Retirement Challenges Breakfast Event

5th June 2013

WEALTH at work recently held an event in London that brought together the thoughts and expertise of some of the industry’s leading pension and retirement experts, to discuss how employers can ensure their employees understand what their retirement options are, and how they could maximise their income for what may be 25 years or more.

More companies are now realising that their employees need to make important choices – not only about when they want to retire but also how they can maximise their income in retirement. With this in mind, our ‘Retirement Challenges Breakfast Event’ included special guest speaker Neil Fraser, Pensions Manager, Schroder Investment Management Limited, and consumer champion, Dr. Ros Altmann.  Please see below to learn more.

Please see the following link to download your copy.

WEALTH at work Retirement Income Options Event (640 downloads)

You can also watch the event.  To learn more, please see:

• Introductions and overview of the market
• The Consumer Perspective
• Case Study – Schroder Investment Management Limited
• The roles of the Employer and of the Trustee
• The WEALTH at work Rethink Retirement survey
• Retirement Income Options Discussion

Retirement Challenges Breakfast Event

Russell Hotel, London

25^th April 2013

Speakers

David Cassidy – CEO, WEALTH at work

Dr. Ros Altmann – Leading independent pension expert

Neil Fraser – Pensions Manager, Schroder Investment Management Limited

Alan Whalley, Chairman, WEALTH at work

Jonathan Watts-Lay, Director, WEALTH at work

David Cassidy:

Right, well good morning everybody and thank you for coming along today and giving up your valuable time. Because we are a little late starting I’m not going to sort of hang about too much but give you a brief overview of the market, which I’m sure you all know anyway. But the fact of the matter is hitting retirement, and that means it is a here and now problem, and coming from Liverpool I’m a big fan of John Lennon and one of the deepest things I think he ever said was in response to the question “what’s the purpose of rock and roll?”. And he said “to be here now”. To be of the time, to deal with the issues, that’s what he meant, at least I think that’s what he meant, and I think that’s very relevant to today; to be here, to recognise the issue.

And the issue is the baby boomers are hitting retirement. 21 million people in our country are now over 50 years of age and contemplating what they do next. Two and a half million people are in company DC schemes. Five hundred thousand people will buy an annuity in the next twelve months. Many of them are people who are retiring from big companies where they’ve been in DC schemes for at least part of their career. £13 billion of people’s savings, the investment made by companies and those individuals will trip over from the accumulation phase to the retirement income phase this year. I think if you go back maybe ten years that will be less than 4 billion. And a number of projections say within three years that will be hitting north of 20 billion a year. 59% of people involved in pensions say that poor annuity rates are becoming a huge social problem. And 85% of people faced with the choice of what to do for retirement income say they need help and guidance of one form or another.

So, you know, it is a huge issue. Now, on a personal level, I’ve been involved in regulation since 1994, first of all with IMRO and more latterly for nine years with FSA on the enforcement committee and in that role I was involved with the prosecution of some of the headline mis-selling scandals such as pensions mis-selling and endowment mis-selling, split capital investment trusts, precipice bonds and at the start of PPI.   And personally, I believe that what we’re faced with here is potentially the biggest mis-selling or non-selling scandal of all time. But unlike all of those other ones I just mentioned, this one is irreversible. Those other scandals might have cost people money, but in most cases it didn’t cost them all their money. In most cases there was a chance of them repairing the damage that had been done. Here, you get just one shot. And it’s irreversible. And the majority of the stakes are going to be made in a largely unregulated environment, which is workplace pensions, by in large, in terms of education advice is exempt. Exempt in terms of the financial services and market act, but I believe not necessarily exempt in terms of people’s right to seek redress in the future. So, you know, we need to be blunt about it and face up to it.

And we are really grateful today to have some prominent and eminent people in this field to enliven debate. We’ve got Dr. Ros Altmann, who everybody knows is a pension expert and consumer champion. To look at things from a consumer perspective, we’ve got somebody who actually does the job on at the coal face; Neil Fraser from Schroders and being from Schroders it’s even worse because he’s looking after the investments of investment professionals. And then we have Alan Whalley who’s our newly appointed Chairman at WEALTH at work, but who spends a lifetime advising as a kind of a gamekeeper turned poacher now I think to talk about his view on things and to chair today. And finally my colleague, Jonathan Watts-Lay, who’s going to talk about a recent survey we’ve carried out and how we hope to help people in addressing this near and present issue. So, without further ado, please join me in welcoming Ros. Thank you.

Dr. Ros Altmann:

Thank you very much, good morning everybody. It’s really nice to see you all here. And we are talking about what I think is a really, really important issue. What I’ll talk about today is a brief look at the position the consumer is facing, what the traditional thinking is about retirement income options, which of course revolves largely around annuities. Then looking at some of the other options including drawdown, and finally a word about where we might be heading, or should be heading into the future.

So let’s focus on the consumer, the people reaching retirement who need to find ways of supporting themselves in later life. Starting with the great news, basically most people can expect to live much longer than they would have expected to live in the past. Now that’s fantastic. But in the past, most workers simply didn’t think about their retirement income. And with the traditional defined benefit type scheme, they didn’t need to. The employer took care of all of it.

So, they just assumed, and it was the case, that whatever they put into their pension scheme would all be fine, and they’d get the promised pension, it would just almost be paid by magic.

Now, of course, with defined contribution schemes being much more prevalent, and defined benefits dying out, it’s different. Suddenly there’s this personal responsibility, and people need to understand the risks and the difficulties of achieving an income that they can live on to give them a good lifestyle for many years into the future. And that’s where we face a real problem, because there is such an asymmetry of information. The consumer simply doesn’t know that they don’t know all sorts of things they need to know to help themselves have a decent chance of a good income in later life. They need help. They need advice. They have no real idea about long term financial planning. The whole retirement income space has changed radically, relatively quickly actually.

And having been led to believe in the past that they could just leave it to someone else, they are now finding they have to make all sort of choices and decisions themselves which they are not equipped to make. That’s where the role of the employer and especially good large employers is so crucial. Because the employer can help them by facilitating and providing information and advice that they so much need.

There is this traditional thinking about retirement income.  You’ve saved in a pension and you get an income, and that in itself people don’t understand. Employers understand it now to a large degree perhaps trustees understand it to a large degree. But certainly individuals don’t.

And the traditional thinking simply doesn’t fit with modern day reality. We need to overcome, I think, a lot of the problems that are tied up with traditional thinking, so what is this traditional thinking?

Well, the basic message is: retirement income equals pensions. That’s the standard thinking. Maybe. But it won’t be necessarily for everybody.

Retirement income replaces earnings altogether. Maybe.  But not necessarily. I’ll come onto that later.

Retirement income starts to be paid as pension from age 65 or 60 or even earlier with early retirement. Again this is the traditional thinking that I feel needs to be challenged and will change.

Of course, if you’ve got a DB scheme, your pension savings give you a guaranteed income. That’s what many people still somehow believe. Even if they don’t know how it works, they think that’s how it works.

And even with DC, people think pension income equals an annuity. Simple.

And that simplistic thinking means that people have not really ever engaged properly with their retirement income options  because they have always been led to believe or grown up thinking, or somehow assimilated the idea that it’s simple. So they don’t need to. But in fact, because most workers don’t know how to assess their income options by themselves, and far too many end up making the wrong decisions, they really need help and advice. They need somebody to talk through with them financial reality. This is about financial plans as well, not just products.

Again there’s this idea that retirement income equals ‘pension’. Well that’s not enough. You’ve got to make a financial plan. Even if you’ve got a pension scheme, how much might it be delivering? How can I end up, if I want more than that, achieving more than that? So that I can get a sufficient income for the desired later in life life-style.

Rather than just sticking money in and somehow hoping it will all be fine, actually making a plan is complicated. It’s difficult. All of us would probably recognise that it’s not something that can be done easily. And most workers, even those with PhDs and sophisticated roles, scientific roles, somehow find this idea of financial planning very difficult. Engaging with it is hard. Partly because of the jargon, but not just because of that, because there’s a lot of uncertainty, and people need help to cope with that. It’s not something that they are automatically comfortable with.

