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

2

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 and IFA advice 16 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.

3

Potential retirement options

DB pension + tax free cash Trivial commutation Pension increase exchange Flexible/ partial DB retirement Partial transfer value Transfer value Enhanced transfer value

DB pension Cash Annuity Drawdown

The options available to members are numerous, complex and financially significant. Once chosen, these decisions are irrevocable.

Pension Cash

4

What’s driving demand?

“Stampede to cash in ‘gold plated’ final salary company pensions” “The sums were attractive to me and it was hard to imagine the

• ffers going any higher”

Baroness Altmann, former pensions minister

“Cold-calling ban is just the start of the war on pension scams”

5

External views on member choice

TPR: “The regulator

believes that for most members, it is still highly likely in current conditions to be in their best financial interests to remain in their DB scheme. However members' personal circumstances may mean they wish to consider the

• ther options open to them.”

Commons work and pensions committee: “To not provide the basis for a well- informed choice could lead to the next major pensions mis-selling scandal” FCA view: “Consumers

will be given the right information, at the right time, to help them make informed decisions about their pension savings that are in their best interest.”

“there are risks and costs to action. But they are far less than the long range risks of comfortable inaction” – John F Kennedy

6

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

• nly 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?

7

The evidence – longer term trends

c 4x + increase in transfer value activity since 2014, and even greater for members aged over 55

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%

• f deferred members as at Jan 2018)

Source : Hymans Robertson third party administration business

DB to DC transfers for members age 55 or

• ver, 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

8

The evidence – more recent trends

c 2x increase in transfer value activity between 2016 and 2017, covering most pension schemes

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 Aon

9 9

Transfer value basis and consistency with

• ther factors

10

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…

11

Consistency with commutation?

Transfer value factors Commutation factors Trivial commutation 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

12

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.

13 13

Partial transfers

14

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?

15

Are partial transfers attractive?

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

Offers members a “best of both worlds” between security and flexibility

16

Practical barriers and considerations

How

Factors to consider

Legal advice Administrative complexity Member communication Funding and investment implications Review consistency across options

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?

17 17

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

18

Quiz 3

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

• ptions within “at retirement” communications” (source: LCP / Royal London)

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

• nly 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

19

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?

20

Other considerations, including for active members?

E.g. an active member, sent retirement options 6 months before retirement



Projected service / salary? – as at DOC or DOR (complex if averaging)



Guaranteed? Probably not given the above? Illustrative followed by guaranteed on request.



CARE revaluation? Similar complexities. Known vs assumed revaluation… Interaction with IFA requirements may also prove tricky. Timescale for IFA to provide advice vs timescale for guaranteed quotation vs retirement process. TVs run in bulk? Or calculated individually



Cost considerations – depends on size and complexity of Scheme



Data quality – limitation? Illustrative, with guaranteed value on request?



For who? - all members? Or only those over 55 only?



How frequently are “batches” re-run?

21

Signposting IFAs through unbiased.co.uk in comms, but nothing further References to specific named / recommended IFAs Eg seminars on retirement planning Part funding IFA advice / access to online tools etc Funding IFA advice, in tandem with

• ther tools and

services

Facilitating access to IFAs

‘Passive’ approach / ‘Actively supportive’ approach lower cost Higher cost



Willis Towers Watson found 55% of members who spoke to an IFA chose to transfer out at retirement in 2017, (just over 1/3 did in previous year).



LCP / Royal London found in 2017 that more than 90% of schemes stress importance of seeking financial advice, but only 5% provide access to a named financial advisor that has been selected by the trustees or employer.



Evidence that more schemes are now facilitating advice – is there sufficient (quality) capacity in the IFA market?

22

Reliances and limitations

This presentation has been produced for the Association of Consulting Actuaries conference of January 2018. It has been prepared as a discussion document and does not constitute advice. This discussion paper is provided solely for discussion purposes. It should not be used for any other purpose. It should not be released or otherwise disclosed to any third party except as required by law or with our prior written consent, in which case it should be released in its entirety. We accept no liability to any third party unless we have expressly accepted such liability in

• writing. The detail in this paper is based upon our understanding
• f legislation and events as at January 2018 and may be subject

to change. Any personal views expressed by me are my own and not necessarily the views of my employer.

23

Appendix – some facts and figures

• 67% of over-55s are confused by Freedom and Choice
• 42% of over-55s say the continual changes to pensions have made them switch off from

the topic

• 21% believe access to financial advice at work would help them save more

Source : Research by Prudential, 2017 Since start of freedoms



Around one in seven over-55s in work believed that they had been targeted by a scam (Portus, October 2015).



10.9 million consumers received unsolicited calls and emails about their pension in a year (Citizens Advice, 2016). That’s 8 every second.



33% of individuals over the age of 55 have been approached about potentially fraudulent pension investments (Which, May 2015).



Freedom and choice raised five times more for HMRC than expected in 2015/16 and twice as much as expected in 2016/17 (vs HM Treasury estimates) (Budget 2017)

• 94% are aware of the pensions freedoms
• 62% are aware that they would need to transfer out of their current defined benefit

scheme into a defined contribution scheme if they wish to access pension freedoms.

• 11% are likely to do so

Source : Research by LV=, October 2016