Retirement Income Lessons from the UK: The UK Pensions System Jamie Jenkins Head of Global Savings Policy September 2019 This communication is intended for investment professionals only and must not be relied on by anyone else.
The UK pensions system • Single, simplified amount payable from 65 for men and women for 35 years’ State Pension (Pillar 1) tax, increasing to 66 from 2020 • Equal to c1/3 of median income, increased annually by rate of inflation, wages or 2.5% • Currently c6% of GDP • Private sector DB schemes mostly closed, public sector only Workplace • Automatic enrolment for anyone aged 22 earning £10,000pa Pensions (Pillar II) • Minimum 8% contribution , with mandatory 3% from employer • Default investment fund charge capped at 0.75%pa Personal • Used for additional savings , self-employed and drawdown Pensions (Pillar III) in retirement Flexibility in • Ability for people to take cash and income as they wish from age 55 retirement 2 Source: Department for Work and Pensions (DWP), 2019
Key challenges 39% <10% Only have taken up the offer of free independent guidance of UK adults trust financial advisers to act in the best 5 times the amount of money is now interest of their clients flowing into drawdown v annuities 42% Of pension savers at risk of being scammed 40% to Private sector participation in 80% workplace pensions of people are 33% has increased from holding their retirement investments in Cash 3 Source: Financial Conduct Authority (FCA), The Pensions Regulator (TPR), 2019
The UK retirement journey New, mainly auto enrolees Joiners moving between employers across retirement journey leading to multiple pots Retired Choice RETIREMENT SAVINGS State pension Debt Saving for house Dependants Empty nest Mortgage finish Savings Tax free cash / save / income Save and protect New pension Early growth Late growth Pre-retirement later growth At-retirement In-retirement saver AGE 4 Source: Aberdeen Standard Investments, 2019
Marketing approach 1 and 2 years 1 Outbound triggered to selected Help decide what retirement date communications income withdrawals might be sustainable Automated data triggered Tax through the income communications. Highly Keep me on planning drawdown tool track program program personalised through dynamic – help me take Save more content and member action program the right steps Help me manage - 18 months Spending pension to selected Annual Statement savings too quickly retirement Save more trigger program program Milestone Get me started program – help birthdays Retirement Bring program me understand event Annual pensions 49, 54, 59, my pension program Statement together 64, 69 trigger Bring program program pensions together program Welcome Keep me on Late growth program In retirement track program – Pre-retirement help me take the right steps Guidance and advice Join Early growth (Across journey) Leavers Operational / regulatory communications Online Servicing Email benchmark / Our average 2 Connected member • Content personalisation driven by data • Self serve approach experience Open rate 43.5% 21% • Multiple contact points – secure messaging, Insight driven journeys across phone, mobile app, social, secure member site Click through rate 7.1% digital and servicing 2.5% • Driving best next action through data 5 Source: Aberdeen Standard Investments, 2019
Challenges & Solutions Government Society & Industry Transition from Defined Benefit Acceptance of to Defined Contribution personal responsibility Stabilisation of State Understanding of balance Pensions and tax reliefs between State and individual Increased coverage through Increase in gig economy and compulsion or nudging regular employment moves Increased engagement Technology adoption & among employers ESG considerations and members across generations Good quality guidance Understanding the value of and affordable advice advice 6
Risk transfer State/employer Individual Generous state benefits State benefits only focused including top ups, incentives on basic subsistence and payable from early age Defined Contribution Defined Benefit schemes provides no promise and where employers fund only part-funded by entire risk employers Retirement income Retirement decisions structured and guaranteed entirely responsibility of throughout retirement individual 7
Increasing need for advice Income and Other spending Simple guidance savings plan and information Online Holistic advice, Pension Joint planning Rules of thumb combining technology planning with partner and human elements – Robo-wealth ‘bionic’ advice advisers Income tax Inheritance planning planning Adviser 8 Source: Aberdeen Standard Investments, 2019
Current issues Retirement Outcomes Review • Single page wake-up packs from • Low consumer engagement • Lack of shopping around age 50 • Signposting to Money & Pensions • Poor investment choices Service • Annual drawdown statements to Regulatory …caused by intervention include charges • Industry-led drawdown • One- off ‘wake - up’ packs comparison tool • Overly formal risk warnings • No cash default • Limited information on annual • Investment pathways statements Source: Aberdeen Standard Investments, 2019
Investment pathways – the new ‘nudge’ 1) I have no plans to touch my money in the next 5 years 2) I plan to use my money to set up a guaranteed income (annuity) within the next 5 years 3) I plan to start taking my money as a long – term income within the next 5 years 4) I plan to take out all my money within the next 5 years
The Australian Retirement Income Journey Jason Nyilas Head of Retirement and Product Strategy, Australia September 2019
Australia’s imminent retirement income journey can be accelerated by adopting key lessons learnt from the UK Significant UK Policy Change (2009 – present) Retail Distribution Review (RDR) Pension Freedom reforms UK developments Australian implications Behavioural techniques Member/client digital solutions Adoption of best of breed digital incorporating behavioural methods retirement income solutions (accumulation and retirement) Design defaults Power of inertia Adoption of learnings from RDR: Advice vs Product focus Best practices and further adviser SMAs professionalism Separation of product and fund Re-imagining adviser role selection from advisers Outcome based investment Opportunity to leverage latest UK solutions retirement income products and investment solutions Alternative retirement income solutions ( post abolition of (i.e. implement the next generation of retirement compulsory annuity) solutions and fulfil CIPR requirements) 12 Source: Aberdeen Standard Investments, 2019
Industry consultation with a variety of stakeholders to assess our retirement assumptions and propositions Engagement Sessions Key questions 1. How are you approaching the retirement income legislation and framework? Industry and Adviser groups retail super funds and platforms 2. What other initiatives are a higher priority in your Industry business? consultation 3. What are the essential must-get-rights to be Phase successful? Industry Trustees >40 4. What are the prerequisites and starting blocks you consultants need to enable a retirement income solution? Industry consultation meetings and interviews 5. What eco system or partners do you require to implement a retirement income solution? Software and 6. Where is the best example in Australia of putting in Industry bodies Fintech place retirement income solutions to date? 13 Source: Aberdeen Standard Investments, 2019
Retirement Income Industry feedback… 4. Super funds will require some degree of partnerships 5. Legislation must lead to simplifying the retirement income process 6. Advisers and platform 1. Demographic changes and providers have the “tsunami” of retirement work to do money 2. Member interaction and journey is a ‘must get right’ 3. Digital solutions essential – no plan B 14 Source: Aberdeen Standard Investments, 2019
When worlds collide… Product Perfect: A point in time Imperfect: Life changes & sustainability Member Super funds Perfect: Imperfect: Member Retirement Information information Imperfect: income Perfect: Financial literacy Financial literacy Policy Perfect: Financial & Social intentions Imperfect: Results 15 Source: Aberdeen Standard Investments, 2019
Simplifying the beast: The Retirement Income Industry Value Chain Retirement Member Platform Advice Solutions (1) Deepen the digital engagement (2) Complete the dialogue (3) Adaptable retirement solution Impact F2F Goals Assess- Flexibility ment Telephony/ Collaborative Wants Needs Other Fill in the <=> Strategy gaps Scaled Risk Self-reliant High Mgmt Income Life- Features Risk style Peace of mind Understanding retirement in Translating individual circumstances into Adjustable to changing life & appropriate investment solutions retirement circumstances plain language 16 Source: Aberdeen Standard Investments, 2019
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