budget 2014 pensions are dead, long live savings? · • buy annuity later in life (say age 80)...

PENSIONS PEOPLE VALUE FROM MERCER

BUDGET 2014Pensions are dead, long live savings?27 MARCH 2014

MERCER DC AND SAVINGSPENSIONS PEOPLE VALUE,WHATEVER THEIR PRIORITIES IN LIFE


MERCER

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BRIAN [email protected]

PAUL [email protected]

GAIL [email protected]


INTRODUCTION

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DC CHARGES

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So what are the changes?

PENSIONS PEOPLE VALUE,WHATEVER THEIR PRIORITIES IN LIFE


CHANGES FROM 27 MARCH 2014 TO MARCH 2015

Trivial commutationlimit increased from

£18k to £30k

Minimum IncomeRequirement for

flexible drawdownreduced from £20k

to £12k

Capped drawdownlimit increased from120% to 150% of

“GAD rates”

Small potcommutation

increased from £2kto £10k

These new flexibilities on their own would have been seen asradical

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PROPOSED CHANGES FROM 6 APRIL 2015

No DC memberhas to buy an

annuity

Minimum IncomeRequirement

abolished• 25% tax free• Annuity or Income

withdrawals taxedat marginal rate

LifetimeAllowance and

Annual Allowancerestrictions

remain• £1.25m / £40k

It’s nothing short of a revolution!6

Provision of‘guidance

guarantee’ atretirement

Minimum pensionage to be linked

to SPA• From 2028 (57)

Consultation ondetails


POLLING QUESTION #1

Technology

What do you expect your DC scheme members’ reaction to thesechanges will be?

a. No reaction – what changes?

b. Mildly indifferent – I’m still not interested in pensions

c. Some interest – Because someone mentioned it in the pub

d. Very interested - A big increase in contribution levels from all

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CONSIDERATIONS

Short Term0-3 months

Medium Term3-6 months

Longer Term6 months +

Action is needed now and going forward8


Short term considerations

Short Term MediumTerm

LongerTerm



SHORT TERM CONSIDERATIONS

Members who have recently retiredAbility to cancel annuity purchase?Scheme rules / administrator allow this?Costs?

Members retiring before April 2015 Delay retirement – feasible, desirable?Employment planning

Members in lifestyle phasing period De-risking and end point still appropriate?

Need to create an action plan and material to contactscheme members who are immediately impacted

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Medium term considerations


LongerTerm



MEDIUM TERM CONSIDERATIONS

Investment

• Default fund• Building block

funds and de-risking

• Pre, at and postretirement

Employeeexpectations and

desires

• How to deliverguidanceguarantee?

• Pre and postretirementplanning

Impact on Sponsor

• How is theschemedelivered?

• Employeesdeferringretirement?

• Lower opt outrates and highercontributions?

• N(ew) ISA rules–activate workplaceISA option?

Communication

• How tocommunicate withemployees –short, medium andlong term

• What do membersneed tounderstand, hasthe emphasischanged?

Need to focus on the actions needed before next April

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Longer term considerations


LongerTerm



Earnings

State / DBPension

State / DBPension

Drawdown

Income

Age

Annuity

RETIREMENT NOW

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Earnings

State / DBPension

State / DBPension

Drawdown

Capital

Income

Age

Annuity Annuity

RETIREMENT NOW

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NEW RETIREMENT OPTIONS

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DC PensionPot

Cash

Securedincome

VariableIncome


Earnings

State / DBPension

Cash

Income

Age

Annuity

RETIREMENT IN THE FUTURE?

