Aon HewittRetirement & Investment
Session #116 May 2016 – San Francisco 19:00 / New York 22:0017 May 2016 – London 03:00 / Beijing 10:00 / Sydney 12:00
Session #2San Francisco 0:30 / New York 03:30 / London 08:30 / Beijing 15:30 / Sydney 17:30
Session #3May 17, 2016 – San Francisco 12:00PM (Noon) / New York 3:00PM / London 8:00PMMay 18, 2016 – Beijing 3:00AM / Sydney 5:00AM
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Today’s speakers
How to ask questions during the webinar
ChairAlison Borland
U.K. Kevin Wesbroom
AustraliaJenny Dean
U.S.Steve Shepherd
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U.S. Guest SpeakerKevin Hanney
United Technologies Corporation
Guest speakers
Australia Guest SpeakerIan Lorimer
UniSuper
U.K. Guest SpeakerMark Fawcett
NEST
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Agenda
Decumulation – Global Overview Market factors making Decumulation more challenging A range of options and approaches across the globe
Decumulation in the U.K. A changing landscape Integrated savings solutions
Decumulation in Australia Welcome to CIPRs The role of advice
Decumulation in the U.S. Lower savings increase the challenge Employees and employers faced with a myriad of options
Guest Speakers Kevin Hanney, United Technologies Corporation Ian Lorimer, UniSuper Mark Fawcett, NEST
Key learnings for global plan sponsorsQ&A with guest speakers
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5
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3
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Past and recent market factors have presented increased challenges…
Bond yields have been falling for more than 20 years.
The amount outstanding of bonds trading with negative yields reached $6.9 Trillion as of April 2016.
Source: ECB, J.P. Morgan.
Source: Bloomberg, Datastream
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…future returns and longer lives are making the problem worse.
Source: McKinsey Global Institute: Diminishing returns: Why Investors may need to lower their expectations
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12
14
16
18
20
22
1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Male life expectancy at age 65 by country, 1960-2050
Australia Canada France
Japan UK US
Source: Historical data on life expectancy OECD Health database 1960-95. Recent data and projections of life expectancy Future based on the United Nations Population Division database, World Population Prospects – The 2008 Revision.
Compared to the last 30 years, real returns in global equities and bonds over the next 20 years are predicted to be materially lower…
…while life expectancies in many countries continues to climb, creating the need for pension dollars to stretch even further.
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The perfect decumulation solution?
What features would a retirement solution need to have?
Consistent pre-and post-retirement investment
strategy
Economies of scale
Clear, engaging and flexible
Encourages regular member
engagement
Available to all fund sizes
Easy to implement and
monitor
Investments
Range of investment options and
target outcomes
Costs
Institutional not retail costs
Member Experience
Range of tools and support
Administration
Seamless transition from accumulation
Coverage
Suitable for a range of legacy situations and requirements
Implementation
Little/no additional cost
Income
Some level of guaranteed or certain income
Buckets for growth and spending
Inflation protection
Lifetime advice available
Multi-channel communicationTax efficientFlexibility in
times of need
Integrated with other savings
and state benefits
Integrated with long term care,
disability benefits, aged
care
Source: Aon DC Global Community
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Retirement expectations are changing – what do members want?
How members want to spend their retirement income, compared to how they need to spend their retirement income
Source: UK Aon Hewitt survey with Cass Business School
Will take money as soon as possible
Early spender10%
Continue to invest and dip in as
and when
Flexibility foremost15%
Continue to invest to generate
stable income
Steady Spender35%
Set aside for long-term
care or bequest
Residual Required5%
Secure guaranteed income via an annuity
Certainty-Seeker35%
Years in retirement
Expe
ctat
ion
and
inco
me
sour
ces
Travel
Repay mortgage
State Pension
Base Pension
Tax
free
cas
h
Part time work
Help children / grandchildren
Care costs
Travel
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Each country is coming up with different solutions schemes
Country Lifetime Annuities Income Drawdown Lump Sums
Australia Allowed, but very little demand Allowed. Main options are account-based income streams Allowed and relatively common
New Zealand Allowed, but there are no annuity providers in New Zealand Allowed Allowed and relatively common
U.S. Allowed, but demand is weak. 9% of retirees have significant annuity income Allowed Allowed
Canada Allowed, with significant demand Allowed, although with restrictionsin some cases Limited for DC pension schemes
IrelandRequired, unless income can be shown to the above threshold to qualify for income drawdown
Allowed given sufficient incomeRestricted to 25% or 1.5 timesincome as tax-free lump sum (taken by most people)
Switzerland Default option, and subsidised Not allowed Allowed, but discouraged
Denmark Unlimited deferred annuities Restricted amounts can be allocated to term annuities Allowed
Netherlands Mandatory Not Allowed Not Allowed
Singapore Mandatory Not Allowed Not Allowed
Chile Default Option Restricted to ‘programmed withdrawals’ Not Allowed
U.K. Formerly primary option. AllowedCurrently restricted to ‘capped drawdown’ and ‘flexible drawdown’’ products.’
