The Pension Conversation - Are you having the

Right one?

Presented by:

Vincent Boyle

Gwen Reddy 30th April 2015

Progress

Desire for progress inherent in our nature

2

Evolution of Pensions

Medieval pensions (5th to 15th Centuries)

• Royal pensions awarder by the King (UK)

• For services rendered

• Money, land or office

• Early records from 1180 refer to pensions for

members of the clergy

Early Modern Period

• 1590 - Chatham Chest pension scheme for sailors

• 1684 – Civil Service Port of London

• 1712 – Superannuation scheme for Civil Servants

Present Day

• Optional at present

• Defined Benefit (DB)

• Defined Contribution (DC)

3

More Recent Trends

Switch from DB to DC

• At a global level DC assets under

management now exceed DB

• Ireland not there yet!

• Trend towards DC from DB

• DC catching up

4

Source IAPF Investment Survey 2013

The Pensions Conversation

Multitude of conversations over the years!

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Fundamental is still the same

Car Conversation

6

Crankshaft

Piston

Car Conversation

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Car Conversation

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Petrol Tyre pressure / thread Water

Pay attention to Key Warnings Mechanic Annual service AA

Pension Conversation

9

Jargon !DB, DC, SFT,PFTs, PAOs, OAP, NRA, NPD , EMVs,SRP’s, TLA, SPDIR, SPDIS, FMC,AMC

Pension Conversation

10

Pension Conversation

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Revenue /Scheme Rules

Statement of Reasonable projection

Member Booklet Understanding

Knowledge

Simplicity

Getting the Balance right

Contributions in You/ER/Govt

Default Investment option

Annual update On line access

Pay attention to Key Warnings

Trustees Attend updates

Member Conversation

The Voluntary DC Plan

12

To join or not to join …

That is the question !

Why the increase ?

Increase in Migrant workers

Affordability for employees

Alternative priority options under Flex

(e.g. Health Insurance/ holidays/ saving )

Cost saving for Employer ?

Employees now need to be more pro-active !

Member Conversation

The Voluntary DC Plan

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Appeal the philosophical side

of people’s nature to take

action ?

Member Conversation

The Voluntary DC Plan

14

‘…

Use a famous ‘Irish Philosopher’

to encourage people to join ?

Member Conversation

The Voluntary DC Plan

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A more direct approach

The ‘ Nike’ moment ?

‘…

Member Conversation

The language barrier

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Member Conversation

Language

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No Yes

ABC Limited Defined Contribution Pension

Scheme

ABC Limited Retirement Savings Scheme

Normal Pension Date (NPD) The day you finish working

Default Lifestyle Strategy Let the experts decide for you

The Projected Accumulated Fund at Normal

Pension Date

Your “pot of money” at retirement

Annuity or ARF Options at retirement Using your “pot of money” at retirement

Member Conversation

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No Yes

Are your contributions adequate to meet

your retirement goals?

Do you see yourself as a saver or

spender?

What is your estimated pension as a

percentage of your final salary

Will you spend more or less money when

you finish work

What is your projected fund value at

retirement?

How much do you think you will have?

Have you scheduled a consultation with

the scheme's advisors?

Do you need help with the decisions

ahead of you.

Are you likely to pursue the annuity or

ARF option?

Do you know how you can use your

money when needed?

Member Conversation

So ……..

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How do you see yourself in retirement ?

Would you like to be comfortable enough to do the things you

want ?

How important is ‘Financial Wellness ‘to you ?

Do you hope to maintain a good standard of living ?

Member Conversation

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1st € 10k

Example :Target of € 30,000 income in retirement

3rd

€ 10k

2nd

€ 10k

Basic Living – Food , shelter , clothing, heat, warmth,State Pension

Financial freedom to make choices. Holidays ,travel ,hobbies, further study, change the car, Sky sports !Continue to enjoy a decent standard of living

Run the car , the odd holiday,Basic Health Insurance , club membership.

Member Conversation

Life Stage

Starting out?

• Mid life?

• Approaching retirement?

