A L i f e & Pe n s i o n s I n d u s t r y N e w s l e t t e r. December 2012
intelligent solutions for life & pensions
Annuities - A Poor Harvest // Tom Murray - Head of Product Strategy - Exaxe This article was first published in the Investment Life &
general. The issue has brought annuity returns to the
Pensions Moneyfacts, Issue 193.
forefront of the public’s mind in a way that few
Keat’s season of mist and mellow fruitfulness is upon
pension or life assurance issues ever have been able. However there has been no sign of any of this
us and this is relevant for more than the agricultural
affecting the thinking of the monetary policy
community. Those who have arrived at their
committee (MPC) of the BoE. There is still a huge push
retirement age are about to discover precisely what
both inside the committee, and from former
the fruits of their labour add up to when the total
committee member on the outside, to continue with
value of their pension pots are revealed to them.
the QE policy in order to try to stimulate lending in the wider economy. It is as if this is the only economic
Then, like the farmers, the soon to be ex-workers will
issue in the UK that needs to be addressed.
have to see just how much money they can get for their particular harvest. Unlike the farmers though,
Meanwhile, aspiring pensioners are left dangling like a
those about to retire don’t have an opportunity to
Mayor of London on a zipwire, stranded by the lack of
plant for a new harvest, so getting the best possible
low-risk alternatives to an annuity that, at current
value for their savings is absolutely essential. This is
rates, are a very bad return for years of saving. It is
where the current batch of new pensioners are very
also hard to see how any adviser could be regarded as
unlucky as annuity rates are at an all-time low.
giving good advice to a pensioner if he recommends that they buy annuities at the current rates available.
Effects of QE on annuity rates
At current rates, conventional annuities no longer
up but most of them have significant downsides for
the amount that can be achieved by the remaining
The current global crisis has led to a massive increase
provide any value to those who need to secure an
the average annuitant. The options are primarily
healthy pensioners, as that particular pool will now
in the printing of money in the majority of OECD
scheme pensions, income drawdown products,
live for longer and therefore will have to have their
variable annuities, and enhanced annuities. The
rates reduced to cope with the lengthened average
countries, including the United Kingdom. The Bank of England (BoE), under its quantitative easing (QE)
No cavalry in sight
difficulty with the first three is that the income
longevity. Thus increased use of enhanced annuities,
program, has released an extra £354 billion into the
It is clear that there will be no change in BoE policy
remains invested leaving the retiree exposed to two
while benefiting some pensioners, will ultimately
economy and has used that money to buy up
without a major change in the global economic
major risks – longevity and investment risk. This level
drive down the value of conventional annuities even
government bonds (Gilts), thus raising the price of the
situation, which is not looking likely in the medium
of risk is too much for the majority of pensioners
further, making them even more unattractive for the
bonds and driving down their yields.
term. In fact, the majority of commentators are
whose pension pot is far too small to risk any
expecting a major increase in the QE programme in
reduction by poor investment performance.
Whatever effect this might have on the UK’s economy,
Where do we go from here?
and the jury is still out on whether it is beneficial or
While the GAD rate rules prevent depletion of the
What can we do to provide a suitable pension vehicle
not, the lowering of Gilt yields has had a profound
This means that annuities are poor value for
drawdown pot too quickly, there is not a lot of benefit
for the future? In order to work out what’s required,
effect on the annuity market by causing annuity rates
pensioners and are likely to remain so for the
for the pensioner in stretching a small amount of
we need to understand what is required by pension-
to drop precipitously thereby reducing the pension
foreseeable future. So what should advisers and the
money over an even longer period as the longer the
ers. Most of them have relatively small pension pots –
amount that retirees are getting from their pension
industry in general be encouraging those retiring
pensioner lives, the lower the income will drop at each
the average pension pot held by a retiring British
currently to buy in order to get a decent return on a
review unless the investment returns start reaching
worker is a little over £30,000 according to the ABI
lifetime of saving?
extraordinary high levels.
(Association of British Insurers).
There has been a huge outcry about this in the
Alternatives to conventional annuities
Enhanced annuities can give higher amounts to those
Continued on Page 2...
pensions’ media in particular and the wider media in
There are a number of alternatives that keep cropping
with poor health but only by ultimately decreasing
End of the line for conventional annuities?