25% tax-free, taken by most people. Expected policy is for whole pot to be available, taxed at marginal income tax rates after 25% tax-free allowance
Source: UK Financial Conduct Authority: The Retirement Income market – comparative global research
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U.K.Kevin [email protected]
Decumulation in the U.K.Navigating a shifting landscape
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George Osborne – pensions surprise merchant
Base Annuity Income
Drawdown IncomeLater Life (Deferred)
Annuity
Drawdown Income
Combined drawdown and annuity strategies may offer optimal at retirement options
100 years of “compulsory“ annuity purchase blown away at a stroke
“Let them buy Lamborghinis” Give them 40 minutes of guidance
(not advice) And now (2016) £500 of tax free
pensions advice
Source: Evalue
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At retirement options – what flexibilities are schemes offering?
More cash (UFPLS)? Accessing drawdown solution?
Source: Aon Hewitt UK DC Survey 2015
A majority of schemes are considering or offering extra cash flexibilities to their members
A majority of schemes are considering or offering drawdown flexibilities to their members – but not in their own scheme!
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Decumulation driven changes to investment strategy
Developing themes in DC investment product development
“To & Through” strategy
ETFs to provide
exposure to more niche strategies
Drawdown focused funds
New style annuity
products
Low cost multi-asset
funds
Volatility controlled
funds may have a role
More diversification
within a passive play
Greater sophistication in fixed income
investing
Source: Aon Hewitt
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Post budget(s) thinking – integrated savings solutions
Share save£6,000 pa
Your savings allowance
General savings£5,000 pa
Registered pension£10,000 pa
Share incentive plan
£8,000 pa
Corporate ISA£20,000 pa
LifetimeISA
£5,000 pa
For illustrative purposes only
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Decumulation in AustraliaAiming for more comprehensive solutions
AustraliaJenny [email protected]
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Snapshot of Australia
Total assets as at 31 Dec 2015AUD2 trillion
1 ASFA Retirement Standard – December 20152 Australian Bureau of Statistics 2013-2014
Comfortable retirement income1
Single AUD43K paCouple AUD59K pa
Average balance of ages 60-642
AUD293K AUD138K
Recommended Target Balance1
~AUD545K single~AUD640K couple
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Welcome to Comprehensive Income Products for Retirement (CIPR)
Flexibility
Adequacy
Risk Mitigation
CIPR
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Potential Design ConceptIn
com
e (p
a)
Age75 85 9565
Debt
Holiday
Aged Care
Flexible Cash
Regular Income
Longevity Insurance
Premiums
For illustrative purposes only
Bequest
Payments
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Role of Advice
For illustrative purposes only
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Decumulation in the U.S.Lower savings and many options
U.S.Steve Shepherd [email protected]
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U.S. Retirement Income Scenario – Employees Not On Track
Source: Aon Hewitt’s The Real Deal, 2015 Retirement Income Adequacy at Large Companies; based on results for full-career contributing employees who only have a defined contribution plan available for retirement income accumulation.
Mul
tiple
of e
ndin
g sa
lary
Need Reality
7.0x pay
4.1x pay
11.1x pay
Income Gap
Less than 1 out of 5 DC-only participants is on-track for a
reasonably adequate retirement
Average participant needs 11.1x pay at age 65 for retirement income, yet
DC-only participants fall short
10
8
6
4
2
0 Reasonably adequate retirement defined as being within 2x pay of projected retirement needs
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67%Feel supporting the process to have participants
convert balances to lifetime income is very or moderately important
48%Are very likely or moderately likely to address
ways to encourage lifetime income in 2016
In-plan annuity or insurance product
Prevalence of Tools and Products to Convert Savings to Lifetime Income
7%
12%
Facilitation to purchase annuities outside plan
In-plan managed account with drawdown
30%
45%
Distribution option to receive monthly payments
Online tools or apps to help see how much to spend
66%
Sponsors Retirement Income Integration
Percentages shown are those who answered “Already Offer”Source: Aon Hewitt’s 2016 Hot Topics in Retirement and Financial Well-Being Survey
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U.S. Design Solutions Today
Type of Option
Managed Payout – Existing Funds
Managed Payout -– New Fund
Deferred Guaranteed Withdrawal Benefit
Deferred Guaranteed Income Benefit
Deferred Fixed Annuity
Traditional annuity – End of plan
Annuity Platform
Longevity Insurance
Scheduled Payout
Ongoing GuaranteedIncome Purchase
Lump Sum AnnuityPurchase
Longevity Insurance
Income Category
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Potential Future
Where are you in your Thinking?
Market Driven Advisory Framework Individually Designed Broker Model Greater Regulation?
Retail View
Sponsor Driven Plan Integration Institutional Framework Fiduciary Governance Government Incentive?
Paternalistic View
Provider Driven Advice Model Institutionally Vetted Open Architecture The Great Unknown?
Exchange View
Outcomes Will Depend On Each Organization
Available Today Available Tomorrow?
