LCP Defined Contribution ConferenceThursday 5 February 2015

A new horizon for DC.

#LCPDCconf

Mark JacksonChairman’s welcome

£150,000 Pension pot

65Retiring now

Annuity£5,000

Regular income£7,500

Lump sum£150,000

1 2 3

Q: Which would you choose?

£150,000 Pension pot

65Retiring now

£5,000paState pension

Annuity£5,000

Regular income£7,500

1 2

Q: Which would you choose?

Lump sum£150,0003

£5,000paState pension

£10,000paMinimum income needed

£150,000 Pension pot

65Retiring now

Annuity£5,000

Regular income£7,500

1 2

Q: Which would you choose?

Lump sum£150,0003

#LCPDCconf

Rt Hon Steve Webb MPMinister of State for PensionsOpening address

#LCPDCconf

Andrew CheseldineOpportunities from chaos – what should you be prioritising?

years

years

years

Working life

2xpension

Flexibilities for members at retirement

Reduced Annual Allowance for those

with flexibilities

Charge cap responsibilities

start

Guidance Guarantee introduced

Changes to auto-enrolment

triggers and thresholds

Changes to taxation of death

benefits

Removal of commission as

adviser paymentApril

2015

May 2015

General election

Possible review of all

taxation

Possible review of all pension

legislation

Oct 2015

Removal of short service refunds from

trust based DC

April 2016

Removal of active member

discounts

Introduction of the Scottish rate of

income tax

Changes to auto-enrolment triggers

and thresholds

First Annual Chairman’s Statement required

Implementation of new SMPI rules

for post-retirement pots

April 2017

Review of charge cap

Increase in minimum auto-enrolment

contribution rates

End of transitional auto-enrolment

deferral for DB and hybrid schemes

Changes to auto-enrolment

triggers and thresholds

Oct 2017

April 2018

Changes to auto-enrolment triggers

and thresholds

Increase in minimum auto-enrolment

contribution rates

Providers/schemes take responsibility for

calculation of Scottish rate of income tax

contribution deductions

Oct 2018 ?

What could possibly go

wrong?

Known unknowns

+

+

+

+

Delayed implementation

Member understanding

+

+

UFPLS

FADTax-free lump sum

Drawdown

Tax-free lump sum

Drawdown

Don’t forget the Annual Allowance

Spend the lot!+

Delusions of adequacy

Admin/cost

Flex

ibili

ty

No change Tax-free lump sum

plus pension; or Transfer out to access

flexibility

Only one new option 100% cash out

Add full range of options Cash out in instalments Use drawdown with

flexible drawing Maybe even access

while still a member

Pensions vs

ISAs?

£470bn

Source: Office of National Statistics

13.5m

£57bn

2013/14

Source: Office of National Statistics

£39bnCash ISAs

£18bnStocks & shares ISAs

Tax relief Salary sacrifice Charges Investment growth

Means testing of benefits

Protection from creditors

Investment funds Greater governance

Death benefits

Can be passed on for drawdown

Spend ISAs first

Income tax-free on death before 75

Fiona65years old

£25kpa income

£90kDC pot

£18.5kpa net income*

*after tax, NI and 8% contributions

Basic State Pension

SRA @ 65 Age 80

UFPLS Drawdown (£2,883 pa)

UFPLS tax-free cash (£961)

£7,700 pa

£10,600 pa

£11,561 paPersonal allowance

Net income before retirement

c.£1,540pm

Net income after retirement

c.£963pm**62% replacement ratio

Our opportunity

Promote your scheme to your workforce

Establish your 2015 priorities

Futureproof your DC plan

CHECKLIST

#LCPDCconf

Laura MyersRedefining DC investment – How to make your investment strategy work for members in the new world

Investment strategy

+

AnnuityMembers currently buying annuities at retirement

90%

Pre-Budget

+

6 April2015

+

+

+Cash

Drawdown

Annuity

So how do you begin to design a default

investment strategy?

