Value for money in DC workplace pensions 4 May 2016 Melissa - - PowerPoint PPT Presentation

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Value for money in DC workplace pensions 4 May 2016 Melissa - - PowerPoint PPT Presentation

Oct 16, 2023 151 likes •445 views

Value for money in DC workplace pensions 4 May 2016 Melissa Echalier, Pensions Policy Institute Venue: Central Hall, Aldersgate Room www.pensionspolicyinstitute.org.uk #PPIVfM @PPI_Research Wed like to thank... The sponsors of the value

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Melissa Echalier, Pensions Policy Institute Venue: Central Hall, Aldersgate Room www.pensionspolicyinstitute.org.uk

Value for money in DC workplace pensions

4 May 2016

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We’d like to thank...

The sponsors of the value for money report:

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  • Definition of value for money
  • Factors that influence value for money
  • Value for money in accumulation
  • Value for money in decumulation

Value for money in workplace DC pensions

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There are several definitions

  • f value for money
Office for Fair Trading (OFT) suggests taking into account: Charges Quality, made up of
  • Design and execution of
investment strategy
  • Administration of the
scheme
  • Communication with
members
  • Governance, including
periodic assessments of how well scheme is delivering National Audit Office (NAO) definition Optimum combination of whole-life costs and quality Does not mean always choosing the immediately cheapest option The Pensions Regulator (TPR) definition A scheme offers value for money where the costs and charges deducted from members provide good value in relation to the benefits and services that they receive 4
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  • Value varies in line with pension

membership

  • Value can be subjective, with two

members in identical circumstances

having different definitions

It may not be possible to attain the best outcomes for all members

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  • Value of the pension pot
  • Security of the pension pot
  • Trust in the pension scheme

It is possible to identify three

  • utcomes likely to be

seen as positive by members

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Several players influence decisions around whether a workplace pension scheme offers value for money to the member

IGCs and Trustees
  • Analyse value for
money for all funds and schemes
  • Trustees must do so
with regards to the demographic composition of the scheme The pension scheme Scheme member
  • Value offered by scheme
will to a large extent be judged during decumulation
  • Value will depend on
member’s priorities
  • Decisions made by the
member during decumulation will affect their perceptions of value Employers
  • Select the pension
scheme for their employees 7
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  • Definition of value for money
  • Overview of factors that influence value
  • Value in accumulation
  • Value in decumulation

Value for money in workplace DC pensions

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A feedback loop could work towards governance, administration and communication ensuring that the scheme meets members’ needs

  • Governance
  • Administration
  • Communication
Fund Charges and returns Interaction between member and:
  • Employer
  • Pension
providers
  • Trustees
  • IGCs
Employee behaviour Contribution rates Identify:
  • Transparent charge and return structure meeting
members’ needs
  • Appropriate contribution levels where appropriate
Feedback:
  • Information around the charge and return structure, and
fund performance to members via employers, trustees and IGCs
  • Information around the impact of increased contribution
rates where appropriate 9
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  • Communicate the importance of contribution rates
  • Ensure transparency
  • Set the right default investment strategy for the

membership

  • Ensure effective administration and

communication

  • Challenge and negotiate charges

Good governance can be the lynchpin for driving value

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  • Definition of value for money
  • Overview of factors that influence value
  • Value in accumulation
  • Value in decumulation

Value for money in workplace DC pensions

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  • 16%
5%
  • 6%
50%
  • 28%
  • 40%
  • 20%
0% 20% 40% 60% Retiring later (2 years after SPA) Retiring earlier (2 years before SPA) Facing lower charges (0.3% AMC) Facing higher charges (0.75% AMC) Contributions of 12% of band earnings instead of 8% Opt out from age 30 until age 40

Contribution rate has the biggest impact on retirement income

Impact on private pension income for the median earning man

  • n reaching SPA in 2059, percentage difference from the

baseline

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Employer approaches based on ‘nudge’ and employee engagement can influence contribution levels