Making molehills out of a mountain // Ralph Tucker - UK Sales Director - Exaxe
IN THIS ISSUE
Distribution Review) the service delivered by the insurance providers will be a paramount decision in provider selection. Relying on systems that are in many cases over 20 years old will not do in this fast paced, informa-
Annuities - A Poor Harvest Making molehills out of a mountain
tion on demand, 24/7 industry we are becoming. So what is the answer? Gone are the days of
FCA should listen to wise words of Confucius
complete system replacement costing many millions of pounds. What we are seeing now is a
Income drawdown rule changes must be reversed
demand for point solutions designed to solve specific industry problems whilst addressing the
Stewart Reeder promoted to Client Director
discreet areas of each providers’ business operations, be that agency and commission, or the at retirement market. Many existing IT solutions will not be able to cope with the fluid
The unprecedented amount of legislation and regulatory change taking place over recent years has put a disproportionate amount of strain on the systems and operational capabilities of insurance companies. This strain has led to many short term “mend and make do” IT solutions to solve the problems of the businesses they support. This short term view has built up a bow wave of sticky
requirements of the industry driven by consumer tape solutions that has created a problem of their own
demand for greater levels of transparency, simpler
and will still need to be addressed in the near future.
products and a need to react to industry trends at
No one is blaming the beleaguered overworked IT
a faster pace than coastal erosion!
departments of the insurance industry, for taking this stance. How else could they cope with the additional
Breaking down the problem into bite sized
strain of the legislative requirements on top of
chunks is the only way to address 30 years of
business as usual? However, it cannot be ignored that
systems’ neglect and deliver the service and
as we race toward the bright future of the new world
products that the modern consumer will demand.
The FSA needs to be wary of quick fix solutions Good news at last on longevity Pension reform - The gentleman is for turning Why are we afraid of compulsory pensions? Transform your operational risk
adviser and client empowerment post-RDR (Retail
intelligent solutions for life & pensions
FCA should listen to wise words of Confucius // Ralph Tucker - UK Sales Director - Exaxe Time is slipping past. The Financial Services Authority (FSA) is heading for abolition and with it the birth of the new regulatory system is approaching, with two separate authorities – the Prudential Regulation Authority (PRA), which will regulate the banking and investment markets, and the Financial Conduct Authority (FCA), which will monitor the distribution of financial products and services.
FCA, has the strength to resist this temptation and to
Wheatley should pause awhile and consider his
If they be led by virtue, and uniformity sought to be given
avoid trying to justify his budget, not to mention his
strategy. While doing so, he could do worse than
them by the rule of propriety, they will have the sense of
salary, by producing lots of new regulations, which will
ponder the following wisdom attributed to
shame, and moreover will become good’.
just impose cost on consumers and will prevent the
level of focus on innovation of new products that
The failure of the layers of detailed regulation that
better suit the market; a market that will be expanding
‘If the people be led by laws and uniformity sought to
have been dumped on distributors and producers
dramatically and changing due to the parallel
be given them by punishments, they will try to avoid
over the last decade and a half underlines the veracity
introduction of auto-enrolment.
the punishment, but have no sense of shame.
of the first half of the quotation. The second part is patently true; people who have a sense of shame will try to make sure that they are decent and fair in all
Already the FSA has separated internally into the two
their dealings with others, automatically ensuring that
areas and is running a ‘Twin Peaks’ approach to
they will treat the customer fairly.
financial regulation in preparation for the split, which will officially happen in 2013. Hints have been
I believe the industry would recover its reputation
dropped in various speeches given by those
faster if it was made clear that both distributors and
personnel who are destined for the FCA of how their
producers have a fiduciary duty to the consumer and
strategy will differ from the FSA approach. The
that they would be monitored on this, rather than by
temptation will be for the FCA to try to show they’ve
rafts of rigid regulations that some parts of the
arrived by announcing a raft of new proposals. It will
industry will waste time and money trying to
be very hard for the new team to take over and say
circumvent by ensuring that they meet the letter of
‘everything’s fine – no need for change’. After all, if it
the regulations while breaching their spirit.
had been, the FSA would not have been split in two. But a mountain of new regulation is the last thing that
It is generally more effective if you can inspire people
the consumer or the industry needs.
to be honest rather than spend your time trying to catch them out being dishonest.