Of course they need to understand how charges work, and how to assess value for money, but what they also need is to recognise that when you’re talking about later life income, there is more than pensions. For example, one area that nobody has yet properly engaged with is the need to pay for later life care. And so, often they will buy an annuity, give all their lifetime savings to an insurance company, and then there’s nothing left over if they do need care. We know that one in three, or one in four at least will need some kind of expensive care in later life and nobody is actually putting money aside for that.

Annuities are not an ideal product for 21st century later life lifestyles. There’s the good news that we’re living longer, but that will be associated with different types of requirements for your shape of your income. So annuities have many problems associated with them, even though it is still thought that that must be the right way for you to convert your pension savings into your retirement income.

What are the problems? Well, as David was already alluding to, they are inflexible. Once you’ve bought it, that’s it. It doesn’t change. You’re stuck. They are complicated. There’s different types of annuities. People do not understand this. Many people don’t know anything about the word annuities, you know to all of us it’s automatic, we know what it means. It means nothing to them actually. The annuity is what they think of as the pension.  And, what they think of as their ‘pension’ at the moment is a pension fund, which has to actually be converted into income. And then when you say you’ve got to buy an annuity they don’t really know what you’re talking about.

But if somebody says that’s what you should do, they’ll just go ahead and do it without really understanding that it’s irreversible and that you’ve got to get the right type of annuity for yourself, that’s suitable for you.  And at a good price.  Because there are huge differences in price across the market, not only between different providers, but even with the same provider from week to week. Their pricing structures will change. And again it’s this asymmetry of information. People are currently not getting the advice they need. The regulator has not required advice to be given before somebody sells an annuity, and at the moment, everything seems to be about “shopping around”, getting the best rate.

Well, if you’re just getting the best rate for the wrong annuity. You haven’t really got to where people need to be. They need the best rate for the right annuity, but if they’ve not got any help with finding what the right one is, then you still haven’t really cracked this problem of how to get people the right kind of retirement income or optimising their retirement income. And of course it’s particularly important right now because of the huge fall in annuity rates, which has resulted from the Bank of England’s policies of quantitative easing and all the other issues associated with low government bond yields. And there are other issues that have also forced annuity rates down. Obviously this good news that people are living longer will automatically mean you’ll get less income per year if you’re expected to live longer. But with the trend to unisex annuities, it seems like there’s been a huge increase in risk margins and profit margins in the annuity space. Issues around Solvency II. All of these have combined to produce this dramatic drop in annuity rates that you see on this chart.

And you then have to say “well given that we’ve had such a fall in annuity rates now, is an annuity a suitable retirement income option for all of the consumer’s retirement savings in one go?” And in fact I think people face a number of financial risks in their retirement now which annuities simply aren’t the right product for. They don’t help them with those kind of risks.

For example, these are the risks that I identify, you can probably think of more. There’s a risk of dying early. There’s a risk of becoming ill, even if you’re already ill and get an impaired life rate now, if you become much more ill and you’ve bought everything at the current rate applicable to your health now, you’ve got nothing to compensate you for becoming more ill. The standard annuity gives you no protection against inflation. That is a big issue.

No protection, if you happen to buy now when rates have been artificially forced down so that we can stimulate the economy, you’ve locked in for life. If rates go back up again and you’ve bought today, you have no chance of getting a better deal later.

The same with markets, you know, if you left your money invested and markets go up significantly, which is what the Bank of England’s policy is designed to engineer, but you’ve given it all away today, you won’t ever benefit from that. And as I say, there’s nothing in the standard annuity that will help you protect against the need or eventuality that you might have to pay for care. So actually, I believe at current rates the only risks that a standard annuity actually protects you against is living longer than expected. And that’s the only one of all those risks that a standard annuity can help you really cope with.

So given that annuities aren’t working so well, and given that this has been going on for some time, you know, the fall in annuity rates has been happening for a while, is the government doing anything about it? Especially, as part of the problem relates to official policy. Well, very belatedly, there does seem to be a little bit of activity going on to try and address some of these problems. For example, the pensions regulator has started to look at principles for trustees of DC schemes. But actually I think the trustees of DC schemes haven’t woken up yet to the responsibilities that come along with the retirement income options choice that they provide for members. I think too many trustees still automatically say “all I’ve got to do is get my members to be able to shop around for a better annuity rate, so I’ll provide them access to a good rate. But as I say, if they are not getting the right annuity, getting a better rate isn’t going to be that helpful.

Actually, the real need is for advice, before people convert their retirement savings into an income.  Indeed trustees themselves, if you’re a trustee of a DB scheme with a DC scheme attached, or if you’ve got a closed DB scheme which is now switching members into DC, they’ll have a DB pot, and then they’ll have a bit of DC if they’re coming up to retirement now. Assuming that maybe the scheme was closed three or four years ago, now do the trustees say ok we’ll pay the DB pension from the pre-closed accruals and they’ve got this tiny DC pot, it’s not really that much,  so they can’t really  do anything with it, we’ll just put it out to an annuity broking service and get them whatever the best annuity rate is.

But actually, if people have got a DB pension, do they really need to convert their DC small pot into an annuity at all? Has anybody thought about talking to them about the fact that if they never do anything with it but just leave it invested and they pass away, it’s free. Tax free because until you’ve actually either taken tax free-cash out or converted it into either a drawdown or an annuity policy it just keeps growing as a pension fund. And if it’s only going to give them a tiny bit of income, are trustees doing the right thing? Knowing that they’ve got a DB pension in place anyway, and not talking to the members or helping somebody talk to the members, facilitating somebody talking to the members to inform them of the choice that they’ve got to not annuitise.  If they’ve got a £10,000 pot, they’re not going to get much for it, especially at today’s rates.

We’ve got the ABI code, to try and help people shop around and the Pension Income Choice Association (PICA) is apparently trying to put together a directory of independent financial advisers who will advise on small pots. They haven’t come up with it yet which is very disappointing. There are plenty of firms out there who will advise. Obviously the RDR is a risk for individuals who are on their own because the need to pay upfront for advice often conflicts with the newly promoted direct sell offerings which suggest to people that you can get advice for free and that there’s a free service here. Actually it’s not free at all, I mean some of them are charging three and a half percent commission on the sale of an annuity for which people have received no advice and may be not the right thing for them at all. But they don’t know, they don’t understand.

I think the annuities thematic review that the FCA is conducting is potentially hopeful, because from what I’ve heard so far there seems to be a little more emphasis on the consumer interest. So far the FCA has really failed the consumer. Regulation of annuities has really failed the consumer. So I’m hoping that things will start to improve, because consumers need advice to discuss what is their long term future before they buy and there’s nothing in the regulatory system to really force that. It’s been left to the industry to self regulate but it hasn’t really delivered what people need. And it may well be better for people not to buy an annuity at the initial point of retirement.

And of course, in all other areas of investment, the standard, basic advice, the first thing people will normally tell you – if you’ve got some money to invest over a long period of time – is to diversify. They never tell you with the big pot of money that is your life savings to put all your eggs in one basket. But that’s what actually is happening when people convert their pension income to an annuity and especially when rates are so low, you’re basically saying “put all your money into one product at the most expensive it’s ever been”.  That wouldn’t normally be conventional investment advice. Annuitizing at age 60-65 particularly will give you a very low income relative to what was happening in the past and relative to what might happen if rates go up.  We don’t know. if it’s right?  So could we annuitise some?   Could we leave the decision a bit? We need more flexible thinking I believe.

And just think about the current standard annuity rates which are offering such poor value. The level life rate for male or female, (because it’s unisex now) the annuity rate at age 65 is around 5%, depending on who you buy with. Around 5%. What does that mean? That means if you live to age 85 you haven’t even had your capital back, or you’ve only just had your capital back. You give the insurer £30,000 and by the time you reach 85 you may not have even had your £30,000 back. No interest on it, no investment returns on it, no protection against inflation. Even if you’ve got a five year guarantee and you think “oh well I’ve given £30,000 and if something happens I’m guaranteed for a bit” with a 5% annuity rate, if you die within the five years, the insurer keeps 75% of your money. With a ten year guarantee, which is pretty much the maximum anyone buys, the insurer keeps half your fund. You’ve had no interest on it. If you put it in the bank at least you have a bit of growth. Not a lot these days, but a bit, or if you’ve kept it in the market you’d have a chance. If you buy a money back guarantee annuity, which very few people offer, you face a 55% tax charge on it unfortunately, where again the cards are just stacked against the consumer. And they need to understand that there are other options besides buying an annuity. That’s where I think DC trustees could really help consumers. You know, with contract based pensions and personal pensions it is more difficult, but with trust based there is a trustee there who should be helping members and talking about maybe not annuitising, maybe taking tax free cash, maybe phasing annuitisation, considering different types of annuities, looking at other savings options, looking at where you might get other income from.

