Andrew Tully

Pensions Technical Director

MGM Advantage

The changing face of

the retirement market

Today

What’s happening in the market?What’s happening in the market?

Solvency IISolvency II

EU Gender DirectiveEU Gender Directive

Retail Distribution ReviewRetail Distribution Review

Standard annuity rates over last 20 years

Source: Billy Burrows Annuities, male 65, single life, G5

7% drop since June 2012

Source: MGM Annuity Index, October 2012

What does the future hold?

Solvency 2

Increasing Longevity

MARKET DRIVERS

•Solvency 2 pushing all annuity rates down

•EU gender ruling pushing down male annuity rates, which is 82% of volume

•Enhanced annuity growth and increasing longevity of healthy lives pushing conventional annuity rates down

•Healthy males suffering biggest decline

• If gilt yields increase, rates could spike up. Depends on Euro Debt and Quantative Easing.

Declining Annuity Rates

MARKET IMPACT

EU Gender Ruling

Growth of Enhanced Annuities

Gilt Yields

Drawdown sales decline: will it improve?

Drawdown sales figures from ABI

Advised market 2004

62.5%38.4%

Source: ABI, based on premium

Advised market H1 2012Total sales = £4.5 bn (out of total market of £9bn)

Total sales = £4.3 bn(out of total market of £7.1bn)

9.4%

10.1%

36.2%

44.2%

Increasing popularity of Investment-linked annuities

Source: ABI.

Gender Directive

Annuities and EU Gender Directive

Gender neutral pricing from 21 December 2012

• Only applies to new contracts from that date

• Annuities bought from occupational pension schemes not affected

Conventional Annuities

Male rates Female rates

approx 3-4% approx 1-2%

Enhanced annuities

• Impact not as significant as gender only one of many factors used

Income drawdown

• New unisex GAD tables needed

• Interim solution: use male GAD tables for all

Gender Directive & processing business

MGM Enhanced Annuity – current 45 day guarantee

With effect from 6/11/12 will move to guarantee ending on 20 December 2012

– Need fully completed forms and all funds received by 20/12

New gender-neutral quotes available mid-December

• Back to 45 day guarantee period

MGM Flexible Income Annuity

• Currently has no guarantee period

• Fully completed forms and all funds received by 20/12

Solvency II

Solvency II

What is it?

• EU legislation, due to come into force 1 January 2014

• Will force annuity providers to hold greater capital reserves, or invest in risk-free assets (ie gilts)

• Ongoing developments so position not finalised as yet

Impact on annuity prices

• Uncertain until final rules received

• Some changes already being priced in, and will be a gradual impact

All rates, possibly up to 10%

Income drawdown

• Indirect impact as IDD based on market annuity rates

Solvency II

Trialogue was not able to reach agreement

• Negotiations are continuing

• Delay poses challenges in terms of timing

EIOPA are consulting

• Impact assessment 15th October to 10th December

• Report expected to be published end of March 2013

RDR – impact on advisers and consumers

RDR

OverviewOverview

What does it mean for advisersWhat does it mean for advisers

Impact on productsImpact on products

How will customers buy in future? How will customers buy in future?

What could the advised market look like? What could the advised market look like?

RDR – three key objectives

RDR Professionalism - Journey Ahead

• Initial and ongoing knowledge – qualifications

• Qualification Gap-fill

• Statement of Professional Standing• Evidence advisers subscribe to professional standards

• CPD 2013 and Beyond• 35 hours of CPD (21 hours must be structured)• Focussed on learning outcomes • Must be measurable and relevant• Evidence of learning activity completed

WELCOME TO THE FREE AND SIMPLE ONLINE SOLUTION TO YOUR CPD HEADACHE

Powered by Technology by Accredited by Sponsored by

MONEY MARKETING CPD CENTREwww.ifacpd.com

 

How does the CPD Centre work?

What will RDR mean?

