1 29 OCTOBER 2014 SPP LONDON EVENING MEETING The Pension Revolution Emma Douglas, Head of DC Solutions
2 SPP LONDON EVENING MEETING 29 OCTOBER 2014
3 29 OCTOBER 2014 SPP LONDON EVENING MEETING Freedom and choice
4 29 OCTOBER 2014 SPP LONDON EVENING MEETING Choice – hasn’t been a big hit for DC schemes • 84% of members invest in a default fund • 90% of retirees buy a fixed annuity • Auto-enrolment opt-out rates are very low • ‘Triple Defaulters’ Source: NAPF Annual Survey 2013 and Legal & General
5 29 OCTOBER 2014 SPP LONDON EVENING MEETING One choice
6 29 OCTOBER 2014 SPP LONDON EVENING MEETING Leads to another
7 29 OCTOBER 2014 SPP LONDON EVENING MEETING - Healthy 65 year olds live to 89 on average - 1 in 10 will die before 75 - 1 in 4 will reach age 95 - 1 in 20 will become centenarians
8 29 OCTOBER 2014 SPP LONDON EVENING MEETING Does choice have a ‘sell-by’ date?
9 29 OCTOBER 2014 SPP LONDON EVENING MEETING Choices can be hard to make Source: Agarwal S, et al “The Age of Reason: Financial Decisions over the Life-Cycle and Implications for Regulation”. Brookings Papers on Economic Activity 2009
10 29 OCTOBER 2014 SPP LONDON EVENING MEETING Choices get harder to make In the US, “among the population between ages 80 and 89, about half of the population either has a diagnosis of dementia or cognitive impairment without dementia” Source: Agarwal S, Driscoll J, Gabaix X, Laibson D. “The Age of Reason: Financial Decisions over the Life-Cycle and Implications for Regulation”.
11 29 OCTOBER 2014 SPP LONDON EVENING MEETING Freedom!
12 29 OCTOBER 2014 SPP LONDON EVENING MEETING Annuities - to the guillotine!
13 29 OCTOBER 2014 SPP LONDON EVENING MEETING New forms of retirement income • ‘Cash Out Plan’ • Half and half • Income Drawdown with longevity insurance • Annuities with more flexibility • Income Drawdown with underpin • Income Drawdown that can convert to an Annuity
14 29 OCTOBER 2014 SPP LONDON EVENING MEETING 3 main paths • Annuity • Income Drawdown • Cash • Trustees / Providers choose ONE as the default • Communicate with members at least 10 years before retirement
15 29 OCTOBER 2014 SPP LONDON EVENING MEETING The pre-retirement default will influence post-retirement behaviour We like what we have We don’t change enough • Endowment effect • Anchoring effect Transition to an Explain main features actual fund targeted We believe what we hear We don’t like change • Availability cascade • Status quo effect Publically lobby key Minimise beliefs decisions required
16 29 OCTOBER 2014 SPP LONDON EVENING MEETING What post-retirement options will be offered? • Small number of Trust schemes will offer income drawdown within the scheme • Many more schemes are looking for a ‘Post Retirement Partner’ - Members have the option to transfer funds into a Personal Pension / Master Trust - Trustees review fund range & fees - Optional, but easy for members • Some schemes may offer access to an IFA • Some may leave members to their own devices - It’s a maze - Full of sharks
17 29 OCTOBER 2014 SPP LONDON EVENING MEETING Drawdown Fund choice will be important - Trying to live off the dividend yield is too risky £100 Invested in 100% UK Equities- 40 years projection £200 £150 £100 £50 £0 -£50 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 10th Percentile 25th Percentile Median Percentile 75th Percentile 90th Percentile Assumptions: Monthly drawdown at a rate of £6 p.a. Fees 0.5% p.a. Source: LGIM Calculations.
18 29 OCTOBER 2014 SPP LONDON EVENING MEETING Multi Asset Income Fund £100 Invested in Multi-Asset Income Fund - 40 years projection £200 £150 £100 £50 £0 -£50 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 10th Percentile 25th Percentile Median Percentile 75th Percentile 90th Percentile Assumptions: Monthly drawdown at a rate of £6 p.a. Fees 0.75% p.a. Fund alpha of around 0.6% p.a. Source: LGIM Calculations.