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State / DBPension

State / DBPension

DCPension

Pot

Cash

Securedincome

VariableIncome


Earnings

State / DBPension

State /DBPension

Variableincome +

Cash

Income

Age

AnnuityVariableincome


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DCPension

Pot

Cash

Securedincome

VariableIncome


Earnings

Earnings

Earnings

State / DBPension

Variableincome +

Cash

State / DBPension

Variableincome

Capital

Income

Age

State / DBPension

Securedincome

Variableincome


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DCPension

Pot

Cash

Securedincome

VariableIncome


What do you expect most of your members will want to do atretirement?

a. Take (taxed) cash sum

b. Purchase secured income (ie an annuity)

c. Use variable income (ie income drawdown) throughout their wholeretirement

d. Combination of 1 & 2

e. Combination of 1 & 3

f. Combination of 1, 2 & 3

POLLING QUESTION #2

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WHAT WILL MEMBERS DO?

Take all as cash• Buy a Lamborghini?

Act rationally?

Small funds• Take as cash• What about lots of small funds?

Large funds• Pay off mortgage / help children /

grandchildren / buy severalLamborghinis?

• Buy annuity later in life (say age 80)

With flexibility comes responsibility21


WHAT WILL MEMBERS DOLessons from overseas

AUSTRALIA• Mixed of behaviours• Most drawdown income from fund• Fund design, communications, access to

advice/guidance designed around this• Guidance/advice essential for middle market

USA• 1 in 20 buy an annuity but policymakers would like higher

rates• Average withdrawal rate of 5% from age 70• Influenced by tax rules and desire to self insure against

future healthcare costs• Emergence of deferred annuities and Managed Accounts

Cultural and historic differences22


DESIGN TO THE “U”

“Active” retiree(~65-75)

“Frail” retiree(~85+)“Passive” retiree

(~75-85)

Still physically active

Want to travel – holidays,see grandchildren

Less physically active butgenerally healthy

More likely to be “stay athome”

Less physically active,increased health issues

May need long-term careassistance

High (as possible) incomeneeds

Income needs reduce Increased income needsdue to health and long-term

care

Flexibility to design income around actual needs23

• Foundation income – State, DB, secured• Variable income - drawdown


DEFAULT FUND

Current focus on 25% cash and 75% bonds to match 25%cash and annuity purchase

Typically achieved over last 5-10 years before retirement

Likely to become increasing inappropriate?24

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0Years to Target Retirement

Cash

Bonds

Growth Assets


NEW DEFAULT APPROACH?

Target different for different groups

• Lead into retirement also needs to be different

Can a single de-risking strategy like lifestyle continue work?

Perhaps just default accumulation phase

Contact all members 5-7 years before retirement and present options

• Cash• Secured income• Variable income• A combination• Each would have a ‘de-risking’ approach

Mercer Workplace Savings

Members will need help in choosing before not just atretirement

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POLLING QUESTION #3

Technology

Free face to face guidance is to be offered at retirement – but when doyou think its really most needed?

a. On joining the DC scheme

b. 5-7 years before retirement

c. At retirement

d. A life event

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WIDER IMPACT ON DB SCHEMES

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Short / medium term opportunities

Trivial commutationTrivial commutation

• More members eligible - removes DB liabilities from the scheme

Transfer valuesTransfer values

• Future for transfer values?• Ensure members understand options - may increase transfer value activity in short-term

Member options / liability managementMember options / liability management

• Attractiveness of liability management increases – prepare for action.

Investments and bulk annuitiesInvestments and bulk annuities

• Appropriateness of DB investments• Impact bulk annuity market for buy-ins and buy-outs?


So what next?



HOW MERCER CAN HELP YOU

Action Plan Communicate withmembers

Review and designalternative

investment anddefault fund solutions

Wider membercommunications

Provision ofretirement guidance /financial counselling

Implementedsolutions of our bestideas through MercerWorkplace Savings

Governanceincluding TPR Code

of Practice

Member options andliability managementin your DB scheme

Further membereducation

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SUM UP

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Biggest everchange topensions?

Biggest everchange topensions?

Complicatedrules abolished

Complicatedrules abolished

New regimegives complete

freedom

New regimegives complete

freedom

Exercisingfreedom is

complicated formembers

Exercisingfreedom is

complicated formembers


QUESTIONS

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budget 2014 pensions are dead, long live savings? · • buy annuity later in life (say age 80)...

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