Will change how advisers present their services

• All advised sales will be fee based

• Non advised sales are commission based

Need to ensure this doesn’t not create barriers to clients taking advice

Without advice, risk that clients will make poor decisions resulting in undesirable outcomes

RDR impact on

products

Annuity quotations after RDR

Advised Sale

Fee as % of AnnuityFixed fee from

AnnuityInvoiced fee from

client

Additional fees may be charged for on going reviews for flexible annuities

Advisers will need to agree fees with client before requesting annuity quotes

No – Advice Gross Annuity* Commission

1 Full Commission£6,071

£1,500

Advised sale Gross Annuity* Increase Fee on quote

2 Fee as % (1.5%) of fund & paid by product provider

£6,071 £0.00 £1,500

3 Fee – fixed of £ 1,000 and paid by product provider

£6,101 £30 £1,000

4 Fee – fee of £ 1,000 (nil cost quote) and paid by client

£6,162 £60 £0

*Based on male aged 65, £ 100,000, single life, G5, level payments

Impact on lifetime annuities

Impact on Flexible Annuity

Annual policy charge (levied monthly)

Includes cost of standard commission –

• 2% initial commission (2.25% if online quote)

• 0.25% per year trail commission

These will no longer be included in APC

Advised FIA - £100k

Before RDR After RDR

TFC £25,000 £25,000 (as long as all advice related to annuity purchase)

Adviser receives upfront

£2,000(if standard commission)

Whatever is agreed with clientEg £2,000.

Amount used to buy annuity

£75,000(if standard commission)

£73,000 (if £2,000 charge taken from fund)

Adviser receives ongoing

0.25%(if standard commission)

Whatever is agreed with clientEg 0.25%

APC Higher as commission included

Will be lower as doesn’t include cost of initial or trail commission

OVERALL Costs around the same if adviser paid same amount

Example of TFC calculation

PRE-RDR and commission (non-advised) cases after RDR

Jack has a £100,000 pension fund. IFA receives commission of £2,000.

TFC calculation today = 25% x £100,000 = £25,000 tax-free lump sum 

AFTER RDR WHERE FEES (ADVISER CHARGE) DEDUCTED FROM FUND £100,000 fund, £2,000 adviser charge paid from fund so £98,000 used to buy annuity

Need to understand why the client is paying adviser charge

1. TFC = 25% x (£98,000 + £2,000) = £25,000 tax-free lump sumIf the advice relates solely to the purchase of the annuity 2. TFC = 25% x (£98,000 + £800) = £24,700 tax-free lump sumIf £1,200 relates to wider pension advice which simply happens to be given at same time, eg advice about investment of pension funds being left in force.

Advised FIA - £100k

Before RDR After RDR

TFC £25,000 £25,000 (as long as all advice related to annuity purchase)

Adviser receives upfront

£2,000(if standard commission)

Whatever is agreed with clientEg £2,000.

Amount used to buy annuity

£75,000(if standard commission)

£73,000 (if £2,000 charge taken from fund)

Adviser receives ongoing

0.25%(if standard commission)

Whatever is agreed with clientEg 0.25%

APC Higher as commission included

Will be lower as doesn’t include cost of initial or trail commission

OVERALL Costs around the same if adviser paid same amount

Advised FIA – impact on income

Before RDR After RDR

Amount used to buy annuity

£75,000 £73,000

Market annuity prices

Lower as annuity prices include commission

Higher as annuity prices exclude commission

Income range Should be broadly similar.

Although less invested, average annuity price in market should be better as commission free rates.

Impact on advisers

Independent advice - considerations

Restricted advice - considerations

96% of advisers believe a restricted annuity panel should have 4 or more providers

Panel requirements – restricted

Research amongst advisers, June 2012

How will RDR affect market

Firms will need to change their “Advice Proposition”

• Necessary to agree fees in advance

• Explain scope of advice - independent or restricted

• Explain what advice is and what is involved in advice process

• Justify additional work / advice if an annual fee (trail) is charged

Fees received will match cost of each case

• Cross subsidies will go

• Advisers won’t be able to reach some parts of the market

Fewer advisers as some will exit market, fewer people getting advice

How will customers buy

retirement income

solutions in future?

What’s changing?

1. Retail Distribution Review

2. ABI code of conduct

The customer’s view – ways to buy

1. Do nothing / buy with original provider

2. Search around for better rates – DIY

3. Non-advised to search for better rates

4. Contact adviser

Do nothing – buy with the original provider

New ABI code of conduct will make this more difficult

– Fully effective March 2013

But many will still choose this route

Partnerships with specialist annuity providers

– Customers gain access to enhanced annuity

– Simplified questions so not full market, or individual rate

Opportunities Accumulation providers retain client

x Risks Customers are denied access to full range of market rates and enhanced conditions

The customer’s view – ways to buy

1. Do nothing / buy with original provider

2. Search around for better rates – DIY

3. Non-advised to search for better rates

4. Contact adviser

Search around for better rates

Some customers will ‘do-it-themselves’

