PwC Pensions Conference 2018 · 2020. 1. 23. · IFA1 IFA2 IFA3 IFA4 PwC Pensions Conference 2018....

PwC Pensions Conference 2018

Predicting the Unpredictable

Jeremy MayPwC Head of [email protected] 708256

Introduction

How do we make decisions at a time when past performance has never been a worse guide to the future?

Jonathon Land

PwC Head of Pensions Credit [email protected] 411796

Michael Moore

PwC Senior Advisor on Brexit

Sources of disruption and the context for pensions

Andrew Sentence

PwC Lead Economist

Zubin Randeria

PwC Cyber Security Leader

Predicting the unpredictable in an ‘Age of Disruption’

Michael Moore

PwC Senior Advisor on Brexit

How politics is changing in an uncertain world


Uncertainty is the new certainty in global politics…

If ‘Brexit’, ‘Donald’ and ‘Five Star’ are the answers, what on earth have the voters been asking?

These changes are not simply political weather events – they are political climate change…



To understand the political changes, it makes sense to look first at the dynamics which are changing people’s lives…

The raw materials of this era of aggressive globalisation are familiar:

• Goods;

• Capital;

• Labour;

• Services and data.

But they now cross the globe at increasing speeds.

Globalisation 1The megatrends which catalyse those movements give them unpredictable effect:

• Technology;

• Energy transition;

• Ageing societies;

• Urbanisation;

• Economic power moving east.

Megatrends2

The ‘financial crisis’, starting a decade ago, catalysed a toxic mix…

… the impacts of which are being felt unevenly across the world.


The political responses include attempts to blunt this disruption and re-shape global relationships – In the UK political change will continue…

A minority UK government and divided Parliament…

Consideration of a new independence referendum…

Re-wiring the UK by devolving powers and funds…

Re-setting the UK’s global relationships via Brexit…

1

2

3

4



Brexit changes the UK’s relationships with Europe and the world, while politicians are also tackling other concerns raised by the referendum

UK-EU ‘Article 50’ negotiations

‘No deal’

UK parliamentary processes

Trade ‘framework’

Withdrawal arrangements

Transition negotiation

Summit agreement then

ratification

Security and other issues

International trade negotiations

‘EU Withdrawal Bill’Secondary legislation

New UK regulatory era

Preliminary discussions Bilateral negotiations

Brexit

Trade ‘political declaration’

‘Full deal’

11 12 1 2 3 4 5 6 7 8 9 1110 12 1 2 3 4 5 6 7 8 9 10 11 12 1

201920182017 2020



The economic outlook

Andrew Sentence

PwC Lead Economist

Global growth above long-run trend in late-2010s

% per annum change in world real GDP and consumer prices.

Source: IMF World Economic Outlook, April 2018.

-1

0

1

2

3

4

5

6

7

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

GDP growth Inflation 1980-2017 GDP growth trend


$100 trillion world economy now in prospect

World GDP, US $ trillion (current prices and exchange rates)


34

64

77

88

103

114

0

20

40

60

80

100

120

2000 2008 2013 2018 2021 2023


2% GDP growth is the ‘new normal’ G7 benchmark

% p.a. increase in GDP 2010-17


0.11%

1.22%

1.44%

1.92%

2.03%

2.14%

2.30%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Italy

France

Japan

UK

Germany

US

Canada


Globalisation has stagnated since mid-2000s

Index of world trade volumes relative to world GDP, 1985=100


90

100

110

120

130

140

150

160

170

180

190

200

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

World trade/GDP ratio 2005-2018 average


All major regions supporting 2018 global growth

Russia

Germany

UK

US

Brazil

India

Spain

Key

Canada

South Africa

Australia

Japan

Italy

Greece

Ireland

= GDP growth in 2018

China

2.2

x.x

Mexico

France

Source: PwC June 2018 Global Economy Watch

1.3

2.4

3.5

2.8

2.1

2.1

2.8

2.0

2.22.2

7.4

6.5

1.3

1.0

1.0

2.9


… but UK close to bottom of the G7 growth league

% per annum increase in GDP in year to Q1 2018

Source: Eurostat and national sources

0.90%

1.20%

1.40%

2.20%

2.30%

2.30%

2.90%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

Japan

UK

Italy

France

Germany

Canada

US


UK faces longer period of lacklustre growth

% per annum change in GDP and consumer spending

Source: ONS and PwC forecasts

(5.0)%

(4.0)%

(3.0)%

(2.0)%

(1.0)%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

GDP Consumer spending


Cyber Security

Zubin Randeria

PwC Cyber Security Leader

The reality of today’s world

Consumer

Suppliers

JV/Partners

Service providers

Customer

Industry/Competi-

tors

Enterprise

Trustee

Advisors: Financial, legal, actuarial

Fund Managers

Custodian

Administrator


The impacts of attacks are increasing


Our global CEO survey points to significant increase in cyber threats…

Terrorism and cyber threats rise

Source: PwC, 21 Annual global CEO Survey 2018 PricewaterhouseCoopers LLP

Q: considering the following threats to your organisation’s growth prospects, how concerned are you about the following?