Tailored advice is available Information tends to be more generic Approach based on ‘nudge’
  • ‘Save More Tomorrow
(SMarT) in US increased numbers of people saving and amounts saved
  • Auto-escalation is popular
with employers (57% supported idea)
  • Pension savers supported
auto-escalation (60% supported increasing their contributions up to 15% salary) Approach based on employee engagement
  • Where pensions are
presented as part of a ‘Total reward system’ employees are more positive
  • More likely to take
positive actions that result in higher saving Overview of SMarT and ‘Total reward system’ approaches 13
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Employee engagement at age 22 leading to automatic escalation could make a significant increase to pension pots at retirement

Tailored advice is available Information tends to be more generic Pension pot value at retirement for a low earner aged 22 and 40 under baseline scenario (8%), 9% contribution rate and auto-escalation up to 12% (2016 earnings terms) £195,000 197,500 8% contributions 9% contributions Auto-escalation up to 12% contributions +£24,500 13% +£60,500 28% £166,000 £219,500 £175,500 £280,000 Age 40 Age 22 +£9,500 6% +£22,000 13% 14
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  • Charges have decreased
  • Higher charges can be justified by higher returns
  • Neither higher nor lower charges automatically

lead to better outcomes

  • Emphasis on other ways in which these influence

value for money

  • Consistency and distribution of returns may be

important

  • It is important that charges are transparent

Charge level alone cannot be taken as an indicator of outcomes

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Volatility management throughout accumulation can lead to lower downside risk

150% of median 143% of median 207% of median 202% of median 100% 100% 48% of median 53% of median 70% of median 72% of median 0% 50% 100% 150% 200% 250% Equities with lifestyling Volatility-managed £210,450 £220,507

Distribution of pension pot sizes for median earners depending on the extent to which volatility is managed

90th percentile 75th median 25th 10th 16
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  • Definition of value for money
  • Overview of factors that influence value
  • Value in accumulation
  • Value in decumulation

Value for money in workplace DC pensions

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Considerations for individuals accessing retirement income

Pension factors to take into account – accessing savings
  • Ways in which pension
funds can be accessed, e.g. income drawdown
  • Tax-free lump sum
  • Types of annuity (e.g.
fixed, indexed, enhanced)
  • Annuity rates
  • Tax rules
Personal factors that will affect decisions around accessing retirement income
  • Living circumstances (e.g.
single or part of a couple)
  • Factors related to life
expectancy
  • Likely retirement date
Decisions
  • When to retire
  • When to access
retirement savings
  • How to access
retirement savings 20
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  • Members are aware that they need to make active decisions

about decumulation but may not feel equipped to make these

  • Communication and governance are becoming increasingly

important but challenges remain around who will be responsible for this, and how best to present options to members

  • Members may be best served where pension schemes assess

the likely behavior of their own membership to adopt a suitable approach

The pension regime has focused on value for money in accumulation

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A £100,000 pot could run out 25 years earlier than one that is retained in a pension fund

Median duration of pension savings of £100,000 where this is removed from or retained in the pension fund

0% 20% 40% 60% 80% 100% 120% 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 Removed from pension and placed in an ISA Retained in pension fund invested 60% in equities, 40% in gilts Retained in low volatility pension fund Age 20
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£22,400 £8,800 £9,400 £0 £5,000 £10,000 £15,000 £20,000 £25,000

Lives until age 90 Cash withdrawn 60% equity/40% gilts Volatility-managed

For an individual with a £100,000 pension pot, withdrawing the entire pension pot at retirement could lead to a significantly higher tax liability

Tax payable on pension fund for an individual with a £100,000 pension pot who lives until 90 where cash is withdrawn at age 65 and where this is retained in a pension fund 21
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Conclusions

  • It may not be possible for those responsible for scheme

governance to attain the best outcomes for all members

  • IGCs, trustees, employers and providers may have to make

decisions that are broadly in members’ best interest

  • It is important to consider all determinants of value for

money rather than narrowly focusing on charges

  • Extending the role of trustees and IGCs may be needed to

help individuals who are making decumulation decisions

  • Elements such as charge structures should be transparent to

ensure value for money for members

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Barry O’Dwyer, Standard Life Managing Director, Corporate, Retail & Wholesale

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David Bateman, Policy Manager, Department for Work and Pensions

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Andrew Warwick- Thompson, Executive Director The Pensions Regulator

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Doug Taylor, Financial Services Consumer Panel

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Q&A

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