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FASS Hot Topics 2014 Life, Pensions and Investment Kindly sponsored by Agenda General Introduction and Housekeeping Introduction to the Theme of Sustainability Sandy Macdonald – Head of Sustainability, Standard Life Current Hot Topics from: Life Assurance – Jonathan Ross, Standard Life Pensions – Andrew Hornell, Towers Watson Investment – Craig Mackenzie, Scottish Widows Investment Partnership Drinks Reception 2 Sustainability Sandy Macdonald FASS Life assurance – hot topics ‘sustainability’ Jonathan Ross 17 July 2015 Disclaimer • The views expressed are those of the author and do not represent those of either Standard Life or the Actuarial Profession 5 Sustainability brief • ‘Sustainability is about running your business not just for today, but for tomorrow and for the long term of all our future generations’ • ‘A business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments’ • ‘How we take care of our customers, our people, our environment, our communities.’ • What actions should we be taking now to generate a longterm, stable and prosperous future for ourselves and for all those who depend on us? 6 Agenda Referenda Actuarial Profession? Environment Community Life Companies Government Auto Enrolment Solvency 2 Regulators Customers FCAAnnuity Review 7 Solvency 2 Solvency 2 Timeline. Over 15 years to develop and implement. S2 initiated by EC 2000 The Sharma Report 2001 2002 EC calls for advice 2003 2004 EC adopts S2 2005 2006 2007 L1 adopted 2008 2009 QIS5 2010 Omnibus 2 stalls 2011 Draft L2 2012 2013 2014 1. 2. 3. 4. LTG impact assessment. Final interim guidelines. 1 January 2016 quick fix. Omnibus 2 agreed. 2015 2016 S2 implements 9 Omnibus 2 and LTG Package. The LTG package is now effectively agreed. • Classic Matching Adjustment. • Allows customers to benefit from excess returns. • Asset quality and eligibility requirements encourage long term investment. • Volatility Adjustment. • Always switched on and wide applicability. • May need to better understand its implications. • Transitionals. • Lengthened. • Equivalence. • Third countries may prefer not to engage. • Need pragmatic solutions, consistent with global developments. 10 LTG Package Benefits. Opportunity for creativity and innovation to generate value. • New opportunities. • Open playing field to be creative and innovate. • Size of the prize is large. • Products. • Savings product guarantees. • Improved de-accumulation product value and design. • Scope to invest in infrastructure and growth projects. • Insurance industry uniquely placed to support economies. • Capture risk-adjusted returns for customers. • Potential good outcomes for customers, economy and industry. 11 LTG Package Benefits (continued). Opportunity for creativity and innovation to generate value. • Re/De-risking activities to realise value. • Reassess investment risk strategies to increase risk-adjusted returns. • Securitisation to monetise benefits and transfer risk. • Corporate activities to realise value. • Restructure internal funds to capture risk adjusted returns. • Merger and Acquisitions to modernise business models. 12 Related Developments. Other UK and global developments gathering momentum. • Spill over of banking initiatives into insurance. • • • • FSB, IAIS and PRA. Early Warning Indicators. Non modelled Backstop Capital Requirement. Sentiment moving against models? • IAIS global systemically important insurers. • IAIS Comframe and global solvency standard. • New opportunities created? 13 FCA Annuity review Scope of FCA review – TR14/2 • Assessed whether and by how much consumers would be better off buying an annuity from the open market rather than their existing pension provider • Considered the drivers of provider behaviour, including assessing, at a high level, the profitability expected from their annuity business • Commissioned a report reviewing existing research about consumer behaviour and engagement to better understand how this affects shopping around and the choice of annuity. 15 FCA Findings • 80% of consumers who purchase their annuity from their existing provider could get a better deal on the open market 2 groups of consumers particularly at risk of not getting a good deal: • Those with small pension funds. Most of these customers will get the best deal available from their existing pension provider so FCA concern is how the market serves these customers rather than shopping around and switching • Those who would be eligible for an enhanced annuity but do not explore this option stand to gain the most from shopping around. 