Transfer values post Freedom and Choice Greg Ardan, FIA, Hymans - PowerPoint PPT Presentation

Transfer values post Freedom and Choice Greg Ardan, FIA, Hymans Robertson LLP 21 September 2018 Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority

Contents Section Page Freedom and Choice; and wider context 3 Transfer value basis and consistency with other factors 8 Partial transfers 12 Transfer values at retirement, on retirement statements 16 and IFA advice There are several “quizzes” where I will be asking for your input. Please do also ask questions and give me your views throughout the presentation. 2

Potential retirement options DB pension + tax free cash Pension Trivial commutation Cash Pension increase exchange DB pension Flexible/ partial DB retirement Cash Partial transfer value Annuity Transfer value Drawdown Enhanced transfer value The options available to members are numerous, complex and financially significant. Once chosen, 3 these decisions are irrevocable.

What’s driving demand? “Cold -calling ban is “The sums were just the start of the “Stampede to cash in attractive to me and it war on pension ‘gold plated’ final salary was hard to imagine the scams” company pensions ” offers going any higher” Baroness Altmann, former pensions minister 4

External views on member choice Commons work and TPR: “The regulator FCA view: “Consumers believes that for most will be given the right pensions committee: members, it is still highly likely information, at the right “To not provide the in current conditions to be in time, to help them make basis for a well- their best financial interests to informed decisions about remain in their DB scheme. informed choice could their pension savings that However members' personal are in their best interest.” lead to the next major circumstances may mean pensions mis-selling they wish to consider the scandal” other options open to them .” “ there are risks and costs to action. But they are far less than the long range risks of comfortable inaction” – John F Kennedy 5

Quiz 1 On Schemes which you advise, work on or administer, would you say you had seen: a) only a small increase in transfer value quotes,  and a small increase in transfer values paid? b) a large increase in transfer value quotes, but  only a small increase in transfer values paid? c) a large or very large increase in transfer value  quotes, and a large or very large increase in transfer values paid? 6

The evidence – longer term trends All transfer values across Hymans Robertson administration clients: 3x as many quotations compared to pre April 2015 (from 1.5% to 4.2% of deferred  members as at January 2018) 4x as many transfer values paid compared to pre April 2015 levels (from 0.25% to 1%  of deferred members as at Jan 2018) Source : Hymans Robertson third party administration business DB to DC transfers for members age 55 or over, from Willis Towers Watson clients: In Jan 2018, 13x number of transfers,19x total amount transferred relative to monthly average for May 2013 to April 2014 Source : Willis Towers Watson DB member choice survey 2018 c 4x + increase in transfer value activity since 2014, and even greater for members aged over 55 7

The evidence – more recent trends Across the DB pensions industry: 92,000 transfers from DB to DC Scheme in 2017 vs 61,000 in 2016 (up 50%)  Cash transferred from DB to DC was £20.8bn in 2017, vs £7.9 bn in 2016 (> double)  In Q4 2017 alone, £5.5bn was transferred, vs £2.5bn in Q4 2016 (>double)  Source : Financial Conduct Authority, following a freedom of information request from the FT And between different schemes?: Aon / Professional pensions 2018 survey of 300 DB Schemes showed:  90% of schemes have seen an increase in transfer value requests  40% have seen a significant increase  30% of schemes questioned have taken steps to increase automation of transfer value  calculations. Source : “A guide to member options”, Professional Pensions produced in association with Ao n c 2x increase in transfer value activity between 2016 and 2017, covering most pension schemes 8

Transfer value basis and consistency with other factors 9 9

Discount rates, de- risking… Single or dual discount rates? When freedom and choice first introduced,  many schemes with dual discount rates had TV factors > funding reserve at years very close to retirement. Significant changes to bases since. Allowance for future investment de-risking? Increases transfer values, but  arguably “passes on” expected future funding improvements and future planned investment changes to members before they are realised… 10

Consistency with commutation? Transfer value factors Trivial Commutation commutation factors factors Good reasons for different TV basis and commutation basis.  But are TVs consistent or different to trivial commutation factors?  And are trivial commutation and commutation factors consistent or different?  Transparency increasingly important in retirement communications  11

What about selection risks? Married or not married? vs funding assumptions  Ill health vs good health, and impact on longevity? Vs funding assumptions.  Affluence of those taking transfer values? Feeds into the above  Actuaries, legal advisers and Trustees have debated possible selection risks for some years, and whether / how to allow for them in transfer value bases. Tangible evidence of selection in practice to date? • Any impact on insurer pricing for buy-ins / buy-outs at a later point in time? • Likely far more important other elements when considering TVs in funding, • e.g. cashflows, LDI / hedging, liquidity, underfunding, allow for TVs in funding basis – not covered here Transfer value basis, and other member options / terms have a direct impact on take-up of transfer values, especially close to retirement. 12

Partial transfers 13 13

Quiz 2 1) On Schemes which you advise, work on or administer, would you say: a) none or few offer partial transfers  b) some offer partial transfers  c) most or all offer partial transfers  (consider DB partial transfers here, not for example DC AVCs in same trust) Industry research suggests around 15% of schemes offer partial transfers, though the number is increasing 2) What would you say are the biggest barriers to offering partial transfers? 14

Are partial transfers attractive? Members Scheme / trustee / sponsor  Appealing middle ground…  Offers member choice  Can retain a level of secure, cost-  Likely to improve the funding position effective guaranteed income with  Reduce Scheme’s liabilities and risks flexibility for the balance  Reduce PPF levy  Match personal / tax circumstances complexity – admin, communication ×  Use as part of phased retirement and other risks  Access to cash at retirement cashflows brought forward – × (alternative to commutation ) implications for hedging, liquidity etc  Reduce exposure to sponsor ? Higher/lower level of cost & risk covenant reduction compared to full transfer and × DC investment / longevity risk commutation (depending on take-up) Offers members a “best of both worlds” between security and flexibility 15

How Practical barriers and considerations Funding and Administrative Member complexity communication investment implications Review Legal advice consistency across options Factors to consider Some administrative and practical considerations: Transferring out GMP. All or nothing (unlike divorce)? Protected Rights?  Min / max transferred / retained? Nominal amount or % of pension / TV? Order of tranches?  Administering the remaining pension. Complexities compared to e.g. PSOs due to the above  Limits on number of partial transfers and when taken? Access to cost-effective IFA advice?  16

Transfer values at retirement, on retirement statements, and IFA advice 17 17

Quiz 3 On Schemes which you advise, work on or administer, would you say that they Q1) Include transfer values as a matter of course on retirement statements, rather than only on request? a) None / few , b) Some or c) Most / all Q2) Provide regular transfer values to members from (e.g.) age 55, including through use of technology, rather than only on request / statements? a) None / few , b) Some or c) Most / all Q3) Calculate transfer values for many / all members “in bulk” regularly? a) None / few , b) Some or c) Most / all Industry research suggests around 30% of schemes include transfer value options within “at retirement” communications” (source: LCP / Royal London) 18

To guarantee or not to guarantee…? Less than 1 year to retirement – not statutory so no need to guarantee, but… Cost considerations – initial quote guaranteed, vs initial quote illustrative with  guaranteed quote on request? Guaranteed for how long? 3 months? What process if (e.g.) retirement  comms are sent out 6 months before retirement? (Asymetric) risk to scheme? Consistency with trivial commutation / commutation? Are those terms  guaranteed? Are they market-related / recalculated at retirement? 19