Knowledge Sharing Scotland A sea change in pensions€¦ · Knowledge Sharing Scotland A sea change in pensions Sandy Trust, John Warburton, Stephen Cunningham 26th March 2015 The

Knowledge Sharing Scotland A sea change in pensions

Sandy Trust, John Warburton, Stephen Cunningham

26th March 2015

The views expressed in this presentation are those of the presenter and are not indicative of Prudential policy.

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Approximate running order 1730 - 1755 Sandy Trust, Value for Money 1755 - 1800 Q&A 1800 - 1820 John Warburton, Harnessing the Power of Digital to Empower Consumers 1820 - 1825 Q&A 1825 – 1830 Stephen Cunningham, Risks of Pensions Freedom, Impact of devolution on Pensions

Value for money in Pensions

Sandy Trust

26th March 2015

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The views expressed in this presentation are those of the presenter and are not indicative of Prudential policy.

Agenda

2. Value for money

3. A potential approach

1. The Customer

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The Customer

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Total flexibility at retirement for members

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But the basic need to fund retirement is unchanged…

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Accumulation Preparing

to retire

Retirement

Transition

Retirement Starting out

Ready to Invest

Getting

Started

Guided Accumulation

Self-Directed Accumulation

Playing Catch-up

Retirement Transition

Living & Giving

Assets

DC

Deferred Rollovers

Advice/Drawdown/Annuities

Personal investing

Cu

sto

mer

need

s

Ch

an

nels

New customers

New members

Age 20 30 40 50 70 60

Guidance & planning

But what actually drives better customer outcomes?

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8

Factor

1. Contributions

2. Investment Design

3. Investment Performance

4. Choice at retirement

5. Charges

Source: http://maryvezzetti.com/blog-mary-vezzetti/ Source: http://www.ageuk.org.uk/money-matters/income-and-tax/living-on-a-low-

income-in-later-life//

Value for money

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2014 2015 “The year of the Pension”

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Workplace

DC pensions

Auto-

enrolment ABI Audit

Low

interest

rates

FCA

Westminster DWP CPs

Charge

disclosure

tPR action

“We have got to drive

down these administration

charges. We can’t allow

people to be ripped off in

the way some people are.”

“ever more inventive

ways of extracting

money from their

clients”

“The buyer side of the

…market is one of the

weakest that the OFT has

analysed in recent years”

Charge capping

Banning AMD, consultancy

charges & commission

Value for money

assessment of legacy

schemes

With significant focus on cost and value for money…

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But value for money is a personal concept?

• OED: “The worth of something compared to the price paid or asked for it”

• So how to apply the concept to the world of pensions…a long term product with few comparatives

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It is good value for money

I expected more for the price

Having read the reviews, I expected more

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The regulators have had a go…

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Further guidance and final regulations have now been issued by the FCA and TPR – no prescriptive methodology for a VFM assessment was mandated.

FCA: Policy Statement 15/3 “Final rules for independent governance committees”, providing a new section to COBS, 19.5 Independent Governance Committees

http://www.fca.org.uk/static/documents/policy-statements/ps15-03.pdf

TPR: The essential guide to governance standards and charge controls

http://www.thepensionsregulator.gov.uk/docs/governance-standards-charge-controls-guide-april-2015.pdf

TPR: Regulatory guidance for defined contribution schemes (VFM section)

http://www.thepensionsregulator.gov.uk/guidance/guidance-dc-schemes.aspx

• FCA: Principles based – little guidance

• “the IGC will assess the ongoing value for money for relevant policyholders delivered by relevant schemes”

• TPR: Similar but with more guidance for trustees on process and assessment

• “Trustees should keep VFM in mind on an ongoing basis, including it as an item on the scheme’s risk register. Separately, they should carry out a periodic strategic review, for example every three years, following the steps outlined below.”

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Regulatory Requirements in more detail…

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• FCA – COBS 19.5 (2) (a) to (e)

• whether default investment strategies within schemes are appropriate

• whether the characteristics and net performance of investment strategies

are regularly reviewed by the firm to ensure alignment with the interests of relevant policyholders and that the firm takes action to make any necessary changes

• whether core scheme financial transactions are processed promptly and accurately

• the levels of charges borne by relevant policyholders; and

• the direct and indirect costs incurred as a result of managing and investing, and activities in connection with the managing and investing of, the pension savings of relevant policyholders, including transaction costs

• TPR – DC Guidance VFM

• Benefits

– Investment performance

– Design of the default strategy

– Financial advice

– Support at retirement

– Scheme administration

– Scheme governance and advice

– Scheme specific factors

• Costs

– All member-borne costs and charges

– Portfolio transaction costs

VfM is not....

Low profitability

Good customer outcomes

Equity

Only meeting minimum standards X

X

X

?