16 Media reaction a FCA slams ‘disorderly’ annuities market and plans further probe ‘The Actuary’ FCA raises concerns over 'misleading' annuity comparison websites ‘Money marketing Pension system 'not working', says City watchdog FCA ‘BBC website’ 17 FCA Next steps • Launch a competition market study into retirement income (annuities and income drawdown) • Seek to identify ways of improving consumer engagement to prompt shopping around • Look at market dynamics to understand what drives the high levels of concentration observed in parts of the market • Look at how these markets are likely to develop in future in response to changing retirement patterns and needs • Include a supervisory element looking at pension providers’ sales of annuities to their existing customers 18 FCA Other findings • Consumers struggle to evaluate the best annuity arrangement for them • Consumers choose to stay based on trust and confidence in their existing provider • Third party annuity providers may offer worse rates than available from the same insurer on the open market • 97% of open market for standard annuities represented by 3 firms • 12 out of 13 annuity comparison websites giving information the FCA believes was not fair or clear, and was misleading. Think about sustainability What about the link to opportunities under S2? Is this being thrown away? 19 Auto-enrolment and pensions reform What is it all about? Phasing Staging date - 30 Sept 2017 1 Oct 17 - 30 Sept 18 Minimum employer contributions Minimum Minimum employer Minimum total employer Minimum total contributions contributions contributions contributions 1% Source: Now we’re nudging, 2012 Minimum total contributions 2% 2% 1 Oct 18 onwards 5% 3% 8% CBI research Paternalistic attitudes 49% of employers worry their employees don’t have sufficient knowledge to make investment decisions 77% of CEOs feel a responsibility to contribute to employees’ pensions 89% think a good workplace pension helps recruit, retain and motivate staff 68% of business leaders are concerned that too many employees are failing to take full advantage of their DC scheme 94% think there is a good business case for providing a workplace pension 80% of business leaders are concerned their staff won’t be able to retire when they want to Further change on the horizon? • Ex-FSA chief Lord Turner calls for 0.5% pensions charge cap • Standard Life warns employers over extra auto-enrol charge cap costs ‘Money marketing’ • Labour promises 0.5% cap on pension charges ‘BBC website’ • DWP consultation: • Option 1: A cap of 1% on FUM • Option 2: A cap of 0.75% on FUM • Option 3: Comply or explain • Ban on differential pricing between active and deferred members Sustainability Sustainable? • Government nudging more people to save for retirement. • Simultaneously saying consumers being given inadequate information and charged too much. Constraints on price will cut innovation? • Regulator investigating the market at retirement. • Customers confused. • Industry can support the economy through infrastructure projects (but not if nobody gives them any funds). Moving outside of the Life assurance bubble • Referendum on Scottish independence. • That will be followed by General Election and possible in/out referendum on EU? • What part do we have to play in these in order to support sustainability? As individuals, employees, companies, professionals, a collective profession? Sustainable pension schemes FASS Hot Topics 2014 A presentation to FASS by Andrew Hornell 25 March 2014 © 2013 Towers Watson. All rights reserved. This presentation is prepared for the sole purpose of generating discussion. The information in this presentation is based on information available at the time of preparation and represents the views of the presenter, not Towers Watson. No party may rely on any advice contained in this presentation and Towers Watson does not accept any liability to any party in respect of this presentation. Content Sustainability Pension scheme status quo Defined ambition options 2014 Budget 2 Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Corporate sustainability The Dow Jones Sustainability Index definition of corporate sustainability. Corporate Sustainability is a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments. Includes: Sound financial returns Long-term economic growth Employee satisfaction 3 Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Pension scheme trends Proportion of UK employees with workplace pensions by type of pension (ONS) 4 Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Pension risks Primary risks in a pension scheme Investment Longevity Inflation Counterparty Regulatory Are they all required? Who is best placed to manage them? 5 Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Defined ambition objectives and principles Reinvigoration objective Enable industry innovation and development of new products including those which will give people more certainty about their pensions and encourage more risk sharing Principles for a DA scheme Consumer focused – address consumer needs (members and employers) Sustainable – affordable to the stakeholders (employers/pension providers/members) over the long term Intergenerationally fair – not biased to pensioners, but also take on board needs of future pensioners Risk sharing – incorporate genuine risk sharing between stakeholders Proportionately regulated – the regulatory structure needs to be permissive to enable innovation in risk sharing, while protecting member interests Transparent – there should be high governance standards with clarity for members about any promise made and any associated risks 6 Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Defined ambition models Flexible DB Ability to pay fluctuating benefits Automatic conversion to DC when member leaves employment