Our Changing Future Current Issues in Retail Pensions

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Our Changing Future Current Issues in Retail
Pensions

• Ian Naismith

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Agenda

• Legislative landscape
• The impact of A-Day NPSS
• Regulatory landscape
• The challenges of TCF RDR
• Economic landscape
• The search for secure growth
• Demographic landscape
• The opportunities at retirement

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A-Day basics

• A-day was 6 April 2006
• Legislation in Finance Acts 2004, 2005, 2006,
  2007...
• Plus regulations and guidance manuals

• Simplicity 8 pension tax regimes into one
• Flexibility Fewer rules, more options
  (especially at retirement)

Source Finance Act 2004, Chapter 4
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Post A-Day contributions

• Alternatives to pension?
• May add flexibility but with risks (redundancy,
  death)
• Large contributions close to retirement
• No 40 tax in final year utilise value of
  business?

Source Finance Act 2004, Chapter 4
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Post A-Day Investments

• Essentially no change to investment options
• SIPP momentum proved unstoppable

Source Finance Act 2004, Chapter 4
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Post A-Day Benefits

• Additional tax charge if benefits gt lifetime
  allowance (1.6m)
• 25 tax-free lump sum up to Lifetime Allowance
• Transitional protections

Source Finance Act 2004, Chapter 4
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A-Day effects

• The rise and rise of SIPP
• Driven by consolidation, not new money
• New business opportunity but persistency hit
• Potential change to adviser remuneration model
• Market regulated - FSA concerns over sales
• Flexibility in contributions and retirement
  timing
• Still unclear if saving retirement patterns
  changing
• Post-retirement innovation
• Largely in unsecured pension variable annuities
  etc

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State pension reform

• Increase basic state pension with earnings
• Probably from 2012, subject to affordability
• Raise state pension age starting in 2024
• Eventually to 68 by 2046 (more later?)
• Move towards flat-rate State Second Pension
• Stop defined contribution contracting-out in
  2012.
• Better provision for women and carers
• e.g. Full basic State pension available with 30
  years of NI contributions paid or credited

Source Pensions Act 2007 Part 1
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National Pension Savings Scheme

• Automatic enrolment into Personal Accounts
• Employees aged 22 or over earning gt 5,000pa
• Opt-out available. Self-employed can opt in.
• 8 basic contribution
• 4 employee contribution, 3 employer, 1 tax
  relief
• Centralised scheme, managed in private sector
• Limited involvement from employers employees
• Employer helps enrol staff passes on
  contributions
• Defaults for employee, but limited choices
  available

Source Personal Accounts A New Way to Save
DWP December 2006
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NPSS issues

• Focussing on those with no current pension
• No transfers in before 2017
• Modest contribution limit - 3,600pa in 2005
  terms
• Preserving good existing provision
• Straightforward exemption criteria for employers
• Level playing field no subsidy, consistent
  regulation
• Ensuring members make good choices
• Possible loss of means-tested benefits
• Generic advice Thoresen review

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Possible impact of NPSS
Post-stakeholder
Post-NPSS?
SIPP/SSAS
Group SIPP
GPP/ stakeholder
Personal Pension
Personal Accounts
Stakeholder
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Principles-based regulation

• Movement towards principles, not prescription
• FSA, TPR, ICA, SMPI etc
• FSA NewCOB in force since 1 November
• Flagship initiative - Treating Customers Fairly
• 6 key outcomes for consumers
• MI to measure TCF to be in place by March 2008
• Firms able to demonstrate TCF by December 2008

Source http//www.fsa.gov.uk/Pages/Doing/Regulate
d/tcf/index.shtml
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Key TCF areas for actuaries

• Outcome 2
• Productsare designed to meet the needs of
  identified consumer groups.
• Outcome 3
• Consumers are provided with clear information
  and kept appropriately informed.
• Outcome 5
• Consumers are provided with products that
  perform as firms have led them to expect

Source http//www.fsa.gov.uk/Pages/Doing/Regulate
d/tcf/index.shtml
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Current TCF pensions hot-spots

• Quality and clarity of Key Features
• Only 15 of those sampled met FSA standard
• Communications advice on with-profits
• Explaining guarantees, managing expectations,
  clarity
• Annuity rates and retirement processes
• Flagging of Open Market Option
• Sales of SIPPs
• Quality of advice, justification for higher
  charges

Sources Good and bad practice in Key Features
documents FSA September 2007
Insurance sector briefing FSA May 2007
Outcome of review of operation of the
open market option HM Treasury, October 2007

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Retail Distribution Review proposals
Based on Thoresen Review
Simple advice on straightforward products
Likely to be commission-based
Remuneration agreed with client
Source A Review of Retail Distribution
(DP07/1) FSA June 2007
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The search for secure growth

• Highlighted by falling markets interest rates
  2000-2003
• Traditional options

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Reduced-risk investments

• Protected equity funds, absolute return funds,
  constant portfolio protection insurance
• Whats the growth potential?
• What protection is offered?
• How does it respond to different markets?

Source Personal Accounts A New Way to Save
DWP December 2006
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Variable annuities

• Reduced-risk investment around retirement
• Guaranteed income for life or fund at a point
• May offer wide fund choice
• Risk hedged via options etc.
• Guarantee funded by increased annual charge
  

• How strong is the guarantee?
• What does it cost in different scenarios?
• Can it ratchet up how often by how much?

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Variable annuity simulation
Average growth 7.5 minus 2.5 annual charge.
Income 5 of guaranteed fund
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Variable annuity pension from age 75 as a of
drawdown
Pension is from level annuity purchased at age
75, or guaranteed income if higher. Based on 60
year old male at entry taking income of 5 a year
of initial fund until age 75. Variable annuity
guarantees the 5 for life, with a 1pa
additional charge. Based on 250 stochastic
simulations of possible future financial
conditions. Results are dependent on parameters
used, and should not be taken as an indication of
the outcome of any particular product.
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The retirement market
Estimated population over 90
Estimated population over 65
Sources GAD 2006-based population projections
Mid 2002-Mid 2005 population
estimates reflecting the
revisions due to improved international migration
(ONS 2007)
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Current issues in annuities

• Longevity
• ongoing mortality reassessment rates reserves
• reinsurance based on annuity book or index?
• longevity bonds arbitrage of investments
• effect of enhanced annuities and drawdown
• Protected Rights
• Removal of requirement for spouses/partners
  pension?
• Annuity value
• Open Market Option review
• Differing views on overall value for money

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Annuity payback periods

• GAD estimates.

Female cohort life expectancy (UK) 22.3 years
Male cohort life expectancy (UK) 19.7 years
Based on 65 year old, monthly in advance
guaranteed 5 years
Market annuity rates _at_ 5/11/2007 from FSA
comparative tables.
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Flexible retirement options

• Great flexibility up to age 75, but then reduces
  
• Phase retirement, vary income, maintain
  investment control
• Government not planning to loosen rules for
  annuities

Source Finance Act 2004, Chapter 4
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Conclusion

• Lots of changes
• Legislation, regulation, markets
• Lots of challenges
• Can actuaries adapt to the changing environment?
• Lots of opportunities
• Actuaries have a vital role to play in innovation
  and communication

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Questions discussion