Employee Pension Options – What Is the Employer's Role

Employee pension options – what is the employer’s role?

12 September, 2019 With you today

Richard Birkin Mark Powley Jonathan Summerlin Head of DC Pensions Head of DC Head of Defined Benefit & Wider Savings Investment Advisory Member Options T: +44 (0) 7779 280720 T: +44 (0)7795 644573 T: +44 (0)7967 308112 E: [email protected] E: [email protected] E: [email protected]

Document Classification: KPMG Public Agenda

DC/workplace savings landscape

Changes in DC default strategies

In-retirement investment pathways

Retirement activity and support

DB transfer options and activity

Document Classification: KPMG Public DC/workplace savings landscape DC workplace savings landscape

DC delivery vehicles DC providers 100% To provide some Insurance Companies context, Automatic 80% — Aegon — Aviva Enrolment has — Standard Life — Legal & General increased the number 60% — Fidelity — Scottish Widows of members of DC schemes to around 40% Employee Ben Cons (Master Trust) 15 million. Almost 20% 13.5 million of these — Aon — XPS are in DC 0% — Capita — Willis Towers Master Trusts. — Mercer Watson 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Trust Contract Others — Smart Pension — Nest 2016 2017 — The People’s — Salvus Master Trust 5% 10% Pension — SEI Own Trust 46% 47% Note: The above does not represent an exhaustive list of Source: The Pensions Regulator Source: Pensions and Lifetime Savings Association (“PLSA”) providers in the market scheme return data 2018/19

Document Classification: KPMG Public Master Trust Authorisation

44 Some of those already authorised by the Regulator

LifeSight Crystal Bluesky Aviva

Legal & General Mercer Standard Life

22 Fidelity Capita Aon Smart Pensions

16 The People’s Pension SEI

National Pension Trust

Authorised Applied and Exiting the awaiting market response Note: The above does not represent an exhaustive list of providers that have applied for authorisation

Document Classification: KPMG Public Integrated workplace savings

General investment account

Debt General investment Employer consolidation account contribution

Employee contribution Invest in DC General investment account account

Document Classification: KPMG Public Changes in DC default strategies Realised risk and return, Growth phase return performance, Providers’ 1 year to 30 June 2019 30 June 2019 investment 16% 12% Fidelity Aon capabilities – L&G 8% Mercer LifeSight Return Return Aviva Growth 4% Aegon phase 0% 0% 2% 4% 6% 8% 10% 12% 14% 16%

Annual volatility

Asset allocation 31 years from retirement

100%

50%

0% LifeSight Aon Fidelity Aviva Aegon Mercer Standard NEST L&G Life Passive Developed Equity Equities – Global SmallCap Emerging Markets Equity Infrastructure Equity Private Equity Property Commodities DGF High Yield Debt Emerging Markets Debt Absolute Return Bonds Corporate bonds Government Bonds Cash

Source: KPMG and the providers © 2019 KPMG LLP, ©a 2019UK limited KPMG liability LLP, apartnership UK limited andliability a member partnership firm ofand the a KPMGmember network firm of ofthe independent KPMG network member of independent firms affiliated member with KPMGfirms affiliated International with KPMGCooperative (“KPMG International”),International a Swiss entity. Cooperative All rights (“KPMG reserved. International”), a Swiss entity. All rights reserved. 9 © 2019 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Document Classification:Document KPMGClassification: Public KPMG Public Realised risk and return, Retirement phase performance, Providers’ 1 year to 30 June 2019 30 June 2019 investment 16% 12% capabilities – Aon 8% Mercer L&G

Return Fidelity LifeSight Return Retirement 4% Aegon Aviva phase 0% 0% 5% 10% Annual volatility

Asset allocation 1 year from retirement

100%

50%

0% L&G Mercer Aon Aegon Aviva Standard LifeSight Fidelity NEST Life Passive Developed Equity Equities – Global SmallCap Emerging Markets Equity Infrastructure Equity Private Equity Property Commodities DGF High Yield Debt Emerging Markets Debt Absolute Return Bonds Corporate bonds Government Bonds Cash

Source: KPMG and the providers © 2019 KPMG LLP, ©a 2019UK limited KPMG liability LLP, apartnership UK limited andliability a member partnership firm ofand the a KPMGmember network firm of ofthe independent KPMG network member of independent firms affiliated member with KPMGfirms affiliated International with KPMGCooperative (“KPMG International”),International a Swiss entity. Cooperative All rights (“KPMG reserved. International”), a Swiss entity. All rights reserved. 10 © 2019 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Document Classification:Document KPMGClassification: Public KPMG Public Investment pathways Default investment pathways

Introduction from 1 August 2020 of default investment pathways for drawdown products (100,000 retirees a year) Four options to be provided to cater for different broad retirement objectives Support with investment decision for those moving on non-advised basis Full cash investment has to be an active choice

Will not provide optimal outcome for everyone, but aim to avoid retirees from the worst outcomes (running out of money in retirement)

Document Classification: KPMG Public Default investment pathways – The options

£ £ £ £ £ £ £ £ £ £ £

Leave money Buy an annuity Take money as Cash in all the pot where it is within 5 years long-term income within 5 years within next 5 years