All these things can help, but need to be talked through with an adviser. None of it is simple.

Now of course the main alternative to annuities has been income drawdown. But annuity rates drive the maximum income you can take out of capped drawdown because of the government actuary’s rules. So actually, there is still an issue with the low annuity rates even when people go into drawdown. And the government actuary’s maximum rate makes no allowance for health issues. You’ve got to be careful about charges, you’ve got to look at, you know, what kind of investment options people want, or need. And also talking through what happens if you get into worse health, at what point might you be better off buying an annuity? People just need help with that. Of course flexible drawdown is very good if you’ve got a lot of money because then you can just do what you like. But the impact of low annuity rates on drawdown has also been significant. Things are a bit better since this chart. But not a huge amount. And effectively over that three year period your income had fallen 33% as the maximum income you could take from a £100,000 pension fund. The ONS just released some figures showing similar things for annuities.  In order to maintain the income you could have got in August 2009 the pension fund would have needed to go from £100,000 to virtually £150,000. So there is a real issue.

Now some people will use property, or equity release.   Ideally that would be suitable for people who need long term care because the money can stay there, if you need it you can use it, if you don’t, you won’t necessarily. But again helping people understand the options and also alerting them to the costs of equity release and whether there are other options, could, I think, be facilitated usefully by employers who are willing to offer access to advice for people to know what potential options they’ve got for generating retirement income.  Or I prefer to call it ‘later life income’.

We’ve gone through lots of these different financial products that can help you get later life income, but one thing I haven’t yet mentioned which for me is part of the key to providing good later life income is to keep earning. And for many people that will be the most beneficial realistic option if they haven’t done enough saving or they haven’t got enough pension. But this will, I think entail a complete rethink of the word ‘retirement’.  So retirement becomes a process, not an event. A journey, not a destination. It’s a period of life where there is an opportunity for a whole new phase of life that we can invent for the 21st century that you couldn’t have before. You’ve got a full-time career, earning as much as you can, and working long hours. You get towards the age of around 60, no fixed age, depends on you. And then you start working part time, gradually cutting back. This idea that there’s one magic age and you suddenly stop working altogether is not only unhealthy for your finances, it’s also unhealthy for you. There are lots of studies that suggest working part time, as you get older, using your human capital as well as your financial capital is more beneficial, both to the individual, and of course also to the economy as we’ve got more and more older people.

But again these options don’t automatically present themselves to people, they need help. Ordinary employees need help thinking about it. It doesn’t have to mean that you work with the same employer. it doesn’t have to mean that you have a fixed idea of what you are going to do. And it does put employers is a bit of a difficult position. There is no default retirement age. You can’t discriminate against workers. You need to facilitate the employees to come to you and say “I’m thinking of how my later life work might go”. And if it’s not going to work with that employer, then many individuals have found it’s beneficial to move on to do some training and then work in a different field. You know – ”I’ve always wanted to do something new”.

This new phase of life is out there and it’s tied to the finances.  If somebody speaks realistically and says “look, if you want a better income, this is what you’ll get from the state, this is what you’ll get from your savings. And if you still want more you do have another option. Just think about how to plan your work.”  That’s financial planning, it’s not product selling. And that’s where firms that can give you independent advice for your employees can really help enhance the life of your employees – advice specific to people’s age and life stage, you know, do you have debts? What do you need to think about? How do you plan your future? That’s a role that the employer can usefully, usefully fulfil. But not without bringing in proper facilitating, proper advice, information etc. And of course with auto enrolment, employers are needing to communicate about pensions with their employees. But that also shouldn’t mislead them into believing that just because they’ve been auto enrolled, somehow their retirement is all sorted, which of course a lot of employees do believe. So helping them understand what their options are will help in the future to generate better retirement incomes.

One thing that hopefully will provide a good base is the new state pension reform – clarifying what it will provide. A basic minimum £144 a week is not meant to be a king’s ransom, it’s not meant to generate a good lifestyle. it’s just the basics. Most people will want more than just being able to heat and eat. And therefore they need to do something. Auto enrolment itself isn’t enough, you need a plan to top up the minimum state income with flexible savings and flexible working. I think these are part of the whole key to this. So that later life income is no longer considered to be just about pensions, annuities, and even just about retirement. Your options are more complex, and I think employers and trustees have a huge opportunity to really make a difference to people’s future lives. I’m happy to discuss and take questions afterwards, but that is the end of my prepared remarks.

Alan Whalley:

For those of you that don’t know, I’m Alan Whalley, recently appointed chairman at WEALTH at work. I’ll add my welcome to David’s. We have time for questions at the end. But if there are any quick questions you’d like to ask Ros as a result of what she’s just said, this would be a good time to do that while it’s fresh in your mind. Are there any? Yes, Jerry.

Jerry Gandhi, COO – NOW:Pensions  LTD:

It’s not a question, really more of a comment. I think if I was a person out there who doesn’t understand pensions, sitting, listening to the challenges we’ve got and just thinking through all those options coming up on the screen, I’d be scared. I’d be walking out this room thinking “not for me”. Our challenge is twofold, one is making all that easy. But actually, before we even get there, helping people get there with something in the pot. There are two elements of this that really are the challenge. One is trying to find a way of creating a solution which is tailored to the right level for individuals, rather than too many options. But even before getting there, starting people thinking early. And we’ve discussed that over coffee. It really is crucial that there is something in the pot to be up before we even get there.

Dr. Ros Altmann:

And thanks, I think you hit on exactly, exactly the right point. Which is: at the moment, everybody wants to think “I’ll just stick a bit of money in a pension fund and I’ll be fine.” And when they get to retirement they want to think “well I’ll either get a DB pension or I’ll buy an annuity and it’s all sorted”. But when they see what they get out of it, they won’t be satisfied. So it is really important for them to have a discussion. People I believe – all employees – can cope with the idea that there isn’t a guarantee and there isn’t certainty and I think they can all cope with the message that when you get to later life the state will give you just  £144 a week. And that’s it. If you really do want more than that, and they will, you have to do something about it. And actually, by doing some saving, you will have more. But don’t think that you start saving and that’s it, you forget about it. You actually need to look at it and monitor it over time. So, the older you get, the closer you get to the point at which you’re going to actually need to start taking the money, you need somebody to again talk through with you what you’re on track for and find ways of doing it. Actually the options are: you save or you don’t save, if you don’t save you’ll have the minimum. The products you buy in later life are not what you would be focusing on in these early discussions. What you’re focusing on really is building up a pool of savings that you can then rely on and use. And that’s an easier message. Once you get to retirement obviously that’s when I think we need advice. If someone sits down with you and talks through all these things they’re not that hard to understand. But at the moment workers are not getting that discussion. They are just being told “stick your money in a pension and that’s the right thing to do, you’ll be alright”. And I think that’s kind of misleading and it’s probably caused some of the disappointment and lack of confidence in pensions so far. And if we just keep doing that we’re not going to solve the problem. We need to be honest with people, I think they can cope with the truth which is – we can’t guarantee you, but we will do our best. You’ll have more than if you didn’t save, we don’t know exactly how much and we’ve got to check it.

Alan Whalley:

I think that it is a challenge to actually find a way of making it simple enough to actually understand and bite size chunks is certainly one way, but I’d like to introduce you now to Neil Fraser who’s head of pensions from Schroders. Just to give you a sense of at least what one organisation has done in response to this particular challenge. So Neil, thanks.

