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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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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