Document Classification: KPMG Public Retirement activity and support Market retirement data

Retirement income decision Retirement income decision by pot size (Oct 15-Mar 18) (Oct 15-Mar 18)

60% 53% 100% 7% 3% 15% 4% 5% 29% 50% 80% 4% 40% 4% 31% 60% 58% 86% 69% 30% 58% 84% 40% 46% 20% 13% 3% 20% 4% 10% 3% 2% 7% 15% 21% 23% 20% 9% 0% 0% 5% Annuities Drawdown UFPLS Full cash Less than £10,000- £30,000- £50,000- £100,000- £250,000 withdrawals £10,000 £29,000 £49,000 £99,000 £249,000 and above

Annuities Drawdown UFPLS Full cash withdrawals

Source: FCA Source: FCA

The drawdown and UFPLS options have also increased in Since pension flexibility was introduced, there has been a popularity since pension flexibility was introduced, with marked reduction in the number of annuities purchased, with Drawdown being the route most members take for pot sizes the majority of members opting for full cash withdrawals across over £50,000. all age ranges.

© 2019 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 15 © 2019 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Document Classification: KPMG Public Workplace at-retirement market

‘Retail’

Standard Life 1825

Hargreaves Royal London Lansdown Wealth Wizards Fidelity Wealth at work International LVE

Legal & HUB Financial Product LifeSight Advice General Solutions

Origen Financial Aegon Services Scottish Widows AVIVA ‘Institutional’

Document Classification: KPMG Public At-retirement risks to trustees and sponsor

Risks of doing nothing Risks of doing something

— Members take “Path of least resistance” — Increased costs and cash out — Implied recommendation — Poor member outcomes (e.g. buying poor — Reputational link to provider(s) in a sector value products) with a poor reputation — Succession planning issues — Company pension spend ‘wasted’

Successfulat-retirement frameworks manage each of the risks to the Trustee and sponsor, as well as those borne bymembers

Document Classification: KPMG Public Workplace savings developments

Increased use Improved real of social media time MI Live Chat to Digital Augmented guidance drawdown reality support and journeys admin Links to banking apps

Additional Integrated ISA personalisation functionality in comms Relevant Increased Stronger member functionality security for segmentation through apps apps

Links to Smart Digital Speakers robo-advice (Alexa, Google Home) Debt consolidation

Document Classification: KPMG Public DB transfer options and activity DB transfer activity – Context

In 2014, the Government launched its freedom and choice initiative; the changes came into affect from April 2015

This government believes in the I want as many people as possible With more choice and support principle of freedom. Individuals to be able to access their pension for individuals and a regulatory who have worked hard and flexibly. That is why the government structure designed to both “saved responsibly throughout “has decided to continue to allow “protect consumers and promote their adult life should be trusted those saving into private sector competition, I am confident that to make their own decisions with defined benefit pension schemes to the retirement income market will their pension savings, and the transfer to defined contribution develop in a way that focuses on reforms I announced at Budget schemes, subject to new the interests of savers.” will deliver just that.” safeguards which are designed to protect the best interests of the saver and the scheme.”

Source: Freedom and choice in pensions: government response to the consultation (July 2014)

Document Classification: KPMG Public DB transfer activity – Context

A significant number of defined benefit members have wanted to take advantage of this flexibility:

Combined transfer 235,000 values of scheme members took DB transfer advice £83bn

Note: Between April 2015 and September 2018 Source: FCA

Document Classification: KPMG Public FCA’s concerns Fewer than half about DB transfers of DB transfers deemed suitable – the headlines by FCA – FCA: one third Professional Adviser LEBC agrees of British Steel to stop transfer DB transfer work unsuitable – Unsuitable – Professional advice prompts Citywire Pensions FCA U-turn on DB transfer assumption – Retirement Planner

Document Classification: KPMG Public FCA’s concerns about DB transfers – The reality

Our work of DB transfers – Oct 2017

— 88 cases reviewed DB transfers – market wide since Oct 2015 data results 06/19 — 47% suitable — 3,042 firms have transfer permissions – 99% response rate — 17% unsuitable to FCA — 36% unclear if — 2,426 provided TV advice between 04/15 and 09/18, to 235k suitable or not scheme members with TVs worth a combined £83bn — 69% of members received a positive recommendation to transfer (60% of firms had a rate of 75% or more) — ‘Triage’ likely overstates the above (although still 55% if triage factored in) — This review was not an assessment of suitability of advice

Document Classification: KPMG Public What employers should be thinking about

Providing/supporting access to financial advice – some decisions: — Do you want to provide/support any access at all, or leave individuals to their own devices. If yes: — Do you want to have a preferred provider(s) and if so, how many? — Who will pay for the member advice and in whole or in part? — If funded, how many times can a member see them? — Will funding only be available for members using the selected adviser(s)? — How will you select the FCA registered adviser? — Will members be encouraged to undertake any form of pre-advice process? — How will the FCA registered adviser’s performance be monitored?

Document Classification: KPMG Public Questions? Thank you kpmg.com/uk

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Document Classification: KPMG Public