I hope that Martin Wheatley, the incoming Head of the
Annuities - A Poor Harvest (Contd.) // Tom Murray - Head of Product Strategy - Exaxe Global problem – UK crisis
returns, the amount of pension funding in infrastruc-
earnings through investment style drawdown
The lack of secure investment opportunities is a
tural projects has dropped to £175 billion this year
products without taking the risks that they currently
problem that is affecting all western economies to a
from £186 billion a year earlier, according to the
run, as the returns are ultimately underwritten by the
greater or lesser extent but it is most prevalent in the
Financial Times. Pension funds are voting with their
would give them a annual income of £1,800 per
UK given the large amount of people with private
money very clearly and government needs to
annum on top of their state pension entitlement. This
pension savings in the UK and the level of restrictions
respond. It’s clear that better vehicles need to be
Access for pooled pension funds
is a very poor return which doesn’t justify the effort
around the type of financial products that pensioners
constructed in order to encourage pension funds to
Infrastructural investment opportunities need to be
involved in saving and is also not likely to encourage
are allowed to purchase. This means that the UK needs
provide the investment government needs while
structured to enable individual investment by those
the new wave of savers that are about to start saving
to be at the forefront of the search for an answer to
allowing the pension funds access to these secure
retirees who are managing their own investments in
due to the government’s auto enrolment programme.
investment opportunities in a way that suits their
order to grow their investment in retirement. A new
way of pooling the smaller funds of those investing
Too old to gamble?
Private industry needs to work with government to
Pensioners are not like ordinary investors. They have
come up with long-term investments that can provide
established to allow access for those who wish to
no tolerance for risk at all because by the time they
decent returns without relying on the vagaries of the
Improving the investment vehicles for government
avoid the conventional annuity but still are looking for
find out that their investment is not paying off, they
equity markets. One of the key opportunities that has
projects is only half the story as to date the govern-
safe investments to protect their pension. The
will then be too old to have any chance of re-entering
been mentioned is the use of pension funds by the
ment has focused on attracting large pension funds
investment also needs to be reasonably liquid and to
the workforce in order to make good their losses by
government to invest in long-term infrastructural
and has ignored the potential of the smaller pension
have regular payouts to fund the income needs of the
increasing their capital. Surveys of attitudes to risk
projects. Of course using pension funds to invest
investors, to the detriment of both the government
pensioners. These requirements should not be
prior to selling to those with low to medium size
directly in long-term infrastructural products is not
and the individual pensioners. It is in this area that
beyond the wit of those managing government funds
pension pots are therefore essentially pointless.
new but it needs to be organised in a way that is better
changes to the way these projects are funded could
to devise provided that they have the will to do it.
(Continued from Page 1)...
Based on average annuity quotation rates, this
their pension pots via a drawdown need to be
suited to the needs of the pension industry. At
provide investment opportunities for those seeking to
We urgently need a solution which will enable
present, they seem designed just to satisfy the desire
grow their pension pots post retirement while also
It is vital that we come up with new investment
pensioners, who want to avoid a conventional
of the government to fund their investment projects
giving the government access to a large pool of funds
vehicles that can be accessed by individual pensioners
annuity, to have access to some type of investment
directly from this source as opposed to borrowing in
that they currently don’t tap.
to enable them to purchase drawdown style projects
which will provide a higher return, but will still be one
the commercial markets.
hundred per cent safe for them to invest in. And given
without risking their entire future. Otherwise we will If we can devise better access for individual pension-
be left with far too many pensioners who are below
the increase in the number of pensioners in the
Indeed the need for governments to make their
ers to infrastructure funds, we will give the govern-
the poverty line and who will ultimately require direct
country that is forecast for the next two decades, the
projects more attractive to pension funds is underlined
ment access to funds at a reasonable rate for
support from the taxpayer. Too many pensioners will
provision of such an investment is urgent.
by the fact that at a time when governments are
long-term projects. At the same time we will provide
spend the autumn of their life in financial misery.
