LCP Defined Contribution Conference Thursday 5 February ...LCP Defined Contribution Conference...
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LCP Defined Contribution Conference Thursday 5 February 2015 A new horizon for DC.
Transcript of LCP Defined Contribution Conference Thursday 5 February ...LCP Defined Contribution Conference...
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
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Rt Hon Steve Webb MPMinister of State for PensionsOpening address
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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
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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
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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
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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
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
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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