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Kevin HanneyUnited Technologies Corporation
U.S. Guest Speaker
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United Technologies Corporation - Overview
United Technologies provides high-technology systems and services for the fast-growing aerospace and building industries.
*Adjusted net sales and adjusted diluted earnings per common share from continuing operations are non-GAAP financial measures. Download the corresponding measures calculated in accordance with generally accepted accounting principles (GAAP) and a reconciliation of the differences between the non-GAAP and GAAP measures.
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United Technologies Corporation – Plan Highlights
Plan Highlights Detail
2 Savings Plans - Union & Non-Union 55,000 Eligible
Active/Inactive with a balance 51k / 60k
Participation - Union & Non-Union 72% / 95%
Assets $20 Billion
Roth Contributions & In-Plan Conversion option Yes
Lifetime Income Strategy Annuity Option (LIS) QDIA
% of Participants with Balances in Lifetime Income Strategy 22%
Assets in Lifetime Income Strategy >$800M
Permit Rollovers Into Plan for Retired/Terminated Employees Yes
Source: Aon Hewitt plan data as of 3/31/16
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United Technologies Corporation – Lifetime Income Strategy
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Ian LorimerUniSuper
Australia Guest Speaker
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FlexiChoiceA
ccum
ulat
ion
phas
e
Formula-Linked benefit
Lifetime pension
Market-Linked benefit
Building a lump sum
Investment options
Formula-Linked benefit
Building a lifetime income
Formula based
Insurance
Dra
wdo
wn
phas
e
Formula based
Reversionary option
Minimum payment period
TPD
Death
Income Protection
Market-Linked benefit
Account based pension
Investment options
Income Replacement
Source: UniSuper, as of May 2016
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Mark FawcettNEST
U.K. Guest Speaker
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Welcome to NEST and Mark Fawcett
NEST is the workplace pension set up by the UK government– A trust based defined contribution (DC) pension scheme that UK
employers can use to meet their workplace pension duties (auto-enrolment or soft compulsion). Has to accept all employers of any size
NEST is an easy-to-use, low-charge scheme.– Annual management charge (AMC) of 0.3% plus– Contribution charge of 1.8%
NEST is the scheme that can’t say NO!– Over 70,000 employers so far, 2.5 million members– Last week nearly 4,000 employers signed up to use NEST !!
Mark Fawcett Chief Investment Officer of NEST Responsible for innovative investment design Target Date Funds BUT no shocks in early years Now consulting on how to address retirement, after Freedom and Choice
Source: NEST
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NEST Thinking – the new spending default to match the building default
Regular fixed income Certainty that income won’t run out Protection from stock market falls
Lump sum access Pass on money Flexibility to change
What do people want in the new framework?
Source: NEST
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The NEST proposed approach
For illustrative purposes only
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Closing Remarks
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Closing remarks
Global DC assets are growing rapidly – $10 Trillion
Developed economies are ageing – the baby boomers are retiring!
Global challenges for spending retirement savings
Need to balance security with flexibility, and address outliving your savings
Individuals will need support with increasingly complex decisions
Individuals will need help with their decumulation decisions. Where will that help come from?
Source: OECD; Aon
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More from Aon
Webinar slides will be shared with all attendees by email Additional Global DC Retirement Thought Leadership can be found on our website:
http://www.aon.com/unitedkingdom/retirement-investment/defined-contribution/dc-global-thought-leadership.jsp
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Aon Global DC Footprint
Risk & HR Solutions
DC Mastertrusts in UK, USA, South Africa, Australia, New Zealand, Belgium (pan-Euro). Preferential terms with preferred insurers in a number of countries
Administer benefits for more than 23 million participants around the globe, with $2 billion in DC payments monthly
Investment consulting services for $4.2 trillion in assets globally
Pay and benefits survey data covering 180 countries, more than 2,550 positions and more than 5 million incumbents
Place more than $110 billion of premium flow
Aon presence in over 120 countries with more than 66,000 employees in 500 offices
Source: Aon Hewitt as of May 2016
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Aon Hewitt is a global leader in human resource consulting and outsourcing solutions. The company partners with organisations to solve their most complex benefits, talent and related financial challenges, and improve business performance. Aon Hewitt designs, implements, communicates and administers a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies.
With more than 30,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients and their employees.
© 2016 Aon Hewitt LimitedAon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales. Registered No: 4396810.Registered Office: 8 Devonshire Square, London EC2M 4PL. www.aonhewitt.co.uk
About Aon Hewitt
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Legal Disclosures and DisclaimersInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc. (“AHIC”). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto. This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on AHIC’s understanding of current laws and interpretation. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon AHIC’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. AHIC disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. AHIC. reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of AHIC. Aon Hewitt Investment Consulting, Inc. is a federally registered investment advisor with the U.S. Securities and Exchange Commission. AHIC is also registered with the Commodity Futures Trading Commission as a commodity pool operator and a commodity trading advisor, and is a member of the National Futures Association. The AHIC ADV Form Part 2A disclosure statement is available upon written request to:
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