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Discussion Points

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• Responsibility – IGC, Corporate Trustees, External Trustees

• Scope – Decumulation, individual personal pensions, non-default investment strategies

• Likely areas of focus – charges, communications and default investments

• Provider responsibility for review of appropriateness of default investment

• Potential implications

– Review of charges

– Policy fees reviewed

– Review of default investment strategies

– Improvements to communications/customer engagement

– Impact on fund managers from transaction cost disclosure

• Areas of complexity

– With-profits

– Transaction processing

– Charges methodology (including transaction costs) and comparatives

A potential approach

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VFM – a potential approach? VFM areas of assessment The value for money assessment will be carried out against the following 6 dimensions: 1.Benefits 2.Investments 3.Servicing 4.Governance 5.Communications 6.Charges VFM assessment ratings Each element of the assessment will be classified as: • High Priority () • Medium priority () •Low priority () The overall rating for each scheme will be the maximum of the ratings for each of the components. Definitions for these ratings are given in the table below.

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Assessment meets or exceeds VFM benchmarks. benchmarks.

Some elements of assessment do not meet VFM benchmarks. VFM benchmarks.

Several elements of assessment do not meet VFM benchmarks. meet VFM benchmarks.

Quality

Cost

Implications – Regulatory burden or customer opportunity?

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This could cost

MILLIONS to implement

– and take valuable

resource away from

running our business –

another expensive

regulatory burden

which will stifle us. No

doubt EBCs will pick up

on this too!

An incredibly rich source

of customer data we

have never had before –

this could revolutionise

our ability to connect

with our customers and

drive genuine innovation

in our proposition –

building our brand with the

next generation and

helping to secure our

position for the future.

The views expressed in this presentation are those of the presenter and are not indicative of Prudential policy.

Questions Comments

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Harnessing the Power of Digital to

Empower Consumers

John Warburton

Executive Director, Distribution

26 March 2015

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Summary

The acceleration of the use of digital technology amounts

to an industry-changing empowerment of consumers -

creating challenges and opportunities for providers and

distributors

The industry is responding by moving beyond the

traditional B2B digital relationships between providers and

advisers, whilst seeking to understand the regulatory

implications ... over the course of the next 2 - 3 years we will see a

broad spectrum of product and service propositions

emerging to serve a much greater number of consumers

2005

2013

24

Facebook’s

Mobile users

growth of 600%

in 4 years

50 connected

devices per

household by 2022

vs. 25 in 2017 and 10

today

1.75bn global smart

phone users in 2014

75% increase from

2012

90% of global data

generated in last

two years – 66%

by consumers

75% of all

mobile

commerce from

tablets by 2017

81% growth in

mobile data

traffic globally in

2013

A few statistics to put things in perspective

Digital is an empowering capability for consumers

• We’ve seen technology make similar changes to industries before

The budget changes are likely to be the catalyst for a

significant growth in D2C distribution

The most significant change to

pensions in almost a century FT, 19 March 2014

No one will have to

buy an annuity George Osborne, 19 March 2014

" The £15k new ISA. The

pensioner bond. People given

access to their own pension

pots. A right to impartial

advice. The 10% rate for

savers abolished to zero" George Osborne, 19 March 2014

D2C

£205bn

Advisers

29%

23%

Direct, digital relationships with insurers have

been less of an emphasis in UK Life insurance

market…

…Manufacturers have

traditionally focused on intermediaries

£261bn

£125bn

The opportunity to regain ground lost over the last 20 years is a significant prize for providers and distributors

High Net

Worth

Mass

Affluent

Mass

Market

£1,540bn

80%

Siz

e o

f the p

rize

Face to face

advice £72bn

100%

£1,080bn

67% £55bn

100%

£1,287bn

31% £72bn

100%

Accumulation Decumulation

The next five years will be critical to UK insurers to adapt to meet the challenges of the evolving landscape

As consumers switch

away from compulsory

annuities, insurers will

need to offer more

flexible and holistic

product solutions

As D2C grows consumers

will increasingly demand

multi-channel access,

transparency,

service excellence and

navigation through

complexity

More sophisticated analytics will be needed to provide

these consumers with targeted advice, guiding them

towards the most appropriate products

Coming to terms with digital

Horizon 1

Horizon 2

Horizon 3

The transition to digital largely seen as a

cost saving mechanism as customers are

encouraged to self serve

Broader considerations seen through the

providers eye e.g. greater complexity

Broader considerations viewed through the

consumers eyes e.g. increased significance

of interactions

Changing nature of advice / guidance

Advice

Guidance

Suitability

Flexibility

Using the power of data to enhance customer experience

• How you connect can be a differentiator when what you sell isn’t

• Other industries are leading the way…

Conclusion

Embracing the digital revolution provides the opportunity

for the industry to empower consumers through

increased choice and freedom over their finances.

Whilst this will present challenges to traditional models

and distribution channels, the opportunity is to re-engage

with many more consumers.

The views expressed in this presentation are those of the presenter and are not indicative of Prudential policy.

Questions Comments

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Risks of Pensions Freedom, Impact of devolution on pensions

Stephen Cunningham

26th March 2015

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The views expressed in this presentation are those of the presenter and are not indicative of Prudential policy.

Changes to the Annuity

Equality Act 2010 bans the use of gender, as a rating

factor, in the pricing of insurance policies from

21 December 2012

From 6 April 2015 – don’t need to buy an annuity

From 6 April 2016 – can sell annuity in a marketplace

This raises a number of questions e.g.