Neil Fraser:

Ok, thanks Alan. Thank you. Ok so first thing to say is I’ve gone horribly off brief. But actually, listening to Ros’ piece I think I might be more on brief than I realised, so that’s good, so what I wanted to do today is just run through a little bit around what we’re doing as an employer. So the focus is very much on the employer, not the trustee. Although obviously everyone’s aware the trustee has got such a key role to play in sort of trust based schemes. So, here we are, great stereotype, but you sort of get the picture. It’s time spent doing exactly what you want to do: floating around, not a care in the world. Simple. However, I think that potentially the reality for many is there’s not enough money to do the things you want to do involving a happy retirement, it’s one that’s fought with concern and worry about where the next income stream comes from, or where the next pound to spend comes from. Ok so, rather scarily these next points that I put up are coming from genuine conversations we’ve had with employees. You might not be surprised by some of them. And I think this picks up a theme, there seems to be a bit of a view out there that “just get the right annuity and I’ll retire, it’s all going to be absolutely fine”. Well it sort of is, maybe. But only if you’ve not made horrendous mistakes for the previous 30 years. If you’ve made a whole series of mistakes, or you’ve not planned effectively, or you’ve not made adequate provision. Picking the best one from 3 annuity rates is actually not going to solve your problem.

This is one that we get frequently. We actually have a pretty generous pension scheme, so that’s fine. The downside of that is huge complacency amongst the members, they sort of sit there and say “well the scheme’s good, it’ll be fine” so you say “that’s good, glad you’re happy. Do you actually understand the scheme?” And then there’s sort of normally a moment of silence and then it’s “well not really I think you put something in and, you know, it grows and it’s all good”. So having a good scheme is a positive, unfortunately it does breed a bit of complacency.

Another classic that I think probably people will be familiar with – got a default investment strategy. Well clearly that’s the one for me otherwise it wouldn’t be there, that must be the best fund. Now for some it may be. But it’s clearly not the catch all for everybody. People have very different attitudes to risk, and have very different plans. And they have very different positions outside of the workplace, and I think one of the mistakes it is easy to make is that you only focus on people’s position within the company. You make great assumptions around what their general wealth or plans may be. So just sticking that money in the default strategy, leaving it for the next thirty years, picking the best annuity rate – fantastic. Doesn’t really work like that, as we know. And this is the one that is a real eye opener for most. You say well “are you sure you’ve really got enough, have you thought it through”? And you’d be absolutely staggered how many people say “well I don’t think I’m going to spend a lot anyway”. Right, ok. We’ll come onto that.

So, with that as the backdrop we basically, probably what, 18 months ago sat down and said “well even with our workforce who are pretty well catered for, there are some clear issues”. We closed our DB to accrual in 2011. It had been closed to new members for some time before that so we only had actually about a quarter of our staff in DB, three quarters in DC. Closing it was a fairly painful process as I’m sure most of you are familiar with. But once we’d been through that there was a sort of recognition that as an employer, what should we be doing? Because there was this fundamental lack of understanding out there. So, we basically decided that we were going to approach it from two perspectives really. Firstly to make employees very clear that it’s their responsibility. They have to make their own decisions. Of course the big problem with that is most of them don’t understand A) What they’re looking at. B) what they need to do, or C) how to do it. So we gave a commitment that basically we would set out on a programme providing employees with education support around all financial matters, not just pension. And again I think this is something that Ros touched on. Pension is not the be all and end all, you know I think the financial landscape is changing dramatically and it has been this sort of tunnel vision that “get your pension right, all will be fine”. But as we know there are increasingly large restrictions around what you can do, when you can do it. And I think Ros has covered the annuity issue pretty well. So let’s start with basics, let’s try and educate our employees so that hopefully they feel empowered and enabled to make some decisions that are relevant to their own position.

Ok, so we’re going to spend the next couple of slides going through what we were doing and appreciate that this won’t be relevant to all employers. It may not be possible for all employers. But hopefully there are some ideas in here, so at the start of last year we set out a program that we would hope or were hoping would cover all the different career phases. So we actually set up six different programs covering right through from interns, we have interns in for a six to eight year period during the Summer. Then a graduate programme, and then these become sort of loosely defined, but early career, mid career, late career. Rather worryingly we were seeing the same employees pitch up for all three at different times. And then the pre-retirement stage as well. So I’ll come onto those in a little bit more detail, we did actually have very specific agendas, but for the purpose of today I’ve sort of shortened those and bracketed a few bits and pieces together.

So, interns and graduates. Now a lot of people I think don’t really focus on these, but logically, these are potentially the senior employees of the future. And again I know we might not be that representative, but we have three members of our group management committee which is one level below board, who actually joined on our graduate programme. So there’s a little bit of longevity in terms of service. But I think ignoring these sort of people can get everyone off on the wrong foot really. So this was fairly basic, I won’t go through all of these individually. So just the fundamental of working for the first time income and again we’re looking at grades coming from the top 10% of Universities. And the sort of feedback that you were getting on this was again staggeringly wide. To some it seems a bit of a strange concept that they didn’t get to take home all of their money. And yet others were coming in saying “well I know all that, I’ve been operating a business while I’ve been at University”. So again the range of understanding, even at that early stage is quite staggering. So this was fairly basic. So we went through managing repaying student loans. Again, people in different circumstances, it ranged from “well I’ve never had a loan, my parents paid for it” to some with “you know I have a huge loan, I have no idea how I’m going to get rid of it”. So they’re two identical employees more or less, sitting next to each other with completely different considerations right from day one.

Then just come basic how to build up a credit score, why you might need to do that, why it might be useful. And then fundamental good housekeeping, you know “don’t stick with Vodafone or whoever, because actually if you shop around you may get a better deal, it could be £10 a month cheaper” What might you do with that £10 a month? Could that go towards your student loan, and just trying to tie all of these things up together. We had a very basic sort of overview of savings and investments.

Again you would think that – an investment management company ,everyone who works there understands investments. Very wrong. We’ll come onto that again.  Just giving people a better understanding of the benefits that are made available to employees and how to make the best use of those. Again the flexible benefits programme is pretty generous, we are very lucky with that. But you would be amazed again, employees of all levels who are ignoring cheap and efficient benefits internally and are buying through their bank, or through a local high street broker, because again it comes back to us it’s about education. They just don’t really understand what they’re doing. So someone will come along and say “well I went to Fred Smith, a fella along the road did me a good deal. And he’ll sell them exactly the same policy. Probably scandalous, but anyway, you get the picture.

Okay so we then moved onto early and mid career and again as I say, it’s not clearly defined. It wasn’t bracketed or targeted at particular individuals. It wasn’t age related. We just sent out invitations saying “this may be relevant to you, these are the sort of things we’re going to cover”. Our thinking here was this was the point at which the mindset of individuals might start to change. So, bring them all down. Ok so in those early stages of student loans and going out and spending more than you’re actually earning, which I think we’ve all done, to the stage of “financially I’m starting to mature a little bit, I’ve actually got a bit of spare money each month. What can I do with that?” We then focus on mortgage options. And that’s another sort of dark hole we shouldn’t venture into. But if you look at the number of different mortgage options out there, again, unless you’re a genius I think it might be a struggle to pick the best one. And much with the sort of mobile phone analogy. With mortgages, if you’re in the wrong plan, or on the wrong scheme or on the wrong rate or tied into the wrong deal. The implications of that are pretty significant. So then people are starting to move into the family environment and they are looking potentially to fund children’s education. Which again I guess many of you will be familiar with and the costs associated with University education. Doing our best to accommodate that, and it’s at this stage we really first started to look at what the pension options are and what the longer term investment strategies might be. Our view was that targeting that at the interns and the graduates was going to be a bit of a wasted opportunity as they haven’t got the money and frankly, they probably don’t care at that stage. Whereas at the ‘mid career’ stage they are starting to understand it a little bit more, they’ve been in the business a little bit longer. And at this stage you can still make up for the poor decisions you’ve made in those very early days. You’ve still got time, you’re just playing a bit of catch up.

So we provided a little bit more information about how they could maximise their tax allowances using ISAs etc. Savings income if their partner is on a lower income, transferring potential savings into their name. Basically just trying to start thinking a little bit more widely around how to make the best use of their money. Because fundamentally it’s their money and it’s helping them understand how they can make the best use of it.

