full regulated advice and therefore at risk of buying expensive, poorly designed products on a non-advised basis.

100


Simplest solution is a safe harbour retirement income plan which combines: Simple decision tree and limited set of default

pathways Safe harbour products that:

deliver income flexibility have inflation and longevity protection meet minimum design standards in terms of efficacy deliver clear value for money

Financial help, most probably delivered over the internet.

101


If between them, providers, advisers, investment managers and insurers are unable to deliver this solution,

this would be considerably more serious than the market failure that Pensions Commission was set up to investigate and resolve via AE absence of voluntary pension savings by up

9 million employees in companies without a pension scheme

102


Resolution to this new potential market failure would be national master trust drawdown scheme with public service obligation to accept any

DC retiree, irrespective of pot size. Might be simple continuation of NEST's

public service obligation to accept any employer for accumulation if EU regulations permit

103

Contributing to a national narrative 2: The national media

‘There’s an unsettling dichotomy between the messages of the mainstream media (“This is your money and you are entitled to

do with it whatever you want, whenever you please”)

and the more considered, long-term approach which is generally prevalent in financial services press and among advisers and providers’

104

Contributing to a national narrative 3: The regulatory system

According to those we interviewed, the current fragmented regulatory system fails to: encourage design of effective, value-for-money

products and solutions with safe-harbour status adequately protect consumers from mis-selling and

fraud. Solution would be to have single pensions regulator

specifically tasked with these responsibilities. It would also have responsibility for trying to change

regulations which contribute to bad outcomes.

105

Contributing to a national narrative 4: The political system

Increasingly clear that five-year political business cycle not suited to dealing with long-term issues like pensions, long-term care and long-term savings.

Political parties totally focused on winning next election and unable to think beyond that.

Therefore very hard to get any political party to adopt sensible long-term solutions to the problems of pensions, long-term care and long-term savings especially if this involves sacrifices today, because it

fears this would benefit its opponents who could well be in power when benefits begin to

show.

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Contributing to a national narrative 4: The political system

One way of achieving national narrative as well as dealing with myopia of political system is to have Pensions, Care and Savings Commission (PCSC).

Would be independent body that would have cross-party support and would make recommendations on issues related to pensions, care and long-term savings.

Would require evidence basis for recommendations together with impact and risk assessment.

Particularly important role for PCSC would be to ensure inter-generational equity.

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Contributing to a national narrative 5: Pension tax system and level of pension savings

Final contribution needs to come from pension tax regime and level of pension savings it encourages.

The pension reforms which ended the requirement to annuitise pension wealth bring into question whole system of very generous tax relief currently granted to pension savings and investment.

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In terms of pension tax relief, potential Government aims might be:

To encourage level of pension savings needed to achieve a target standard of living in retirement which might be defined as: ‘essential’ – income sufficient to cover an individual’s

minimum basic expenditure needs ‘adequate’ – income sufficient to achieve a minimum

lifestyle to which an individual aspires in retirement ‘desired’ – income sufficient to achieve the full lifestyle

to which the individual aspires in retirement.

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To encourage individuals to make provision for long-term care

To achieve tax neutrality over life cycle To achieve a degree of equity between

members of the same generation To achieve a degree of equity across

generations In terms of pension savings:

Adopting a national retirement savings target of 15% of lifetime earnings

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Conclusion

Conclusion Unifying thread that runs through funded

pension scheme is requirement to annuitise enough pension wealth to provide an adequate lifelong income in retirement rationale for establishing pension scheme.

It is this requirement which makes funded pension scheme different from any other type of savings scheme.

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Conclusion When annuitisation optional, that unifying

thread is no longer present and real danger that pension system begins to unravel.

At best, it just becomes a tax-favoured arrangement for operating a multi-purpose spending pot once money has been spent for one

purpose, it cannot be spent on another. At worst, it becomes a honey pot for thieves

and other opportunists.

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Conclusion Lying between these extremes are millions

of people now in control of their pension fund and who will be trying to do the best for themselves and their families.

But for anyone who understands the risks involved, many of these people will find themselves in the same kind of control as a yachtsman in the middle of the Atlantic in a force nine gale.

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Conclusion A great deal of effort will now have to go into

re-establishing what a good pension scheme is

This will need a commonly agreed national narrative.

Without this, people’s aversion to annuitisation combined with their willingness to pay highly for both flexibility and guarantees could leave them worse off than if they purchased an annuity to begin with.