Projected pot sizeSalary bandContribution level

AgeGenderPosition in Company

Clients reviewed since Budget

Reviewing the strategy

rd

INVESTMENT BANK

CASE STUDY 1

Background High risk tolerance

High salaries

High levels of engagement

Large projected pots

The strategy Default targeting drawdown

Alternative lifestyles being developed

Gives membership flexibility

UTILITIES COMPANY

CASE STUDY 2

Background Lower than average salaries

Low levels of engagement

Low take up of matching contributions

Small projected pots

The strategy Default targeting cash

No alternative lifestyles being developed

Focus on default strategy

So what changes are happening?

Wider range of lifestyle strategies

Multiple lifestyle strategiesrds

Annuity Cash Drawdown

0%

20%

40%

60%

80%

100%

15 10 5 0

Years to retirement

Growth assets Low risk absolute return Cash

Changes to de-risking period

Targeting drawdown

Charge cap

Monitor and review

Monitor and review

Monitor and review

Don’t panic! Conduct a

review in 2015

Don’t panic! Conduct a

review in 2015

Don’t panic! Conduct a

review in 2015

CommunicateCommunicateCommunicate

Ensure you are charge cap compliant

Review your current default strategy

Monitor your default strategy to ensure it reflects your membership’s choices

CHECKLIST

#LCPDCconf

Rachel CrowtherRetirement solutions for the new world - what’s out there and what’s needed?

Bundled GPPsStakeholder Trust-basedSection 32 buy-out plans

Unbundled Admin and investments managed separately

Third PartyOne provider

Members not getting best available annuity rate

What is required from you?

+

Unbundled trust-based

+ Take 100% cash

Take tax-free cash

Transfer

Not obliged to offer flexibilities

Unbundled trust-based

+Third party specialists

Administration, capability, ongoing responsibilities

Platform provider

SIPP

Master Trust

Third party admins

Master Trust

+

Offer flexibilities “in-product”

Transfer to new or existing product

Bundled schemes

“In-product” flexibilities

100% cash from day one

Drawdown

1 in 5planning to use cash

to pay off debts 25% tax-free cash

Chargesvary between

providers

Outside product options

Transfer of assets = underlying cost

Ability to purchase annuity

Not all developments

by day 1New flexible products for trust-based

schemesDemand for

deferred annuitiesMarket

evolution

On the horizon….

Make use of planning

tools

Make use of planning

tools

Make use of planning

tools Make members aware of

unintended consequences

Make members aware of

unintended consequences

Make members aware of

unintended consequences

CommunicateCommunicateCommunicate

Decide what you want to offer

Appoint a third party

Tell your members

CHECKLIST UNBUNDLED TRUST SCHEMES

Understand what your provider is offering

Consider proactive communications with your members

Continue to review

CHECKLIST BUNDLED SCHEMES

#LCPDCconf

Questions

LCP Defined Contribution ConferenceThursday 5 February 2015

A new horizon for DC.

#LCPDCconf

Mark SmithOne step beyond – helping employees make better decisions in the new world

Why bother?

+

+Valuable benefit

For you and your members

Good outcome is a win-win

Cash options have made retirement saving sexy

Over 55 +18%

+

Over 40 54%

+

Big changes, difficult decisions

Guidance not advice

More telephone, less face to face

Expect more questions from April 2015

+Guidance Guarantee

Where am I heading?

How am I doing?Communications

strategy

Key messages

Engagement

Where am I heading?

Current vs retirement income gap

20-30%Increase matching rates via targeted campaign

Suggest an income target

How much?

Realistic targets

Now 65 80

Acc

ount

val

ue (

£)

Projected to retirement

Projected drawdown

Survival chance

54%

Buy an annuity

Projected retirement lump sum

Encourage retiring earlier to be seen as a loss

Retire later means higher income

When?Realistic targets

X2pension pot

Clarrie55years old

£20ksavings

11years growth

How am I doing?

Are my investments

growing?