Chart shows percentage of respondents answering ‘extremely concerned’.

2017

1 Over-regulation Over-regulation42% 42%

2 Uncertain economic growth Terrorism34% 41%

6 Speed of technology change Speed of technology change29% 38%

8 Chaining customer behavior Populism26% 35%

4 Availability of key skills Cyber threats31% 40%

7 Increasing tax burden Increasing tax burden29% 36%

9 Social instabilityClimate change and environment damage

24% 31%

10 Cyber threats Exchange rate volatility24% 29%

3 Exchange rate volatility Geopolitical uncertainty31% 40%

5 Geopolitical uncertainty Availability of key skills31% 38%

2018


What’s the impact of a cyber attack?Consider the impacts of fraud and data theft

Direct costs Intangible costsIndirect costs

Investigation and remediation£ms in 3rd party specialist fees

Regulatory sanctionUp to €20m for GDPR breaches

Customer redressAnthem spent ~$100m on customer redress campaign

Increased cyber insurance premium3x increase for hacked organisations

Customer fraudBanks underwrite £ms/week of losses

Class action lawsuit47k staff sue Sony for stolen data

Damage to brandHarder to attract new customers

Staff impactTarget CEO and CTO lose their jobs

Competitive disadvantageRetracting services e.g. online account access


Why are pension schemes at risk?

1.25 millionPersonal records leakedfrom Japan Pension Service… there are UK examples too

It’s already happened...

£3.3 trillionWorth of assets in pension schemes in the UK

Data transferBetween a high number ofadvisors and 3rd parties

ReformAllowing members to encash entire holdings at one time

N.I.details

Names and birth

dates

Bank account

data

Pension and salary

details

AddressFamilydetails

RiskThe type of data pension schemes hold could lead to serious financial crime on a wholesale scale

Top 10Risks recognised by The Pension Regulator (Fraud and Cyber)

No industry standard means ‘easy pickings’ for criminals

€20m or 4%Regulators will have the power to fine pension trusts up to €20m or 4% of worldwide annual turnover (whichever is higher) for data breaches


You can manage cyber security risk like any other risk

Security maturity

Ethical hackingIncident response retainers

Third partyrisk

Cyber insurance

Crisis exercising


Stephen SoperPwC Senior Pensions [email protected] 403139

Steven DickerPwC Pensions Strategy [email protected] 242783

Ask the policy makers

What is the shape of pensions policy over the next few years?

Oliver ReecePwC Pensions Legal [email protected] 847211

Pensions legal: where to next?

Lesley TitcombThe Pensions Regulator

Charlotte Clark

Department for Work and Pensions

Chris Woolard

Financial Conduct Authority

Our panel today

Paul KitsonPwC Pensions Longevity Swap and Buy-In [email protected] 106804

Ben StonePwC Pensions [email protected] 845626

Avoiding the unpredictable: getting the right end game

Transfers from defined benefit pension schemes have significantly increased…

From April 2017 to March 2018 schemes reported c73,000 DB transfers (the full figure is expected to be 100,000+) totalling c£14.3bn.

That is more liabilities transferring out than completed buy-ins and buy-outs with insurers.

However, experience amongst schemes is divergent –some reporting high levels of transfers, others relatively little activity.


What exercises are people running?

Deferred members under age 55 Deferred

members

over age 55

Pensioners under age 80

Trivial Commutation/WULS

Enhanced Transfer Value (ETV)

Flexible Retirement Options (FRO)

Pension Increase Exchange (PIE)


PwC 2018 IFA Survey – FROs

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Engagement Take-up Engagement Take-up Engagement Take-up Engagement Take-up

IFA1 IFA2 IFA3 IFA4


PwC 2018 IFA Survey – PIEs

0%

20%

40%

60%

80%

Engagement Take-up

Whole of market


Where is the money going…

Income drawdown

Standard annuity

Transfer out(no benefits

taken)

Cash out

40%

19%

7%

15%

14%

5%

Hybrid Drawdown/

annuity product

Enhanced annuityPwC Pensions Conference 2018

And why are people transferring...

What motivates members to take a transfer out of DB?