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Life Stages

Now Know Knowledge

Member conversation

Member starting out (age range 20 to 30)

• Is there a pension scheme?

• Can I join?

• If so how much?

• What are the costs like?

• Who meets the costs?

• What do I need to know huge detail

around investment?

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Now Know Knowledge

Member conversation

Members (age 35+)

• Maximising the ER contribution?

• Find out about AVCs

• Financial Wellness - focus on a goal

• Get using the support tools

• Know if I am in the default / self choice - how

each works ?

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Now Know Knowledge

Member conversation

Members (age range 60 + )

• Realistic expectations

• Single Premium Options

• Review of all income sources

• Full financial review

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Now Know Knowledge

Member conversation

Member starting out (age 20 to 35)

• What do I need to know about investment?

• Equity markets are need to deliver growth.

• Markets can be volatile.

• Cant access pot of money until age 50.

• Therefore cant “crystallise” loss or gains

until age 50.

• Losses and gains are “notional” until that

point.

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Investment

Member conversation

Mid Life (age 35+ )

• What do I need to know about investment?

• Equity markets are still needed to deliver

growth.

• Markets can be still be volatile.

• Age 50 is coming closer.

• “Crystallisation” event on the horizon.

• Losses and gains may be realised at age

50.

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Investment

Member conversation

Member approaching retirement

( age 55- 65)

• What do I need to know about investment?

• Firstly what do I need to know about my

options

• How do I use my money?

• ARF or Annuity ?

• Choice will determine investment strategy.

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Investment

From joining plan to

age 50 investment will

need a mix of equities

and diversified assets

Illustration of Lifestyle Glide Paths

At age 50 members

asked to choose

Annuity or ARF

route – ending up

with these asset

positions

at age 65

70.00%

30.00%

Growth Phase

Equities Diversified

Phase 1

Phase 270%

30%

Annuity

Bonds Cash

50%

20%

30%ARF

Equities Diversified Cash

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Lifestyling

Glide path

• based on the general principle that investment needs change as members approach retirement.

• Moves individual investors automatically through different asset classes through the various

stages of their working lives.

• Provide a smooth glide path to retirement for those seeking to purchase an annuity at retirement.

This process is automatic, removing the responsibility from individual members to make such

decisions, or

• Maintain performance seeking investments to accommodate members who wish to retain

ownership of their assets in retirement, by means of an ARF (Ireland) or Income drawdown (UK),

and can withstand the volatility of markets because of the longer investment term.

6587

25 35 45 55 65 75 85 95

Annuity and ARF’s / Income drawdown have different investment time horizons

ARF Annuity

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Long bonds a match for annuities

€0

€2

€4

€6

€8

€10

€12

€14

€16

€18

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Feb-09Nov-08Aug-08May-08Feb-08Nov-07Aug-07May-07Feb-07Nov-06Aug-06May-06Feb-06

Annu

ity C

ost

Bond

Yie

lds

Date

Bond Yields vs. Annuity Costs

Bond Yield Annuity Cost

Annuity Cost is the cost of providing €1 of pension for a single life male aged 65 with no increases post retirement

•Interest rate increases cause a reduction in bond values.

•Interest rate increases make annuity purchases cheaper.

•Interest rate reductions cause an increase in bond values.

•Interest rate reductions make annuity purchase more expensive.

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Example of annuity matching

Member

• Age 65

• €100,000 in Bond Fund

• Annuity rate –say 4.5%

• Annuity /annual pension is €4,500 pa

If Interest rates rise

• Value of bond fund falls to €90,000

• Annuity rate increases to 5%

• Annuity /annual pension is €4,500 pa

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ARF / Income Drawdown Investment strategy

Key drivers for ARF investment strategy

• Money passes to spouse and then family on death -therefore likely to be invested for

long period of time.

• Total time horizon for saving may exceed 60 years - from joining at age 25 to date of

death.

• Drawdown of 5% pa –usually taken in monthly instalments - Therefore sale of

investments is gradual rather than single sale – which is the case for annuity purchase.