Then we get onto the rather more sombre bits of death, disability, Will planning. And the last one, I’m sure everyone’s familiar, but we were staggered, as we have potentially a fairly financially sophisticated workforce. But, we did a session on Will planning, and we asked for a show of hands who had a Will. And it was bordering on embarrassing really. And these people have got houses, they’ve got children, but they have never given any thought to the fact that they may need a Will. So that was a bit of an eye opener.

Okay. So then we moved to late career, pre retirement to say you can define that how you will. It’s difficult for us to target particular groups and say right you’re 53 and a half, this is one for you. Because outside of the workplace you don’t know what people’s plans are. We felt at this stage that involving employees partners became quite key. So we actually ran for the first time, as a pilot, a session in the evening. We invited employees partners along. Now I’m not sure if it was the content, the excitement, or actually all the free wine that was on offer, but we had a really good take up with that, and real positive feedback. Employees sometimes need a nudge from their partner. I know we’re probably all familiar with that. So bringing them along, making them feel part of the whole process. We did run the risk of course that the employee didn’t share some of the information with partners to start with, so I’m not sure if there were any domestics that came out of that. But I think it’s an important process because everyone has a slightly different view, and everyone has a slightly different question. And the networking that went on after that evening’s session, I mean we literally struggled to get them out the door.

Moving onto the pension projection piece. I think we all know how difficult state pension projections can be. But understanding, and again it’s picking up on one of Ros’ earlier points, you know they’ve suddenly got this – they’ve not thought about it for years, they’re just putting money away. They don’t really know what it’s going to mean. So getting them to understand what they need to do, what they can do, what level of support is there through our administration function. We have a website where they can do their own projection modelling. And a consolidation piece is absolutely key. And again it comes down to the “let’s not drive everything down this annuity” which produces whatever it produces. You know you’ve got some money that you want easy access to. You’ve got some money that you might be prepared or willing to tie up for three, five, ten years. And then somewhere you might need to commit now to generating an income stream.

And then these are the bits that got quite interesting. What are you actually going to do? And it is quite incredible how few people have a real clear picture of what’s going to happen. So it’s almost as if everyone’s rushing towards this finish line and actually when they get there they sort of turn round and it’s sort of “well I don’t know what I’m going to do now.” So trying to get them thinking around that, and that was quite interesting with the partners. I think some of them had more of it planned out than they realised, for example the costs and how much you’re going to spend. It comes back to one of our earlier points around “I’m not going to spend much when I retire.”  And if you think clearly about some of this, some of your expenditure will go down. Work suits (hopefully) will go down. Travel might go down “because I’ve not got a travel season ticket, but actually I’m going to be out and about more during the day” so car expenses may be higher. Household bills are going to be higher because actually, in the winter you’re probably sat there with the heating on all day, as opposed to being out of the house. So we put together a sort of little grid of things that might stay the same. Your food expenses might generally be the same. And then the things that will be higher compared to the things that may be lower. And it’s quite a powerful message when you put that up on the screen as to where all these things slot in. Because at that stage people then start to think “well hang on a minute, I’m quite comfortable now. But I’m going to have income that’s roughly half (hopefully) of what I’ve currently got. But I can see from there that four areas of my expenditure are going to be higher than they are now”. So it does start to sort of focus the mind a little bit.  So, the next question to ask is how do you keep yourself occupied? It might be that you do voluntary work, you might go into higher education. You might learn to play the trumpet. Or you might do some paid additional work to get that sort of retirement or late career income. It’s important to sort of put a whole plan around not just the financial aspect, but how you’re going to spend your time. The classic, sort of coasting along idea is “we’ll play a lot more golf, or we’ll go on more holidays”. But, you know, that’s probably not mentally stimulating enough for a lot of people. I think it’s great to start with, but I think you need to give some thought to what’s happening longer term.

I’m just going to summarise what some of these key points are and these are the challenges that I think employers have got today.  I’ve already said that trustees have got their own concerns and they have got their own responsibilities. I don’t intent focusing on that; this is very much from the employer perspective.

I think we’re all agreed that from the day you start work, to the day you walk out (hopefully) to a happy and healthy retirement that it is a pretty tricky road really. There’s going to be a few bumps along the way. And I think this picks up on one of Jerry’s points. You know, the average employee is never really going to fully understand pensions – I’m not sure I fully understand pensions. But what hope have people got realistically? It’s about trying to get them up to a level so they at least understand what they need to know. It is pretty important. I don’t think the industry helps itself frankly. The ever changing regulations are complicated. I think there has been some bad PR, quite understandably. So you can well understand a situation where an employee thinks “well pensions. It’s long term. I’ve read terrible things about it. I’m not sure I’m going to live that long. And it’s all very restrictive”.  There’s a lot of work to do around that in terms of the wider financial picture. We do focus on it, we do try and publicise our scheme. It is generous. It costs us a lot of money. We want people to appreciate it. But there’s more than one horse in the race really. So it’s trying to get them to understand what the alternatives are out there. We’ve touched on this a number of times, but I think, as a caring employer, I think there is a responsibility to support the workforce. I think you can’t just bring them in, get them to do their day job, pay them their monthly salary and send them off. I think there’s quite a strong cultural view around this, but I think any sort of employer has a duty of care towards employees really. So that’s pretty important. We’ve touched on scheme trustees and the regulatory body that is really sort of leading the way in that area.

So again, it’s a bit of a step back time.  A lot of benefit programs have sort of evolved, and they are there because they were there last year and actually, well, they will be there next year because they are here this year. And yes we give a pension and we give life insurance and that’s an employee benefit package. But I’m not sure that the average package now is particularly suitable to today’s needs. And I – time will tell. I think the way in which we provide employee benefits is going to change quite dramatically. And I think I can see a move towards a wealth financial platform benefit. With access perhaps more to ISAs and unit trusts and different types of savings plans rather than “we’re going to put X percent into pension and, aren’t you lucky”? So I think we – there will be some challenges to come on that. And it may take some time. But I think if you started now as an employer and you are looking to reward employees. How would you actually do it? And I suspect with a clean sheet of paper it might be quite different to how we currently do it.

And this is a bit of a mantra for us so sorry if it sounds a little bit twee. But the view very much is that if we support our employees they are going to be engaged employees. You know, and what we can do for them in the workplace has benefits for us as well.  You know, if you have engaged employees, if you have healthy employees. We have quite a big health care programme. Gym on site, this sort of thing. Where there is a bit of encouragement. And you want healthy and happy employees, you get much more out of them. And I am conscious to say we are in a very fortunate position that we are able to do a lot of this sort of stuff, and not every employer is. But there are some pretty easy wins in this space actually. Okay, so we’ve done all of that. We’ve educated them. They’ve taken heed. They have great plans. They have consolidated their finances. They know exactly what they’re going to do in retirement, and it’s going to be long, healthy, happy etc. So it’s all a bit of a relief actually. So, I’m not really sure what that says about healthy and active lifestyle, but you sort of get the message. It’s been a bit of a hard road. Everyone’s a bit worn out and actually it’s relief and let’s all have a rest. But, okay. So that was it, I just wanted to run through that very briefly. I’m happy to take questions now, I think there’s time for a bit of panel discussion at the end. So a little bit off brief, but hopefully it’s been of interest. Thank you.

Alan Whalley:

Are there any quick questions from here then, at this stage?

Peter Robotham – Head of Performance & Reward Europe, HSBC Bank PLC:

The key observation for me is, I’m very impressed with that, is Neil has talked about financial education. Advice, guidance and help through a career. Whereas the previous speaker was all about advice. I’m absolutely in Neil’s camp. We’re not going to get any advice as an employer. How do we deal with the dichotomy between the two, as an employer? You talked a lot about, Ros talked a lot about. You know, advice, advice, advice, employers can do that. I don’t think we can. We have a legal challenge about providing advice. We can’t do it.

Alan Whalley:

It’s a great question and it would be nice actually to hold that thought and come back to that at the end. Because some of the things that I want to say are actually pertinent to that particular point because I think there is a middle ground. I think there are things employers could and should be doing. I think there are things trustees could and should be doing. Which don’t go as far as technically “giving financial advice”.  But it’s a great question and I know it stops a number of employers from doing things.