Most popular Access to a one off cash lump sum

To retire early and work part-time

To access additional income now

Due to ill health

Tax planning reasons

Making Lifestyle changes

Least popular Increased security of benefits


Regulation and FCA consultation

Moved away from 2017 consultation viewpoint by retaining the opening stance that an adviser should consider a transfer from DB to DC to be unsuitable

A ban on contingent charging structures will be considered as part of the new consultation

Confirmation that a personal recommendation is required, taking into account an individual’s circumstances

Latest Consultation expressed concern around whether ‘triage approaches’ pre-IFA are crossing the line into advice


Cash flow matching requirements very different

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

1 11 21 31 41 51

Baseline Base + 15% FRO Base less TFC


Digital communicationsEngaging a wider audience

A new range of digital member communications tools to increase engagement on member options and help maximise employer return on investment from offers


Innovation...Flexi-PIE

Member example

• Pensioner age 70 with pre 97 pension of £30k:

Current After Flexi-PIE

0

10

20

30RPI (max 5%) increases

0

10

20

30

£30k

Current pension Residual pension

£30k

c.£75k cash pot


Innovation…Flexible Mindset employee interface

Hello

Henry

£400,000

Value of your pensions

30 June 2018

Your normal retirement date

How would you like to take

your benefits?

1. How much cash do

you want

immediately?

2. How much guaranteed

pension for life?

3. How much of your

pension pot would you

like to keep to use

flexibly in the future?

Check to

fix level

Inflation protection?

Protection for a

dependant?

Max

Max

Max

Low Some High

Low Some

Explore and download the

details

What’s next?

Request your quotation

document

Find out more ways to

access your pension

Guidance and advice on

retirement planning

What you can receive from

your pensions

£100,000 Immediate cash of which £100,000 tax free

£10,000 Pension per year

If you die, your dependants will

receive a pension of £5,000 per year

Pensions will increase to offset some

of the effect of inflation

Nil

Remaining amount that can be

accessed flexibly in the future, by

you or your dependants


Latest death data progression of life expectancy (age 65)

Source: Mortality Projections Committee WORKING PAPER 97 CMI Mortality Projections Model: CMI_2016


A range of views exist on the future of longevity change

Exponential growth?

“What I’m after is not living to 1,000. I’m letting people avoid death for as long as they want to.”

Aubrey De Grey

Stagnation?

“While eliminating smallpox and curtaining cholera added decades of life to vast populations, cures for the chronic diseases of old age cannot have the same effect on life expectancy. A cure for cancer would be miraculous and welcome, but it would only lead to a three-year increase in life expectancy at birth.”

S. Jay OlshanksyPwC Pensions Conference 2018

Define the disruptors

Magnitude

Uncertain Reasonably certain

Lik

eli

ho

od

Uncertain

Gene editingUnderstanding of the microbiome

GH/IGF1 axis age retardation therapy

Telomere extension

NanomedicinePoor access to care

Antibiotic resistanceNegative mortality effect of widely used drug

Reduction in air pollution in major cities

Obesity wipeout

Smoking cessationImproved/universal flu vaccination

Xenotransplantation

Social isolation

Reasonably

certain

Autonomous vehicles reduce accidental deaths

Polypill

Technology improves access to care

Personalised medicine

3D Printing replacement organs

90% of vehicles electric

Real time medical risk

technologyImmunotherapy

Stem cell therapyArtificial Intelligence in medical

intervention


Outputs from the model

Very high socio-economic

correlation

Some “real world” scenarios gave a

significant increase in liabilities,

e.g. 30% - 40%

Some scenarios had positive

trends

Potential to become more certain over the next five years –weak signal monitoring key to spotting this early


Endgame solutions


A new normal in the bulk annuity market

The “best price” results from an insurer finding the optimal assets to back your scheme liabilities

0

4

8

12

16

20

24

28

32

0

2

4

6

8

10

12

14

16

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Vo

lum

e o

f b

us

ine

ss

Nu

mb

er

of

ins

ure

rs

Number of insurers Volume of business


The wider set of endgame solutions

Low

Co

st

High

High Current sponsor’s risk exposure Low

Consider:

• Scheme funding level

• Timescale to buyout affordability

• Sponsor covenant

• Provider covenantReturn seeking assets

Insurance managed exit

New consolidators


Endgame solutions


Can we predict the next 'black swan' event?

Sinead LeahyPwC Pensions Investment [email protected] 979400

What key risks are keeping asset managers awake at night?

