UK - Actuarial Advisory Firm of the Year
UK - Pensions Advisor of the Year
January 2015
Agenda
Changes to DC pensions
Product innovation
Engagement innovation
Global lessons
Market structure changes
2
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
3
Previous DC investment focus
Growth phase
Investment choice and engagement
focused here
4
Protection phase
Common destination point of
purchasing an annuity
DC investment focus now
Growth phase
May need to simplify choice in the
growth phase so that more of the
governance budget can be re-directed
to the protection phase
5
Protection phase
Governance budget focused on
designing strategies based on how
members are expected to retire
Protection phase – in reality
Growth phase
May need to simplify choice in the
growth phase so that more of the
governance budget can be re-directed
to the protection phase
6
Protection phase
Governance budget focused on
designing strategies based on how
members are expected to retire
Investment framework
7
Drawdown innovation – wish list
 Growth-seeking but with a
capital preservation focus
 Provides sustainable
level of income
 Provides inflation
protection
8
Drawdown innovation - launching
Focus on downside risk
•
•
•
low volatility DGFs
volatility management (e.g. cap overlay)
‘hedge your bets’ investment option
Price cap friendly DGFs
•
9
diversified beta funds?
Developments in the annuity market
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?
10
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
11
The engagement journey
Key messages:
Stay In
How much?
Age 22 - 30
30 – 50
Growth
12
How and when to
take this benefit
50 – SRD & beyond
Shape
Access
Innovation in communication
Good member communications need to accompany innovative
investment products
13
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)
14
What can we learn from others?
15
Insight from Australia
DC formula
• Mandatory DC
– introduced in
1992
• 81% coverage
16
• 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 2020
Trust
17
Master
Trust
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
18
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.
19