Update on targets

John40years old

55cash lump sum

In line with cash benchmarkPerformance falling behind inflation

What do I need to know?Communications

strategy

Key messages

Engagement

Tailored for audience

Education is key!

+Extensive options

Choice of investment?

Type of retirement income?

How much and when?

Which provider?

++

Member understanding

PullPush

Information held on intranet

Simple click-through Monitor web visits

Face-to-face induction Training videos Targeted

communications

How to deliver all this ?

Communicate tax rates, introduction of money purchase and changes to Annual Allowance

Joe£50kpension

£50kmortgage

Member understanding

How DC works

TaxState pensions

Longevity

Provider services

Investment

Communications strategy

Key messages

Engagement

Tailored for audience

Continuing education

Targeted delivery

Communicate to your members now

Have a tailored communications plan

Harness technology for effective delivery

CHECKLIST

#LCPDCconf

Paul CravenPaul Craven Partners LtdBehavioural Economics – what can the pensions industry learn about engagement?

Behavioural Economics

• Adding psychology to traditional business models

System 1 Instincts

• Evolutionarily successful…

• Modern day biases

Probability and belief

Decision-making

Social

Memory

Pareidolia

• The Mapakansat Pebble

“As soon as the infant can see, it recognises faces, and we now know that this skill is hardwired into our brains.” (Carl Sagan)

1. The Mind

2. Challenges

3. Practical steps

Today’s talk

Helping people to invest

What to invest in and how much?

Getting people to stay invested

Communication and understanding

Performance and Costs

The DC Perspective

Human issues:

• Hyperbolic discounting

• Loss Aversion

• Self Control

• Procrastination

• Inertia

SYSTEM 1THINKING FAST

SYSTEM 2THINKING SLOW

Thinking Fast and Slow

• ‘Dual process’ model of the brain

• System 1 – fast, unconscious, reactive, emotional

• System 2 – slow, conscious, analytical, rational

Cartoon: James Ferguson, FT

Source: Westcore Funds / Denver Investment Advisors LLC, 1998

We are emotional creatures

• Markets and beyond…

• Emotional amplitude?

• Relationship with risk

Point of maximumfinancial risk

Point of maximumfinancial opportunity

Source: Amos Tversky and Daniel Kahnemnan. Judgment under uncertainty: Heuristics and biases (1974)

1. Loss Aversion

• Avoiding losses vs. acquiring gains

• Attitude to book cost (e.g. run losses)

• Sunk cost and endowment effects

Prospect Theory, 1979

2. The Status Quo Bias

• Organ Donation(Opt-in versus Opt-out Countries)

Organ Donation Consent Rates in Europe

Source: Freymuth and Ronan, Modeling Patient Decision-Making: The Role of Base-Rate and Anecdotal Information, Journal of Clinical Psychology in Medical Settings.

Negative story Positive story

Treatment A 90% effective

Treatment B30% effective ?7%

‘Base rate information’

39%

78%

?

3. Base Rate Neglect

• The Power of Stories

“Stories are just data with a soul.” (Brene Brown)

88%

Jonathan Haidt: “The emotional tail wags the rational dog”

Behavioural Biases in The Media

• Books, newspapers, TV etc.

1999/2000

Source: Ahir and Loungani, “Fail Again? Fail Better? Forecasts by Economists During the Great Recession” (2014), Consensus Forecasts

Why were none of the 62 recessions in 2008-09 predicted in the previous year?

Unreliable economic models?

• Incentivisation?

• Behavioural biases?

“The only function of economic forecasting is to make astrology look respectable.” (JK Galbraith)

Biases and Heuristics- what can we do about them?