Robert GallHead of Market strategy, Insight Investment

Our panel today

Lisa FridmanManaging Director, PAAMCO

Lucy Macdonald CIO, Global Equity, Allianz Global Investors

Mark VerseyCIO, Real Assets, Aviva Investors

Historical “black swan” events

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Inte

rest

rate

(%

p.a

.)

Price I

ndex

TR UK GVT BMK BID YLD 10Y (£) - RED. YIELD S&P 500 COMPOSITE - PRICE INDEX FTSE ALL SHARE - PRICE INDEX

Source: Thomson Reuters datastream

Black

Monday

Russian

financial

Crisis

Asian

financial

crisis

Dot-

com

bubble

2008

Financial

crisis


Ten years of goldilocks in financial markets

Real estate

backed

Real estate

backed

Project

backed

Asset

backed

Corporate

backed

Source: Aviva investors. For illustrative purposes only.

Private Markets

Real estate

backed

Real estate

backed

Project

backed

Asset

backed

Corporate

backed

Project

backed

Asset

backed

Source: Aviva investors. For illustrative purposes only.

Late economic cycle – rising rates / credit downgrades / high property prices

Geopolitics / Brexit

Liquidity

Covenant-lite

ESG

Cash flow coverage / amortisation / strong covenants / real asset security

Multi-asset diverse approach – idiosyncratic asset risk focus

Defensive Core property – Long lease, gateway cities

Development property/infrastructure – Good ESG credentials

Increase Debt/Mez relative to Equity

R

I

S

K

S

DE

FE

NC

E

Private Markets

Risks for LDI Investors

Source: Pension Protection Fund 7800 index. As at 31 April 2018

Funding position

Assets

Liabilities

Making decisions in uncertainty

Gavin StonerPwC Pensions and Restructuring [email protected] 255652

Preparing for high-impact, low-probability covenant events

Chris MartinExecutive Chairman at Independent Trustee Services Ltd

Tony SkrzypeckiPwC Public Bids Leader

Our panel today

Activism in the UK is an increasing phenomenon

Up to 20% of the FTSE 350 have likely been targeted in the last 3 years

Sources: Hedge Fund Research (2003-2016), U.S. News (2018)

“Surging equity value in the US has forced activist funds to look towards the London markets to find further value.”(The Telegraph, March 2018)

12

32

73

176

0

50

100

150

200

250

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Global

estimate:

$250bn

Global Activist Hedge Fund Assets Under Management (AUM), $ billions


Activists commonly seek board seats, but that is to drive through their agenda

Activist demand-type breakdown in 2017

Source: Activist Insight (The Activist Investing Annual Review 2018)

(Frank Field MP, Chair of UK Parliament Work and Pensions Committee, referring to the GKN-Melrose bid in March 2018)

“... a pension scheme could be offloaded to someone clearly less equipped or inclined to support it without the regulator having a say”

Board & governance-

related

M&A-related

Balance sheet

Business strategy

Remuneration Other

61%15%

11%

7%4%

2%


Trustee leverage

Investment strategy Balance of powers –e.g. wind up

Creditor ranking –contractual and structured

Triennial valuation –TPs and cash contributions

TPR powers – s.231, Moral Hazard

‘Type A’ events

Discretionary ‘gives’ –e.g. RPI to CPI or scheme merger

PR strategy Other influences –e.g. trade unions/Government

1

7

2

8

3

9

4 5 6


Victoria TillbrookPwC Pensions Credit Advisory [email protected] 063987

“This house believes IRM is not helping pension scheme stakeholders”

Dealing with unpredictability through IRM

Venetia TrayhurnIndependent Trustee, Law Debenture

Debating today

Shan AbdullahSenior Finance Leader, Pensions Risk at BT

Jane EvansPwC Pensions Credit Advisory

Adam LanePwC Investment Advisory

Affirmative Opposition

Felicity ReesHead of PwC Pensions [email protected] 552189

Assurance for tomorrow

What are chairs not looking at and how do you know it’s OK?

Assurance for tomorrow


Transfer out1

Fees and charges2

Board effectiveness3

DC operations4

Monitoring (stewardship reporting, SLAs)

5

Jonathon Land

PwC Head of Pensions Credit Advisory

Predicting the future of pensions

Rory MurphyChair of the MNOPF

Leo JohnsonPwC Disruption Leader

Our panel today

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2018 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the UK member firm, and may sometimes refer to the PwC network. Each member

firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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PwC Pensions Conference 2018 · 2020. 1. 23. · IFA1 IFA2 IFA3 IFA4 PwC Pensions Conference 2018....

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Transcript of PwC Pensions Conference 2018 · 2020. 1. 23. · IFA1 IFA2 IFA3 IFA4 PwC Pensions Conference 2018....