Ability to change scheme pension age Greater certainty DC Money back guarantee Capital and investment return guarantee Retirement income insurance Retirement income builder Collective DC 7 Proprietary and Confidential. For Towers Watson and Towers Watson client use only. An idea Use flexible DB options Less generous accrual Remove indexation DC on leaving employment before retirement Adjusting scheme pension age Sharing of risk Employee, employer and providers Investment, longevity and inflation 8 Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 2014 Budget Overview On 19 March 2014, the Chancellor announced radical changes to the rules governing how DC pension pots can be converted into income. “No-one will have to buy an annuity” 25% of the DC fund value, within the lifetime allowance (LTA), will be available as a tax free lump sum. When will these changes take effect? The changes are being introduced in two stages – the first from 27 March 2014 (increased flexibility); the second from April 2015 (complete flexibility). The two-tier approach is because the changes taking effect from April 2015 require changes to primary legislation. Will this flexibility apply to DB pensions too? These changes only directly affect the DC environment. DB scheme members can currently transfer to DC, but the Government is to consult on whether continuing to allow transfers, and seeing more of them take place, could adversely impact the economy. What other changes are proposed? The Government also proposes to increase the minimum pension age to 57, from 2028, and to then maintain it ten years below State pension age. New legislation will allow any other amounts drawn to be taxable at the member’s marginal rate+. + An LTA charge would apply on any amount in excess of the member’s available LTA. 9 Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Questions 10 Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Sustainability is more strategic than it looks Craig Mackenzie Head Sustainability, SWIP Theof materiality of climate change Investor ‘sustainability’ often seems relatively trivial Some typical examples of investor sustainability • Operational sustainability • Screening out sin stocks • Engagement to encourage CSR in companies • Nothing much wrong with it, but not exactly a response to the central issues of our time • But this picture is changing – Large scale adoption of sustainability agenda by large investors – UN PRI, 1000+ investors, $35tn AUM – A new emphasis for investor sustainability Case 1 – tackling short-termism An example of something that wasn’t sustainable Financial crisis has had lasting impact on growth UK 41 Short-termism was one causal factor • Excessive risk taking by people who prioritised short-term interests over long-term value creation • e.g. bankers receiving large bonuses for selling CDOs to institutions, with little downside if CDOs later blow up • CEO’s paid bankers their bonuses because of pressure to deliver on quarterly earnings expectations • Pressure from whom? 42 Investor short-termism causes corporate short-termism? Portfolio turnover rates of 990 equity asset managers, 2006-2009 Source: Mercer/IRRC 43 Towards long-termism Companies • De-emphasising short-term earnings guidance • Encouraging long-term incentives and clawbacks Investors • Focusing on strategy and long-term numbers • Voting to strengthen board incentives for long-termism • Changing fund manager incentives to emphasise long-termism • Changing investment processes to reduce turnover Pension funds • Reducing emphasis on quarterly performance reviews • De-emphasising index benchmarks • Favouring long-termist equity styles • Reviewing mandate design 44 Case 2 – tackling climate change 45 An example of something that’s not sustainable Source: US DoE Even on mid-range scenarios, the world is projected to get a lot dryer Dai, A (2012) Increasing drought under global warming in observations and models Nature Climate Change Average Palmer Drought Severity Scores for years 2090-99 Assuming mid-range carbon emissions stabilisation (650ppm) -3 = severe drought Source: Dai, A (2012) Increasing drought under global warming in observations and models Nature Climate Change An investor response • 80 European investors • $10tn of assets • Working to support more effective action to mitigate and adapt to climate change • Many members have very long time horizons Solving climate change is about fundamentally about investment Source: IEA Institutional investor capital flows to EU renewable energy projects €4,500 4,144 4,096 €4,000 €3,500 Project Debt €3,000 Dev Cap P2P €2,500 Growth Cap IPP €2,000 2,011 Project Equity €1,500 1,111 €1,000 €500 274 345 2004 2005 450 540 691 815 812 €0 2006 2007 2008 2009 Source: HG Capital 2010 2011 2012 2013 2014 Summary A new perspective on investor sustainability • Some aspects of global economic activity are fundamentally unsustainable • This can have profoundly important consequences for investors and for wider society • Investors can be a major cause of sustainability problems • But investors can be a central part of the solution • Many investment institutions exploring how they can respond Drinks Reception Relax, and join us for a drink!