• Average Life Expectancy to age 87.

87

25 35 45 55 65 75 85 95

Potential investment time horizon may exceed 60 years

ARF

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ARF / Income Drawdown Investment strategy

Key drivers for ARF investment strategy

• No single date for sale of assets - investments sold in 324 instalments

from age 60,or 264 instalments from age 65 (typically).

• Potential to invest in performance seeking assets.

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Member Conversation

A member conversation must be ‘relative’

Their Life Phase

Age

Salary

Personal circumstances

Key messages for each phase

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Now Know Knowledge

Employer Conversation

• How do they see their role ?

• Participation levels ?

• How do they heighten awareness & understanding ?

• Deal with adequacy?

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Employer Conversation

How do they see their role ?

• Responsibility towards employees ?

• Paying in a contribution amount – full stop ?

• Contributions decided locally or in a parent Co abroad?

• Increase to State Pension – do they want staff working until age 68?

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Employer Conversation

Participation levels

• Less than 50% of workforce

participating in Ireland

• Remainder depending upon the

State

• Low proportion of young people

• How does their scheme measure

up if voluntary ?

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Source: OECD Review of Pensions Systems

Ireland 2014

Employer conversation

Promoting Awareness & Understanding

• Pension scheme - significant investment

by Employer

- Moral and financial

• ‘In house’ champion ?

• Easy access in house to information for

employees?

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Employer Conversation

• Make it easy to join

• Easy to invest – default strategy

• Easy to increase contributions

Providers

• Cover basic principals in main

communications package

• Bite sized info covering each topic

• Option for more information if requested

(whilst meeting disclosure obligations)!!!

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Plan design

Employer Conversation

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IAPF survey – 6,430 DC schemes

(2014)

Average Employer

Contribution rate

( of salary)

5.7%

Average Employee

Contribution Rate

5.4%

Total Contribution 11.1%

Irish Life’s Retirement

Readiness report (2014) .

Contributions

Employer Conversation

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ER further supporting Adequacy Issues

Make it compulsory or Voluntary on an ‘opt out’ basis ?

Move to a ‘tiered rate’ based on service and or age ?

‘Automatic’ increased ER + EE rates?

Increase the minimum ER level ?

Willing to commit to a higher ER rate for older lives (age 55+)

ER Single Premiums before retirement ?

Interaction Points

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IBM Global Business Services

Report published- Jan 2010 on Retail Insurance

Survey over 20 countries - 21,740 consumers

‘ Interaction Points ‘

Personal

Print

Email

Social Media

Smartphone

Call Centres

Websites – Portal sites

Life products are more complex

‘Personal interaction points are generally

preferred’

Interaction Points

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Current ‘Personal’ Interaction points ?

Typically …

Group Work site presentations

Mixed audience ….too many messages !

Logistics around freeing people up

In house support to encourage attendance

One to ones Clinics

One to one clinics

Large workforce

Time constraints

Members not willing or asked to pay for a

consultation within the workplace

With

Group meetings

One One

Interaction Points

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Presentations

Short & focussed

Starters / existing mid age / closer to retirement

On site presence

Drop by hub

High visibility…volume traffic points

3 minute focussed chat

Direct to additional supports – get members registered / download apps

Interaction Points

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Consumer interaction preferences in the future ?

Mix of interaction points needed to meet the modern consumer’s

needs

Make ‘pension savings’ real !

More streamlined website portals

Tailored messages to the demographics

age

sex

Salary cycle / bonus to the demographic

• -

Integrate ‘social media’

Interaction Points

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e.g . Text alerts

Your pension contributions were invested to-day

Congratulations your fund has reached X to-day

Reminder increased contribution opportunity

e.g. 30/40/50 birthday ,31st October

Your Trustees have added new investment options

Check out the Budget update on line

‘What’s app‘ group for Co pension ?

U Tube

Tutorials

Face time

The Pension Conversation

How do people view retirement ?

It’s an age thing !

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https://www.youtube.com/watch?v=XDtmjabVxyY