desperate for investment opportunities with good
individual pensioners with the ability to grow their
intelligent solutions for life & pensions
Income drawdown rule changes must be reversed // Stewart Reeder - Client Director - Exaxe The changes wrought by the current government to
in retirement of £5,700 per annum, most pensioners will not be capable of surviving without some
the income drawdown regulations, i.e. the restriction
government subsidy on top of the regular state
of the level of drawdown to 100% of the government
actuarial department annuity rates rather than the 120% that it was previously, has seriously affected the
Does it matter whether that subsidy is given in the
at-retirement market. The effect of this change has
form of a constant trickle throughout a person’s
been to sharply reduce the amount of drawdown
retirement or none is given for the first few years and
products currently being sold; income drawdown
then a higher amount is given later? Either way, the
products have slumped in 2011 to 60% of the level
taxpayer has to support the pensioner.
they were in 2010.
If pension pots are given a chance to grow during
The pity of it is that income drawdown can often be a
retirement, then there is an chance for the markets to
more suitable product than standard annuities for
come to the rescue of the pensioner by allowing the
many pensioners. The fact that annuity rates are so
pots to grow in retirement and therefore providing a
low means that there is a strong argument for
higher benefit to the retiree, delaying the point at
deferring annuity purchase until a later date,
which the taxpayer must step in or perhaps prevent-
particularly as the stock market may well be in for a rise due to the flood of auto-enrolled pension money that will increase the demand for equities over the next decade, thus pushing up prices. Rising stock market values could boost drawdown investments, allowing pensioners to drawdown just the gains and retain the capital for a later annuity purchase when annuity rates have risen, an
Get in touch!
ing it completely. occurrence which may come when the Bank of
drawdown product line when the market is
England finally finishes its quantitative easing
Income drawdown is a far better solution than an
programme and begins to unwind it.
annuity for almost all retirees. The government must The primary reason given for the restriction of
seriously consider changing the rules back to make
In the meantime, by reducing the amounts that can
income drawdown rates to the 100% level is that the
the product more attractive to the 1.6 million workers
be taken from income drawdown products, the
government wishes to prevent pension pots
who will be hitting the retirement age over the next
government is stifling product innovation. Why
becoming exhausted. But given that the average
would providers invest money in the income
pension pot in the UK will deliver an annual pension
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Stewart Reeder promoted to Client Director Exaxe are delighted to announce the promotion of Stewart Reeder from Senior Client Account Manager to Client Director. Stewart Reeder joined Exaxe 12 years ago as Information Systems Manager and since then has grown with the company fulfilling several project and account management roles. Reeder also holds a BSc Hons IT Bachelor of Science Information Technology
and a MBA Masters in Business Administration.
Stewart to Client Director. Stewart has proved
am looking forward to
himself to be a valuable part of the team with his
assisting new and existing
Reeder’s new role as Client Director will be to
years of expertise built up during his tenure with
clients identify long term
engage with senior management, in new and
Exaxe and his excellent relationship skills. Stewart’s
strategic solutions that
existing accounts, to provide an unrivalled
ability to define business solutions whilst remaining
provide real value and
results-based service to our clients.
client focussed made him the ideal candidate for the
forging long term
Client Director role. ”
Philip Naughton, Executive Director Business Development at Exaxe says:
Reeder says “I am thrilled to be given this opportu-
“I am delighted to announce the promotion of
nity to show what I can deliver as a Client Director. I
The FSA needs to be wary of quick-fix solutions // Tom Murray - Head of Product Strategy - Exaxe to pay it on the drip over the lifetime of the policy
RDR project. They have released a report which
review it to see if it is truly built on solid foundations. If
than to have to pay it upfront.
seeks to reinstate commission for cash and equity
the FSA accept this approach, it will make the new
ISAs, stakeholder pensions and annuity purchases,
system even more complex and completely unman-
So when the FSA realised the truth of this, rather
fearing that the fee-only RDR regime would lead to
than accept that their programme was flawed, they
these products being purchased without any advice.