Will the annuitant require underwriting?

Can the marketplace use gender as a rating factor?

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Update from FCA

CP15/7: Proposed changes to our pension transfer rules

We propose to:

▪ amend our rules to incorporate the new specified

activity of advising on conversions or transfers of

safeguarded benefits to flexible benefits, and

▪ require that all advice on DB to DC pension transfers

be provided or checked by a Pension Transfer Specialist

‘We want to know what you think of our proposals and

welcome comments … by 15 April 2015. This is a

shortened consultation period, to enable us to have

updated rules in place for June 2015.’

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Taken from http://www.actuaries.org.uk/news/press-releases/articles/ifoa-warns-risk-new-pensions-

freedoms

Quote from Desmond Hudson, Chair of IFoA’s Regulation Board, 11 March 2015

“There is a danger that unscrupulous selling or advice to the

unwary could see individuals suffering financial loss. People

who transfer benefits out of their existing DB schemes and

into DC schemes may be accepting more risk than they

realise by giving up a lifetime of income.

The IFoA is also encouraging life insurance companies to

develop products for the new retirement market that are fit for

purpose for the individuals who would be purchasing them

and do all they reasonably can to ensure well informed

decisions are being made.

“The public should be reassured that actuaries have

professional responsibilities when providing advice, as IFoA

members have an obligation to observe the principles of The

Actuaries’ Code in the public interest that promote confidence

in the work of actuaries and the actuarial profession.

Taken from http://www.actuaries.org.uk/news/press-releases/articles/ifoa-warns-risk-new-pensions-

freedoms

Quote from Desmond Hudson, Chair of IFoA’s Regulation Board, 11 March 2015 (CTD)

“The IFoA expects its members working in both the pensions

and life insurance industries to ensure any advice given is

objective and considers all the risks. This includes any advice

given to employers providing DB schemes, providers of

retirement products, individual scheme members, scheme

trustees and potential clients.”

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Devolution - Key events to date

• 19 September – Prime Minister establishes the Smith Commission to consider further powers for Scotland

• 27 November – Smith Commission publishes its Heads of Agreement

• 22 January – UK Government publishes draft legislation and a Command Paper in line with our commitment to do so before Burns Night

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The Smith Commission Agreement Outlined a series of further powers for Scotland, including • Significant financial powers including tax raising powers; • A new fiscal framework for Scotland; • A range of welfare powers; • A range of constitutional powers; and • Other powers in areas such as oil and gas, transport and equalities.

Also outlined a number of other areas that would not require legislation, such as: • Improved intergovernmental working

And outlined a number of areas that should be given further consideration, such as: • Health, immigration, food levies etc. • The recommendations were made without prejudice to whether devolution should

take place and in what form.

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WHAT’S DEVOLVED WHAT’S RESERVED

• HEALTH (further consideration required)

• EDUCATION

• POLICY, COURTS, PRISONS

• PUBLIC TRANSPORT

• ENVIRONMENT

• SETTING INCOME TAX RATES

• LOCAL GOVERNMENT

• EMPLOYMENT SUPPORT PROGRAMMES

• WIDE RANGE OF BENEFITS

• ECONOMIC DEVELOPMENT & BUSINESS SUPPORT

• HOUSING AND PLANNING

• SPORTS AND ARTS

• AGRICULTURE, FORESTRY AND FISHING

• SOCIAL WORK

• FOREIGN POLICY

• DEFENCE

• NATIONAL SECURITY

• MACRO ECONOMIC POLICY

• FINANCIAL POLICY

• CURRENCY

• PENSIONS

• UNEMPLOYMENT BENEFITS

• CHILD BENEFIT

• ENERGY

• IMMIGRATION & NATIONALITY

• INTERNATIONAL DEVELOPMENT

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Taxation Income tax will remain a shared tax

• Scottish Government (SG) will set Scottish rates and thresholds for non-savings income tax

• There will be no restrictions on the rates or thresholds and SG can create new bands

• The personal allowance remains reserved

SG will receive all non-savings and non-dividends income tax • Currently worth c£11bn so forms a substantial part of the SG’s funding First 10ppts of standard rate of VAT and 2.5ppts of reduced rate VAT will be assigned to SG APD and Aggregates Levy • Smith Agreement Paragraph 86: Power to tax air passengers leaving Scottish airports will be devolved • Paragraph 89: Once legal issues are resolved, power to tax commercial exploitation of aggregate in

Scotland will be devolved

- Both taxes are being fully devolved

- UKG will ‘switch off’ existing UK taxes

- SG will decide whether and how to implement replacement taxes

Northern Ireland – “Corporation tax rate to be 12.5%”

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The Implications of Further Devolution of Powers in Scotland and UK on the Financial Services Sector

Date: 16 April 2015

Time: 18:00 to 20:30

Location: Scottish National Gallery, The Mound, Edinburgh

See map: Google Maps

Email: [email protected]

Panel of leading academic, political and industry speakers including Prof David Bell, Angus Armstrong and Jeremy Peat.

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