Good, okay. What I want to try and do in this short session is just to try and pull some of the threads together a little bit and hopefully pull up some debating points for you to think about and for us to talk about later. There are some statistics on here, or quotations, which are really saying kind of “what is the issue”? And David referred to the fact that it is potentially the next mis-selling scandal. But whenever people have regrets and things don’t work out, they tend to look for some way – for somebody to blame. And I think that’s where the mis-selling comes from, if things don’t work out right. And there was an NAPF survey recently of employees and 42% said they wish they’d taken an interest in saving for retirement earlier. So there’s kind of regret about not doing it early enough. That’s not yet got to the stage of blaming someone for not telling me, but, you know, there is that risk. ABI survey – 53% of people weren’t confident they’d have enough to live on. Or at least to maintain their standards of living. I’m surprised that’s not higher to be honest, but I think that leads on to the next couple of points because people don’t really know what they don’t know. I think Ros said that as well. This from the JP Morgan Asset Management research – that the average people say saving into a pension – this was the people in the sample which is kind of a broad cross section of employees in the UK. They were saving 3%, but they were expecting to get an income of 37% at the end. Now you don’t need to be an actuary or a mathematician to figure out that if you pay 3% for over a working lifetime of 40 years and you draw that for, say, 20 years. Probably people living longer than that, but let’s just say, to keep the maths easy – you’re paying for 40 years, you’re drawing for 20 years. So if you’re paying 3% you can take out 6% on that basis. And then this money is going to be invested for an average of about 30 years. Pay for 40 draw for 20, that’s 60 years going to be invested on average half the time. So if you could get a real return of, you know, 2, 3 %. Maybe a bit more than 3%. That could double your money in that length of time. So you pay 3% for 40 years, draw it for 20 years. That gets to 6. It’s going to be invested, you’re going to get a real return (hopefully). That could double it to 12. So, nowhere near 37%.

People just don’t understand that simple arithmetic that I just took you through. It is simply painful. Save it for a number of years, draw it for a number of years and it’s invested for a while and you get some investment return. And that’s it. That’s it very simply. But people don’t get it. And they are not saving up. A lot of the defined benefit pension plans that were so successful for many years until the rules changed and the government made them too expensive. Were set up on the basis that members pay for it, employee paid 10. 15% was going in. Using my simple arithmetic of double it for the period you put in and take out. And double it for the investment returns. Four times 15% gets you to 60% roughly. With two thirds pension. So I think, given the fact people are living longer. Given the fact that rates are lower. You probably need to put in 20% if you’re going to pull out a sixty or two thirds pension. And people aren’t saving anywhere like that amount of money.

Mathew Webb – VP Benefits EMEA/APAC, Thomson Reuters:

Does that assume though that people are including state pension in that?

Alan Whalley:

No. the 37% is how much they get out of their pension saving, not including the state this is on top of the state. So I mean there is a lack of financial awareness – the Chairman of the House of Lords Committee commented on public service demographic change said recently that people must be better informed and able to get a better idea of what income they can get in retirement. And hopefully there will be more initiative from the government to achieve that. But the more immediate scandal, which Ros was highlighting – the best estimate is, because people are not shopping around with the pension saving pots that are currently coming to maturity this year. They are losing effectively about a billion pounds. So, 500,000 people are losing about a billion pounds of saving simply by not shopping around for the best annuities. And, you know, that’s kind of the tip of the iceberg. And the range of outcomes between the worst and the best can be 50% easily. So people are losing money and they don’t realise it. This is the issue. There is a lot of action going on. Ros referred to most of this so I’m not going to dwell on it. But there is a lot of action, but the problem is it’s not really addressing the core issue of getting people to save more and getting people to understand the choices that they have.

And the level of communication, financial awareness, and so on is really a challenge that we need to face up to. And I think employers ought to have a role. They do have a duty to care to their people. They are in a position where they can’t compulsorily retire people when they get to a particular age. So if their employees didn’t save enough and can’t simply afford to retire and just want to carry on working; the employer is stuck. They are managing an aging workforce and, you know, some people can work for longer in desk based roles. But if people are in manufacturing or, you know, climbing telegraph poles to put telephone lines up, or digging holes in roads to mend water drains or – physically you can’t do that in your 70s. So if people are not saving enough, employers are going to have a challenge. They are being asked to auto enrol people. And they are not necessarily – you know if people are auto enrolled but then are left to their own devices. They could turn round to the employer and say “well you didn’t really tell me enough information to know that I should be saving more than I was saving. Okay you put me in this scheme and it’s alright, but you didn’t really give me the rest”. So I do believe that financial education should be made available to the workplace until such time that we’ve got much more financial awareness in the population generally – if we ever get to that stage. How much to save. Where to invest it. What sort of options do I have at retirement? But I would also say that whilst any case is necessary, I don’t think that’s necessarily sufficient to get people to do things. Because you can educate people and give them a range of options and they’ll think “okay I’ll put that off for another day”. So what else can be done to actually nudge people to do things? Your great point Neil about bringing the partner along because that gives people a nudge to think about things seriously at that sort of trigger point. But is there a way of nudging people more frequently in earlier stages of their career? So for example, you know, can you get your people to agree that when they get a pay increase half of it goes into saving, half of it goes into the paid packet. So is there a way of automatically putting pension increase contributions to go up? When people get pay increases. Is there another way of nudging through better targeting of messages, recognising that interactive or face to face is a much better way of getting people to do things. And I do think at some stage we need to take a more holistic approach. Understanding there are other things. Neil was making this point as well. Maybe the flexible benefits program needs to be a bit more flexible and broader. People need to understand that, you know, they can invest in ISAs. There are these other vehicles that may make more sense rather than just putting everything into the pensions pot. And to your point, I mean it’s where this question was coming from. I believe actually it will be very helpful if there could be better clarification on what employers can and can’t do. In terms of, you know, where does education stop, where does advice start? And I believe there’s a lot of generic advice that can be given. Which isn’t actually recommending that people use this particular product or this particular thing. If you remain on a generic level that doesn’t need to be regulated. Certainly not in the workplace, where there’s a duty of care and there’s a degree of trust going on. But I do think we could have more clarity and to be honest I think it would be helpful if, as in the US, there were a safe harbour law that allowed employers to give generic financial information and education to people without getting caught by disgruntled employees outing lawsuits at the end. That happens in the States, there is this safe harbour. Employers don’t think twice there about giving financial education and advice. Not on specific products, but certainly generic – on a generic level.

We’ve already referred to the fact that trustees are a bit of a silent player in this space at the moment. They are probably thinking more about getting people to contribute more and make the right investment choices. But I think too few trustees are focusing on the options at retirement. They should have a duty to act in the best interests of beneficiaries. They can’t act in the best interest of beneficiaries if people are simply taking the default option at retirement. It can’t be in the best interests of their members. We know that the pension regulator has issued principles for better member outcomes. One of those principles is about investment choices – retirement choices. But the latest guidance from tPR is pretty silent actually on what trustees or employers could or should be doing at that particular point. Hopefully more guidance will come in the future. But we’ll just have to wait to see. But I do think that trustees do have a role on a trust based pension. There is contract based pension. There’s not much trustees can do because there aren’t any. So, you know, we have to default back to the employer.

But where do members go when they need advice? So those are the challenges. Nobody said it was easy. I agree that the biggest challenge is on the funding. Jerry was making this point earlier on. And basically people get on with their life until they can’t work anymore. And these choices are too difficult to get into. How can we help to influence that as an employer, as a trustee, as somebody who has a strong interest in the pensions space? Yes the choices that are made in accumulation make a difference, yes the choices that are made at retirement make a difference. But it doesn’t make a difference if people haven’t contributed enough. So that’s number one. But the other two areas can be quite important too. I believe the state should do more to increase financial awareness in the population generally. To promote a savings culture that we’ve lost from the UK. So, you know, I think we need to get back to a savings culture. And financial awareness will help in that.

And then I’ve already made some comments around what I think employers and trustees ought to be doing to help. Good. So I’d like now to ask Jonathan Watts-Lay just to say a few words around some research that WEALTH at work has done and, you know, I don’t think you would be disappointed if we had a very few comments around what WEALTH at work is doing to help in this space as well, so that will be a short commercial, but I promise you it will be very short. Jonathan.