began to search for ways around it: simplified advice
since the Retail Distribution Review was first mooted, voices in the industry have been pointing out its primary flaw; the effect of the regulation is to put advice on financial matters out of the reach of the majority of the population, who could not possibly afford the advice they needed. Of course commission is effectively paid for by the same people but for most individuals it is much easier
It is clear that financial advice should be unbiased and
and basic advice. They failed to realise that people
This is yet another sticky plaster to fix a problem,
the only way to do that is to make it fee only. High
who are looking for advice want the benefit of all the
which has come about because the whole RDR
quality financial advice costs money and there is no
experience of the expert they are consulting – not
project has not been clearly thought through and
demand for a yellow-pack version. Having gone this
some cut-down version that may or may not fit their
this solution could end up causing more problems
far, the FSA needs to keep going and implement the
needs. All these attempts came to nothing, primarily
than it solves. For example, what happens if the IFA
new regime. Once it is up and running, we can see
because the concept of simplified advice is
realises that the best advice he can give the
where the advice gaps are and devise new ways of
fundamentally flawed – (see earlier blog post on
individual is to buy a more complex product that
giving those excluded access to it.
www.exaxe.com/blog on this topic – ‘The
should be under the fee regime? Does he or she
Conundrum of Simplified Advice’).
keep going and recommend one of the ‘commission’
Knee jerk reactions will only make things worse. The
products or does he tell the individual that they
FSA took a very high-handed approach from the start
Now the wheel has turned full circle and it appears
need to buy the more complex product and then hit
and refused to listen to the industry. They will just
that the FSA are coming under pressure from a
them with the full fee for the advice?
have to take the consequences of their own actions
group of industry experts, including the Association
and try to learn from it.
of British Insurers (ABI) and the Association of
Once again people are attempting to prop up the
Mortgage Intermediaries (AMI) to backtrack on the
crumbling structure rather than stand back and
intelligent solutions for life & pensions
Good news at last on longevity // Kathryn Desmond - Business Development Manager - Exaxe Crack open the champagne! At last we have a reason
showed life expectancy increasing at a faster rate than
On the downside for those looking for a longer
Before we get too carried away, there remains the
for celebration. The latest figures from the Office of
healthy life expectancy, leaving us with the rather
retirement, these figures also support the argument
issue of private pension savings. The fact remains that
National Statistics (ONS) bring some good news for
dismal prospect of having a longer life but spending
for a later retirement age, as it appears that we all will
most of us do not have enough saved for our
those growing old. Britons are living longer. And not
more of it ill.
be able to remain active in the workforce for longer
retirement and if we are going to live longer and be
than was originally expected.
healthy for more of it, then we’re likely to want to have
only are they living longer, but their healthy life expectancy is increasing as well.
a higher income level to make use of that fact.
If backed up by other surveys, this news will also reduce some of the pressure on long-term care
However, given the changes in the worker to retiree
The latest study carried out by the ONS shows that
planning, as it appears we will be able to look after
ratio that is forecast for the mid-century and the Office
For all our sakes, we better hope that auto-enrolment
between 2009 and 2012, the life expectancy of the
ourselves for longer without requiring outside
for Budget Responsibility’s recent prediction that it
works to deliver better pensions or there’ll be a lot of
average Briton has increased by 0.9 years, from 77.2
assistance. This will help the Treasury reduce the
will take until 2061 to return the UK’s debt/GDP ratio
fit pensioners about without the means to enjoy their
years to 78.1 years. But the number of healthy years
amount they have to set aside to implement the
back to where it was in 2007, perhaps resisting later
retirement. Perhaps we should restrict the celebra-
that a Briton can expect has increased by 2.1 years
Dilnot report, which recommended putting a cap on
retirement was always going to be futile. There is
tions and just have one glass of champagne until we
from 61.5 years to 63.6 years in the same period.
the amount people have to spend for their long-term
never going to be enough workers to support the
see how that works out.
care with the government picking up the tab for the rest.
amount of retirees that would be around in 2050 if we all retire at the current retirement age.