• 150+ biases

In an Ideal World…

• ‘Via Negativa’

“It’s simple. I just remove everything that is not David.”(Michelangelo)

Source: Antifragile by Nassim Taleb (2012)

Performance Improvement

• System 1 thinking can provide insights – particularly useful on ‘the battlefield’ when reaction time matters

• System 2 thinking eliminates errors, allows for better strategies

The Nudge Concept

• “Choice architecture”

Further reading: Nudge by Richard H. Thalerand Cass R. Sunstein, (2009)

Opt-in Opt-out

Opt-in Auto-enrollment

Regular saving ‘Save more tomorrow’

Rubbish bins Green footprints

Reminder ‘…or lose your car’ plus photo

TRADITIONAL FOCUS ‘NUDGE’

ORGAN DONATION

DC PENSIONS

CONTRIBUTIONS

LITTER

CAR TAX

Source: Nudge, Richard H Thaler & Cass R. Sunstein, 2008, Save More Tomorrow, Richard H. Thaler and Shlomo Benartzi , 2004, The Economist 2012

The Nudge Concept

• “Choice architecture”

The Nudge Concept

(“Choice architecture”)Opt-in Opt-out

Opt-in Auto-enrollment

Regular saving ‘Save more tomorrow’

Rubbish bins Green footprints

Reminder ‘…or lose your car’ plus photo

TRADITIONAL FOCUS ‘NUDGE’

ORGAN DONATION

DC PENSIONS

CONTRIBUTIONS

LITTER

CAR TAX

Source: Nudge, Richard H Thaler & Cass R. Sunstein, 2008, Save More Tomorrow, Richard H. Thaler and Shlomo Benartzi , 2004, The Economist 2012

Overcoming biases

“Our chief problem – even our worst enemy – is likely to be ourselves.”

Further Reading: An Intimate Portrait of an Individual Investor by Durand, Newby & Sanghani, Journal of Behavioral Finance (2008)

5 Practical Steps

Self-awareness: System 1 or System 2?

Conformity vs. devil’s advocacy

Diversity

Decision diaries

Nudge techniques

Lessons from Behavioural Economics

• Conclusions

Bias awareness reduces our errors and increases our insight

Ask yourself: “Am I using System 1 or System 2 type thinking?”

We can use this to develop our skill and help our clients

My Favourite Optical Illusion

“The investor’s chief problem – even his worst enemy – is likely to be himself.”

Benjamin Graham

Thank you very much!

PLEASE STAY IN TOUCH…

paul@paulcraven.com@CravenPartners

Further reading

‘‘Outside of a dog a book is a man’s best friend. Inside of a dog it‘s too dark to read”

Groucho Marx

www.paulcraven.com

Twitter: @CravenPartners

EXTRAVERSION Attitude towards risk

AGREEABLENESS Conformity vs. devil’s advocacy

CONSCIENTIOUSNESS Patient analysis vs. speed of decision

NEUROTICISM Risk tolerance and emotional impulsiveness

OPENNESS Curiosity a double-edged sword?

Personality and Investment

“The investor's chief problem –even his worst enemy – is likely to be himself.” (Benjamin Graham)

Further Reading: An Intimate Portrait of an Individual Investor by Durand, Newby & Sanghani, Journal of Behavioral Finance (2008)

“The Big Five” Personality Traits

#LCPDCconf

Questions

How can we work together to ensure that

members get better outcomes?

#LCPDCconf

#LCPDCconf

Mark JacksonChairman’s conclusion

Lane Clark & Peacock LLP is a limited liability partnership registered in England and Wales with registered number OC301436. LCP is a registered trademark in the UK (Regd. TM No 2315442) and in the EU (Regd. TM No 002935583). All partners are members of Lane Clark & Peacock LLP. A list of members’ names is available for inspection at 95 Wigmore Street, London, W1U 1DQ, the firm’s principal place of business and registered office. The firm is regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. Locations in London, Winchester, Belgium, the Netherlands, Ireland and the UAE.

Scope

This generic presentation should not be relied upon for detailed advice or taken as an authoritative statement of the law.

If you would like any assistance or further information, please contact the partner who normally advises you.

While this document does not represent our advice, nevertheless it should not be passed to any third party without our formal written agreement.

© Lane Clark & Peacock LLP 2015