– Search online for better rates

– Prompted by wake-up pack

– Similar approach to other insurance products

Price comparison websites will benefit

Danger of customer mis-buying

– Not aware of all solutions

Opportunities Price comparison websites

x Risks Customers may buy wrong retirement solution

The customer’s view – ways to buy

1. Do nothing / buy with original provider

2. Search around for better rates – DIY

3. Non-advised to search for better rates

4. Contact adviser

Contact broker to search for better rates

New type of broker emerging

– ‘Non-advised’ under RDR

– Can charge commission

Simplified enhanced annuity questionnaire

Operate ‘NEST-style’ panel

– Nationwide

– Some providers

Opportunities Banks; providers; rate brokers

x Risks Customers are denied access to full range of market rates and enhanced conditionsCustomers only get advice on rates not suitability

The customer’s view – ways to buy

1. Do nothing / buy with original provider

2. Search around for better rates – DIY

3. Non-advised to search for better rates

4. Contact adviser

Independent and restricted advice

Two distinct areas – but customer may not recognise

Opportunity for adviser to create USP

Specialise - eg in areas such as long term care, equity release

Qualifications

on

Opportunities Advisers working on independent or restricted basisCustomers will get holistic solution

x Risks Not all customers can benefit – lack of supplyNot all customers willing to pay for full advice

Agree objectives1

2

3

Present options Recommendations Implementation Your retirement savings have to last you for the rest of your life State benefits in the UK are among the lowest in Europe

There are around a dozen different product types, with different features depending on which company you choose What shape suits individual circumstances best?

There’s usually nothing you can do if you make a poor decision It’s could also effect your dependants if you make the wrong choices

The stakes are too high

It’s too easy to make a mistake

Mistakes can’t usually be rectified

It’s crucial you make the most of your retirement savings…

Few people have much experience of what to do. After all, you only retire once!,

How would your client feel if you knew you could be receiving more money each month?

Why clients need advice at retirement

It’s not just the best rate

Identify the best

rate

Transfer penaltiesConsolidation

Guaranteed annuity rates

Protecting your partnerProtection on deathCountering inflation

Flexible drawdown / capped drawdown / phased drawdownInvestment-linked annuities / WP annuities / variable annuity

Fixed-term annuities / conventional annuitiesLifestyle annuities / impaired annuities / postcode annuities

The right company

The right questions

The right options

The right product

What could the advised market look like?

Market split – smaller pots

£40,000 to £50,000

£0

Pots of this size are likely to annuitise

Although there may be occasional cases where other income or individual circumstances mean a different outcome

Shopping around is crucial

All figures for £50,000 pot, 65-year-old, single life, 10 year guarantee, moderate enhancement. Figures from Moneyfacts data for MGM Advantage

£3,436

£2,805

£2,882

£2,417

£3,235

£2,752

£2,787

£2,212

42%

for

male

s

46%

for

fem

ale

s

En

han

ced

Sta

nd

ard

En

han

ced

Sta

nd

ard

How will advisers help clients in this market

96.2%

2.1%

0.8%

0.9%Advisers will help

• selection of appropriate product

• consider other issues such as transfer penalties and guaranteed rates

• shape of annuity

• find best rate

• vast majority of enhanced sold through advisers

Source: ABI

How we can help you

Adviser meets or calls

client and ascertains they have a medical condition which

may qualify for an enhanced annuity

Adviser completes quote with client using MGM on-line system

MGM contact client and produce quotes for Adviser

Adviser arranges a telephone interview with MGM Advantage

OPTION 1

OPTION 2

Pre-populated ECQF now available to send to other providers

Time saving

• Immediate decision on qualification

• Ability to capture all you need in one meeting

• Quotes system only asks questions relevant to medical conditions selected

• No more laborious paper filling

Pre-populated ECQF available to send to other providers

Benefits of ECQF

The benefits of choice

Market split – larger pots

£40,000 to £50,000

£0

Pots of this size are likely to use blended solutions

Pots of this size are likely to annuitise

Although there may be occasional cases where other income or individual circumstances mean a different outcome

Blended solutions at outset

Move to new solutions as circumstances change

Summary

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More future pressure on annuity rates• People will need help• Important to consider all options

Customers will change the way they buy retirement products

• Danger of mis-buying

RDR means advisers need to position their services differently

•offering a range of products from a wide range of providers is likely to give customers best solutions•some providers helping advisers do this cost efficiently

Any questions?

PP00395 06/11

This presentation is based on our understanding of the HMRC rules & regulations as they stand but these regulations are still subject to change. (Copyright - MGM Advantage 2012)

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