19 29 OCTOBER 2014 SPP LONDON EVENING MEETING What’s important? • Adequacy and sustainability of income • Will the money last? • What is the sensitivity to different withdrawal rates? • Limiting downside risk • Fees
20 29 OCTOBER 2014 SPP LONDON EVENING MEETING Certainties in life – death, taxes and fees Over 20 years cost drag is a key determinant of investor outcomes Estimated performance drag from costs 1 • All else equal, the impact of 1% extra fees: • c.12% less assets after 10 years • Over 25% less assets over 20 years • Not just headline fees Transaction costs changing asset allocation Additional costs and administration expenses 1 LGIM analysis, ‘Diversified Thinking: Examining the costs of diversified growth funds
21 29 OCTOBER 2014 SPP LONDON EVENING MEETING Disclaimer and important legal notice Legal & General Investment Management does not provide advice on the suitability of its products or services. Past performance is no guarantee of future results. The value and income derived from investments may go down as well as up. This presentation, and any information it contains, has been produced for use by professional investor and their advisors only. It should not be distributed without the permission of Legal & General Investment Management Limited. The risks associated with each Fund are set out in the relevant Fund Prospectus and these should be read and understood before making any investment decisions. A copy of the relevant Fund Prospectus can be obtained from your Client Relationship Manager. Legal & General Investment Management has been appointed as a distributor of the funds and to carry out the investment management of the Funds, except for the Property Funds. Confidentiality and Limitations: The information contained in this document (the “Information”) has been prepared by Legal & General Investment Management Limited (“LGIM”, “we” or “us”). Such Information is the propriety and/or confidential information of LGIM and may not be disclosed by you to any other person without the prior written consent of LGIM. Unless otherwise agreed by LGIM in writing, the Information in this document (a) is for information purposes only and we are not soliciting any action based on it, and (b) is not a recommendation to buy or sell securities or pursue a particular investment strategy; and (c) is not investment, legal, regulatory or tax advice. Any trading or investment decisions taken by you should be based on your own analysis and judgment (and/or that of your professional advisors) and not in reliance on us or the Information. To the fullest extent permitted by law, we exclude all representations, warranties, conditions, undertakings and all other terms of any kind, implied by statute or common law, with respect to the Information including (without limitation) any representations as to the quality, suitability, accuracy or completeness of the Information. Any projections, estimates or forecasts included in the Information (a) shall not constitute a guarantee of future events, (b) may not consider or reflect all possible future events or conditions relevant to you (for example, market disruption events); and (c) may be based on assumptions or simplifications that may not be relevant to you. The Information is provided “as is” and “as available”. To the fullest extent permitted by law, LGIM accepts no liability to you or any other recipient of the Information for any loss, damage or cost arising from, or in connection with, any use or reliance on the Information. Without limiting the generality of the foregoing, LGIM does not accept any liability for any indirect, special or consequential loss howsoever caused and on any theory or liability, whether in contract or tort (including negligence) or otherwise, even if Legal & General has been advised or the possibility of such loss. Third Party Data: Where this document contains third party data (“Third Party Data”), we cannot guarantee the accuracy, completeness or reliability of such Third Party Data and accept no responsibility or liability whatsoever in respect such Third Party Data. Publication, amendments and updates: We are under no obligation to update or amend the Information or correct any errors in the Information following the date it was delivered to you. LGIM reserves the right to update this document and/or the Information at any time and without notice. Although the Information contained in this document is believed to be correct as at the time of printing or publication, no assurance can be given to you that this document is complete or accurate in the light of information that may become available after its publication. The Information may not take into account any relevant events, facts or conditions that have occurred after the publication or printing of this document. Issued by Legal & General Investment Management Limited which is authorised and regulated by the Financial Conduct Authority. Legal & General Investment Management, One Coleman Street, London EC2R 5AA Each Fund is a unit linked life fund provided by Legal and General Assurance (Pensions Management) Limited, please refer to the Key Features Document and the Description of Funds document for full details of each Fund's objective, key risks and features LGIM as at 4 September 2014
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