Jonathan Watts-Lay:

Morning all. How are we doing? Bearing up? Nearly there. I just want to give, I’m afraid a little bit of data. But it’s very high level. Just to give a bit of a picture of what the employers are thinking based on some research that we’ve recently done. But also what individuals are saying. And I’ve actually picked on research from HSBC. And as we’ve got two people here from HSBC I’m going to have to make sure I get it right I think. Just to start with. The survey we did – tail end of last year which was primarily to large employers over one hundred employers responded. You’re all going to get one of these actually, it’s not a very big document you’ll be pleased to hear. So it’s not going to burden you too much on the way back to your offices. But it does highlight some key figures around this space. But I’ve just picked out four of them for the purposes of this presentation that I think are particularly important. The first one is people just not saving enough, so this is the view of the employer remember. Not the employee. So employers believe that only 16% of their employees are saving enough. So clearly there’s a recognition out there that more needs to be done now that we’re in the DC world. I guess auto enrolment will help with that to an extent. But of course auto enrolment isn’t the total solution because of the relatively low contribution levels.

The next one is around people’s awareness of the retirement income options available. So there’s been a lot of discussion this morning around what those options are. How actually it’s quite tricky. It’s quite complex. And people do not understand them. Employers are saying they believe only 18% of their employees are aware of the various income options available to them at retirement. I don’t know about the people around this room, but I just think that is absolutely shocking. One of the reason’s I think it is most shocking is that pensions are often stated as the biggest benefit that an employer will provide. But of course it doesn’t actually become a benefit until you do something with it. So you save into this thing for perhaps 40 years and actually seeing no benefit whatsoever. It gets to the point when actually you would like to see some benefit. And unfortunately people are, arguably abandoned. But actually if they have some direction often that direction is very polarised and is often polarised around annuities. So people are not actually understanding the real choices that perhaps they have. If you draw down into that a little bit more and you look at the annuity option specifically, employers believe that only 13% of their employees are aware that they no longer have to buy an annuity. I guess to an extent you can argue this is not surprising. Because we have had the pension providers, the insurers sending out the retirement packs “just sign here for our annuity”. I guess it’s just become default, so perhaps it’s not surprising that this number is so poor. But clearly in the new world this has to change. People need to understand that there is more beyond – there is more than just annuities.

And I think this is the last one from our survey, And I think this is a very interesting figure. And interesting given your comment that you made Peter, that you made a few moments ago. Overall 71% of employers believe there will be an increased requirement for specialist advice at retirement. And I think, I think the reason that people are now beginning to say this is because of the comment I made at the top. This is the biggest financial decision that most people will make in their lives. People used to say that about mortgages, didn’t they? They used to say the biggest financial decision was getting that big mortgage. But actually with mortgages you can change your mortgage provider, you can pay down. You have actually got flexibility there. When it comes to retirement, if you go down certain roads, as we’ve heard, perhaps go down the annuity road. Actually that is it, that is it actually until the day that you die. So it is a massive financial decision. For a lot of people, a lot of employees. So in some ways I’m not surprised that this is now up at 71%. But it is a real sea change from where it used to be. If you went around asking this question four or five years ago you would not have come anywhere near 71%. So it is quite interesting that employers are now starting to look at this advice piece in a slightly different way. Although I have to say Peter, this is clearly not the employer providing that regulated advice. That is giving it to a company like ours or whoever it may be.

That was the view of – some highlights as it were, from the employer survey that we did late last year. HSBC also did some research looking at individuals. So I’ve put this in really as a comparison. This was again research done at the tail end of last year –of one thousand respondents in the UK, although there is actually a global report that HSBC have done. I haven’t included those figures, but if you’re interested – if you have remits outside of the UK it could be interesting to look at. And again I’ve just pulled out a couple of things that I personally found particularly interesting. The first was: respondents expect their retirement to last for 19 years. But they accept that their retirement savings are only going to last for seven. Which I find kind of interesting conceptually as to, what are they doing about that? And looking at what level of income they want in retirement. They want their retirement income to replace basically three quarters of their income. Which is a phenomenally high figure. Actually much higher than one of the figures that was given earlier. But it does demonstrate to me that just through those two bullet points there is clearly a big mismatch between what people want. And actually what they are doing to get there. The other thing that I found quite interesting in the HSBC study with individuals was the impact of financial planning. And the way that they looked at this was to try and identify if there was a strong relationship between financial planning, and people saving more. And I guess unsurprisingly perhaps, the answer is yes there is a correlation there. What I found particularly interesting was actually – what do they actually mean by financial planning? And the way that this was done for HSBC – they effectively divided it into three categories. They talked about informal financial planning. Formal financial planning and regulated financial planning. So informal to them was “I’m kind of thinking about this. I think I might save £200 a month. So I’m kind of creating a bit of a plan in my mind” so it’s quite informal. Formal planning was, literally, they are not going to regulate or advise it at all. But they are sitting down. They are going through perhaps what they can get through the benefit provision through their companies. They are writing down their income and they are coming up with a plan, and they are reviewing that plan periodically. This research suggested that they are likely to have four times the retirement income than those who have not planned. If they go through that informal or formal planning process. If they actually go through a regulated planning process, that increases again by two and a half times. So it’s interesting to know that actually, whether it be informal or formal that actually putting these processes in place does have real impact. If this research is to be believed. I’m sure it is and does have an impact on ultimate outcomes.

So what can we do about it? As an organisation we’ve been looking at this for a while. Clearly there’s been a lot of changes happening in this space, with the removal of default retirement ages. The fact that people are now becoming more aware that there is an open market option with annuities. But perhaps they don’t understand much more beyond that. But for us it’s “you’ve got to get this decision right”. This is not a decision, unlike those lovely platform shoes, that you can afford to get wrong. So very simply we’ve just put it into five component parts which to a degree are a bit of a mix and match. But I’ll just briefly go through them. Financial education to us is a non regulated activity it’s the sort of thing we do for Neil who talked through earlier. Where we’re really going in, talking to groups of employees. Normally on some sort of segmented basis as Neil described. And we’re just talking about options. We’re just talking about pros and cons at a generic level of those different options. But the whole idea is that people understand that there are options. And they will understand generically that there are some pros and cons with all those options. That may be supported with internet tools, so people can go back to their desks or they can go home that evening and have a play around with some of those tools. So for example, we have an annuity tool. You can’t actually buy anything through this annuity tool. But it’s real time, it links into all the major annuity providers. And it just allows individuals to fill in some simple data. They can actually put in questionnaires and all the rest of it. And it will give them, if they were buying today – this is what you may get as an annuity. But we don’t allow them to buy. So it is there purely as a tool. Just really trying to inform them to what their pension pot could buy.

Help desk support. So this is very difficult sometimes for companies to have in-house because pension departments are often very small, even in large companies. So it’s actually having a back stop if you will, where employees can call us and actually, again, on a non regulated basis we can just talk them through high level options. Things perhaps they should be thinking about doing. Bed when it actually comes to “right, well I think I might actually want to retire” whether that’s phased retirement, full retirement. The service we now offer is allowing those individuals to contact us and we will actually go through those options with them on an advised basis. But what that advice looks like really depends on what assets they have, so, do they simply have a very small pension pot? Let’s say 30,000. They don’t have anything else. They don’t have any other savings or investments. And we might say to them, well we will take you through a process where actually maybe an annuity is the right thing. But we’re going to hold your hand through it, we’re going to make sure all the questionnaires are filled out correctly. And we’re going to go to the open market, and we’re going to try and find you the best rate. Equally somebody could call in, and it transpires they’ve got a couple of DC pots which are quite large. Maybe they’ve got a DB from earlier in their career. Maybe they’ve got stock from their company. Maybe they’ve got other investments. Where actually the calibration of how they’re going to generate retirement income is a lot more complex. And so we will say “well you do need advice, but perhaps it’d better that you sit down face to face with someone and receive that advice”.  And the reason we’ve gone down this advice route. Whether it’s the quick and easy advice over the telephone, or whether it’s the broader route based phase. It’s because we think you cannot afford to get these decisions wrong. So actually when you’ve been saving 40 years, and you’re going to make a decision which could stay with you until the day you die, the best thing you can do is get advice. That’s me. Thank you very much.