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Conclusion However, potential market failures:

No deferred annuity market No institutional drawdown or annuitisation

solutions being offered No equivalent of NEST

Gap between guidance and advice Guidance is not enough People don’t want to pay for advice People want ‘help’ in the form of a decision tree

• Although advisory, this is currently classified as advice

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Key elements of a national narrative

Key elements of a national narrative The primary purpose of a pension scheme

is to provide an income in retirement for however long the scheme member lives

A pension scheme needs to offer accessibility, inflation protection (either directly or via investment performance) and longevity insurance

A pension scheme needs to provide value for money with the benefits clearly exceeding the costs

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Key elements of a national narrative Individual should not be expected to manage

the risks involved in the generation of retirement income from pension savings themselves

Middle Britain – with pension assets between £30,000 and £100,000 – should be recommended to use a retirement income plan that involves a simple decision tree and a limited set of default pathways

The retirement income plan would be self-started following a guidance or advice surgery

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Key elements of a national narrative The plan member would choose from a set of

safe harbour products approved by the regulator. The purpose of the decision tree is to identify the products that are most suitable for meeting the plan member’s needs

The safe harbour products would include annuities, drawdown products and longevity insurance that meet minimum design standards in terms of efficacy and deliver clear value for money

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Key elements of a national narrative The plan member would have flexible

access to the pension pot until the point that longevity insurance kicks in

To have an adequate pension in retirement, Middle Britain, needs to understand that it has to save 15% of its lifetime earnings in a pension scheme

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Thank you

Pension Freedoms:The Good, the Bad and the Ugly


Steve WebbDirector of Policy and External Communications,

Royal London


Gregg McClymontHead of Retirement Savings, Aberdeen Asset

Management PLC


For professional investors and financial advisers only – not for use by retail investors

7 Nations Pensions Reforms

10 June 2016

Gregg McClymont, Head of Retirement Savings Aberdeen Asset Management

Lessons for the UK?

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Robust and effective pensions system Recent reforms encouraging Further intervention needed

CanadaSome of the world’s leading public-sector schemeswith huge economiesof scale and expertgovernance.But also innovatingin Collective DC:New Brunswick developed risk sharing model harnessing scale, expertise, and clarity as to the security of the pension promise.

NetherlandsMarket leader in DB and collective DC. Sector-wide occupational schemes with scale and expertise. Strong but weakening commitment to collective risk sharing cross generations.

UKSignificant improvements in UK pensions system in recent decades, particularly with auto-enrolment. But with the UK workplace system so fragmented there are issues of scale, governance and transparency.

GermanyDemographic pressures leading to reduction in state pension coverage. Third pillar retail pensions have been promoted heavily by Government. But renewed attention now on scaled occupational second pillar schemes as more efficient way of delivering non-state pension income.

SwedenQuasi-nationalized system with high contribution rates. State uses its purchasing power to drive down costs of fund management in mandatory second pillar. Occupational schemes organised on sector wide basis. State monopoly annuity provider.

PolandA cautionary tale of pension privatisation – in 1999 switched from single pillar state organised DB to multi-pillar DC with privately managed second pillar. Costs were higher and returns lower than modelled. Govt u-turn restored status quo ante.

AustraliaPioneer of compulsory DC workplace savings in large well-governed pension schemes with escalating contribution levels. But concern growing at failure to translate large balances into guaranteed retirement income streams.

UK

GermanyPoland

SwedenNetherlands

Australia

Canada

International pension reformOur assessment of country pension provision based on the following factors: Scale, Governance, Transparency and Cost


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International pension reform


Our assessment of country pension provision based on the following factors: Scale, Governance, Transparency and Cost

CanadaSome of the world’sleading public-sector schemeswith huge economies of scaleand expert governance.But also innovating in Collective DC: New Brunswick developed risk sharing model harnessing scale, expertise, and clarity as to the security of the pension promise.

Canada


129


NetherlandsMarket leader in DB and collective DC. Sector-wide occupational schemes with scale and expertise. Strong but weakening commitment to collective risk sharing cross generations.

Netherlands



130


GermanyDemographic pressures leadingto reduction in state pensioncoverage. Third pillar retail pensionshave been promoted heavily by Government. But renewed attention now on scaled occupational second pillar schemes as more efficient way of delivering non-state pension income.

Germany



131


SwedenQuasi-nationalized system withhigh contribution rates. State uses its purchasing power to drive down costs of fund management in mandatory second pillar. Occupational schemes organised on sector wide basis. State monopoly annuity provider.

Sweden



132


PolandA cautionary tale of pensionprivatisation – in 1999 switched from single pillar state organised DB tomulti-pillar DC with privately managed second pillar. Costs were higherand returns lower than modelled.Govt u-turn restored status quo ante.

Poland



133


AustraliaPioneer of compulsory DC workplace savings in large well-governed pension schemes with escalating contribution levels. But concern growing at failure to translate large balances into guaranteed retirement income streams.

Australia



134


United KingdomSignificant improvements in UK pensions system in recent decades, particularly with auto-enrolment. But with the UK workplace system so fragmented there are issues of scale, governance and transparency.

UK



Where next forRetirement Income?


Douglas Anderson, Partner, Hymans Robertson

Andrew Tully, Pensions Technical Director, Retirement Advantage

Gregg McClymont, Head of Retirement Savings, Aberdeen Asset Management PLC

Steve Webb, Director of Policy and External Communications, Royal London

Where next for RetirementIncome - Panel


Thank you and Close

Baroness Sally GreengrossChief Executive, ILC-UK


Please join us fora drink


Economy & Finance

ILC-UK's Second National Retirement Income Summit