This is unexpectedly good news, as previous surveys
Pension reform - The gentleman is for turning // Fergal O’Doherty - Business Development Manager - Exaxe Thirty-two years ago Margaret Thatcher rose to address the Tory Party conference with the party in great turmoil. Her financial reforms were running into severe difficulties and the downturn that had been forecast as part of the reform was turning out to be much worse than everyone had originally expected. Having been elected on the basis that Labour had increased unemployment to over one million, unemployment had risen by then to over two million and the country was very restive. It was at this point that Mrs Thatcher made her famous quotation in response to calls for a policy U-Turn, which was ‘You turn if you want to – the Lady’s not for
turning”. Whether you agreed with her policies or not,
reform programme. Without a flat-rate pension and
We need statesmen, not politicians, at a time like this.
it was difficult not to admire her determination to
the removal of the majority of means-tested
People who are prepared to look at the long-term
proceed with them rather than buckle under the
programmes, it is difficult to see why anyone would
benefits to the country and risk short-term unpopular-
pressure for short-term popularity.
not opt-out of the new pension schemes that they are
ity to get it right. Pensions are the ultimate in
being put in via the auto-enrolment programme.
long-term projects and if we are to be in a sustainable
Fast-forward three decades and it is clear that the Unless means-tested benefits are drastically reduced,
But it requires the government to hold fast to its
ment to its policies. The Financial Times is reporting
the majority of lower-income workers would be worse
policy, withstanding the pressures from different
that the commitment to a flat-rate state pension is
off if they save for their own pension and so it is hard
interest groups in order to make that happen.
being reviewed on the personal orders of the Prime
to see how any employer or financial adviser could
Minister because of the risk of a backlash from those
justifiably advise them to save. If true, and the FT
Unfortunately, the current PM is far from earning
who would lose out.
generally has impeccable sources, this will make
himself the ‘iron’ epithet that was revelled in by Mrs
pension reform a dead duck and the Treasury will
Thatcher and the long-term welfare of the UKs
This policy forms a cornerstone of the whole pension
Why are we afraid of compulsory pensions? // Kathryn Desmond At the National Association of Pension Funds (NAPF) annual conference 2012, the pensions minister was quite adamant that compulsory savings could cause “an awful lot of trouble” if introduced to the UK and therefore the uneasy compromise of auto-enrolment was preferable. The example of Australia was not one that the UK could follow. The primary reason the minister gave was that there would be political difficulties with compulsion because many people would perceive it as a new tax.
position in 2050, then action needs to be taken now.
current government lacks the same level of commit-
futures of their own businesses are so insecure. The opt-out level from these firms is going to be shockingly high. The auto-enrolment process, with its complex rules about eligibility, enrolment and re-enrolment of the opt-outs, is a bureaucratic nightmare for small employers. It will have them praying for the simplicity of a Brussels directive.
pensioners could suffer as a result.
Transform your operational risk // Ralph Tucker Worried about managing your operational risk? Spreadsheets are set to be the FSA’s next target area and warning shots have already been fired concerning the management and security surrounding our industry’s use of workbooks. Exaxe can help you assess your company’s suitability for transformation. To have a free initial chat or to book a consultation with one of our calculation experts call us today +353 (0) 1 2999 100 or email us: email@example.com.
That is why compulsion would have worked far better
Politicians should be there to solve political difficulties. The future pensions of UK employees are far too important to be jeopardised because the government lacks the ability or will to get their message across to the workforce. In times past, politicians have had to face the public with far worse scenarios, even to the point of telling the public that they would have to send their young men and women off to war. Without compulsion, the numbers saving will not be anywhere near as big as they could be. The auto-enrolment process is starting off with the very large employers who have big human resource departments that can sell the pensions idea to the staff and will probably be able to keep the number of opt-outs very low. Once it is the turn of the small and micro-employers (less than 5 employees), however, it will be a completely different story. In a recession these employers are already stretched just trying to keep their business afloat. They will have neither the time to be concerned about the long-term future of their employees, when the short-term
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for employers. It is not a tax but in terms of arrangement, it works exactly the same way as standard NI contributions. This would be far simpler for employers and would not distract them from their business. Compulsory pensions would have worked better for employees as they would not have been faced with a complex choice about saving but would have been forced to start saving for the future immediately. Compulsory pensions would have allowed a big bang approach, rather than the current 5½ year phasing in approach, permitting a more concentrated publicity campaign from the DWP to launch the whole project. Even pension providers, including NEST, would have benefited because they would have got far more members in their schemes from the beginning, giving them greater opportunities for cost control. The only group that compulsory pensions would have created difficulties for is the politicians, who would have had to work much harder to sell the concept. Guess whose interest ultimately triumphed?
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