Alan Whalley:

Good.  Thanks Jonathan. So we’re at that stage of the programme where we’ve got a little bit of time for questions, comments, discussion. We hope that’s given you some food for thought. We’re very passionate about financial awareness and education. As well as proper advice. So hopefully you’ve got a sense of that passion coming through. But are there any further comments and questions? We’ll start here and I’ll come across to you Jerry.

Mathew Webb:

Just a question maybe more to Ros. I think from what we’ve heard and what we know the biggest problem with annuities is not knowing what the pot will buy you at retirement. So on that point, has the government ever thought about regulating that, or maybe go along the Swiss route of fixing the conversion rates? Because that to me would be so obvious and simple thing to do. And make things so much more certain plan give you more trust in the system. Stop all the risks, the profit motive. etc. etc.

Dr. Ros Altmann:

I have tried very hard to get the government to engage with this issue. One of the things I suggested was maybe the government itself issuing annuities or national savings issuing annuities or issuing gilts which could replicate annuity type income streams. They are absolutely refusing to do it. They have no interest in doing so. The treasury has always seemed to believe that annuities are the right product. And in fact they consider annuities to be a no risk financial purchase. The way annuities are regulated can only suggest that they don’t believe buying an annuity is risky because you don’t have any of the normal regulatory protections of someone who is buying the product. And the annuity seller is allowed to deduct money from your pension savings for the privilege of selling you this product. Which could be at a completely lousy rate and the totally wrong product. The regulatory system has so far completely let consumers down. And you’re right. People have no idea what they are going to get. The more we get headlines saying annuities are terrible value, people bought the wrong product, or they don’t understand. The more you are at risk of again undermining confidence in long term savings.

So, you know, it is a real shame. I personally would suggest that because when you buy an annuity, you are automatically paying whoever is selling to you some money. They should be required to provide something to you in the form of advice, hand holding, whatever you call it. Before or alongside the sale. And that would make sure they do it. At the moment it is free money. Anyone who is selling an annuity gets free money whether they give you advice or not. Why would they give you the advice? It would cost them something.

Jerry Ghandi:

Yeah. Observations and a particular point based on where I am working at the moment, but based on a passion I believe in. Observations really, I think a lot of the comments he had – employer is the trusted vehicle for giving support. I fully endorse that. That’s really the start point for helping employees understand what they need to do. I think so far we probably – I’ve written it down here. But I think employers need to have the opportunity to be able to talk sensibly and openly with their employees. And educate them without the fear of that accumulation. We are running scared of providing simple and easy advice, and that’s really not the right place. And that comes back to the point I think Ros just said – Annuities are easy to buy, but I really fear for more regulation. We’re heading up to an environment where it is ‘nanny state’. So no matter what I do I can sue someone rather than actually “I need to take some time so i can think about it” and actually take some ownership of the outcome. That’s coming in at two different angles. Yes you need to support people, but people need to take ownership as well. And without that you will end up with more and more mis-selling because regulations will create more opportunities to mis-sell. And that’s a big fear I’ve got. The final one is probably not in agreement with what you were saying in one of the points. I have worked in pensions for 35+ years and every time I try to do better for the employees and the employers I work with. I did a lot of work at RSA a couple of years back to engage. Create a lot of positive messaging and positive engagement. In a DC environment which was contract base. But I didn’t like contract base and I don’t like contract based DC because I think it creates a problem for the future members, where many people will be at some point. But the issue is really about the investment process during that accumulation phase. A lot of effort is spent in educating people on the risk and other things. And I just don’t think that the right place to spend the time and effort. People want a quality default fund, where it is owned by somebody – a board of trustees and managed efficiently. Where they can take the steps and manage it for those employees all the time that they are members. Not just as actors and helping them into retirement. So I think there is a bit around – I don’t think we should spend more time educating a risk good default funds with trustees owning it is the right way forward.

Peter Robotham:

That’s a real worry. Default funds. You join a default fund when you join your employer, you never revisit that default fund until you retire. I think there’s a real danger that you’re not going to provide the outcome. There’s a real mis-selling risk from a consumer point of view hidden in there…

Jerry Ghandi:

I think you’re missing the point I’m making. With a trustee board who are managing that fund on going, all the time.

Peter Robotham:

Ok, ok. Active management of the default fund. A quality fund which is – pensions is long term saving. Let’s not forget it’s not about the short term. It’s not about the equities now and the gilts later. There’s a risk of reducing volatility is important. But over the growth phase, the accumulation phase you want consistency, stability, generally lower volatility. But you want a stable long term income and growth. And that’s what I’m talking about.

Alan Whalley:

I think you’re generally right. If you’ve got trustees looking over it and communicating with members to say, you know, if you fall into this – if your situation is something of this nature or something of that nature. Then you really ought to think about the default not being suitable for you. But trustees know what the population is that the default fund is suitable for, and is looking after that on an active basis. Year by year. Communicating with people, to make sure they think about whether the default fund isn’t appropriate for them if they fall into these categories of situation then that’s an ideal world. But contract base – you’re stuck. And I think there’s a real issue with the fact that trust based pensions are regulated by the pension regulator, contract based is regulated by FCA, and they claim to talk to each other but I’m not sure they get along that well.

Dr. Ros Altmann:

The work and pension committee yesterday, and I’ve put the same endorsement in. I’ll call in for one regulator for work based pensions. You know, the duty of care in a trust based scheme, and a contract based scheme are actually quite different. All contract based schemes have to do is TCF which is very low hurdle. Whereas all contract based schemes, trustees responsibilities, as set down by the regulator, are actually quite a bit higher. But members won’t have a clue about that. They just, you know, won’t know any of it. But one question is: why we call this a default fund. When you think about the employee, they don’t want to go into default. Default is a bad thing. Can we find, you know, some more friendly words for some of the terms we use.

Marta Phillips OBE – CEO, The Pensions Advisory Service:

I just want to pick up some of the comment that were made earlier. Particularly around potential mis-selling issues from the perspective that we see the pensions advisory service. To me the issue is about managing people’s expectations. And a lot of our work is around – is when people come to us with quite overblown expectations as to, at a basic level, what they are entitled to get if they believe that they’ve suffered mal-administration or mistake with something from their pension fund. And I think it’s particularly relevant for the prospective outcomes that people can expect to get as a matter of going into automatic enrolment. What I’ve been trying to say to the DWP is if the likely outcome of people’s pension savings as a result of automatic enrolment is going to be 80% below attribute contribution level. Then you should be talking to people in terms of cash. Because they can get their heads around “well if you say this amount you could end up with £5000 or £10000 by the time you get to 65. And that makes sense. If you say to people “if you save 5% of your salary and you end up with a pension of two- and sixpence a week” they are going to say “why bother”? And so the whole information base is to what it is we tell people and when we tell people “this information needs to change”. Because if not, people are going to feel aggrieved and they are going to think that they have been mis-sold something when they haven’t.

Dr. Ros Altmann:

I completely agree with you. But that is absolutely against what the politicians are trying to do. I was at a lunch with the House of Lords, and the commission on demographic change last week. And the way they are heading – they are doing a new review, taking further their initial report. They are saying “how can we make it clearer to people what income they are going to get”? We are not interested in the lump sum. I think that’s a fundamental mistake. And you’ve also got the requirements now coming out that with your pension saving statement you’re going to be required to be provided with an inflation adjusted retirement income projection. As you say, it’s going to deliver you a tiny income, and people will say “ooh, why on earth am I bothering”? If you say to an ordinary worker “you might have £10,000” for many of them, they will think that is a decent sum of money. But the pensions industry at the moment and the politicians and policy makers are all focused on helping people look at income. And from a consumer perspective I think they are slightly misguided. And it could be actually counterproductive.

Alan Whalley:

I am conscious of the time. We did promise you that we would close at eleven. So I’m sorry we are a few minutes late but I am going to draw the formal part of the proceedings to a close at this stage. For those of you who do have a little more time and want to carry on talking, there are refreshments in the room that we had refreshments in before we came in. So if you’d like a cup of coffee and would like to carry on talking that’s super. You’re more than welcome. If you need to get away back to your desks then, you know, that’s fine too. So thank you all for coming, thank you for spending time with us. And let’s hope that collectively we can make a difference in this area. Thank you very much indeed.