ABI Chairman Paul Evans' speech at ABI Retirement Conference 2015: A New Retirement - Funding Life After Work
25 February 2015
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Good morning. It is a pleasure to be here today to open this conference and I would like to thank you all for making the time to be here.
The concept of retirement, life after work, or even work during retirement, has never been more relevant. As we all know only too well, last year, in one stroke, the Chancellor transformed the whole concept of retirement planning by removing any compulsion to buy an annuity when we retire. Instead, allowing society to draw down on their pension savings as they see fit.
This was a very bold move, and one which could have a profound effect on how we think about retirement saving, and ultimately may help improve the savings ratio, which today still languishes at unviable levels. No longer should we fear that our hard earned savings might have to buy an annuity when yields are low; no longer should we fear that we might die too soon after buying an annuity, and lose the ability to pass on that accumulated wealth to our children.
But equally we must, and of course we do, recognise that those worries are simply replaced by another, arguably more profound concern – what on earth should I do to ensure my money lasts long enough?
And this is the context that sets the scene for today’s conference, which will look at:
- the impending April deadline;
- lessons to be learned from experiences around the world; how to foster better industry engagement; and ultimately,
- what the future holds for pension products.
Later, you will also hear from the ABI’s new Director General, Huw Evans, who will be summarising those challenges we face in getting ready for April and just how important it is that we get it right.
Ahead of these sessions, allow me to set the scene by a statement of the bleedin’ obvious - these reforms really are a radical step, which, if implemented well, could transform the retirement savings agenda for the benefit of society. However, they also present challenges in the short, medium and long term that we, as an industry, simply must address –
- through promoting these new freedoms to encourage increased low-cost saving
- through innovating our products and customer experiences to meet changing customer needs and to keep them engaged in the experience of saving; and
- through taking explicit actions to rebuild trust in this great industry of ours.
But of course these were reforms which by their nature came without consultation, next to no notice and therefore little developed thinking on the practical consequences for industry, for Government, or indeed regulators. As we fast approach implementation deadlines, many of us in this room and at the ABI have been tearing out our hair in search of the great many details that had to be concluded some months ago to assure a smooth launch, yet were outside this industry’s control.
And let's face it, there is a good degree of social experiment about these reforms. All parties are doing their very best with what we have, but I'm sure that over time, lessons will be drawn from customer behaviours post April.
Will it prove realistic, for example, to allow people to have just one, thirty minute conversation as they near retirement and expect them to make an informed decision about the retirement options open to them for the rest of their lives? These are complicated decisions because the safety net of a guaranteed income for life is no longer the default option, and a society, poorly educated on how to manage their finances in retirement, may well need more than a 30 minute chat – personally, I think this will need to be revisited at some point by the next Government.
Beyond the short-term implementation pressures we face today, how we look beyond April collectively as an industry, is crucial. More broadly, we must understand and draw lessons from the past but not be stuck in it; we must build on the knowledge and expertise that we undoubtedly have; and look to securing our role as the trusted partner in people’s financial security both before and during their retirement.
Within the ABI, we too must become a more forward looking organisation, one which is helping to shape the market of the future. To achieve this, the ABI must also take care to reform. Pension savings and retirement is no longer the sole domain of insurers. The ABI must represent the wider industry, an industry which has developed new business models not considered ‘insurance’, and which has seen new entrants who don’t consider themselves insurers. To serve its members, and secure wider appeal, the ABI must address the full retirement savings market, no matter the business model – because to be frank, the customer just doesn’t understand, nor care about which model they are sourcing solutions from.
But for today, let's start with the question of whether people are saving sufficiently for their retirement given how long they might now expect to live.
It is worth remembering that Britain’s first state pension was introduced in 1909 by Lloyd George, and offered an initial payment of five shillings a week to all retired workers over 70 who had been earning less than £31.50 per year.
Whilst it was considered radical at the time the truth is, of course, that very few people lived past 70 years of age in 1909. Fast forward to today and one in three babies are expected to reach 100.
People have been conditioned to see a comfortable retirement as an entitlement, having paid into the state system throughout their working lives – the state pension has become the hallmark of a civilised society. But the truth of course is that such an entitlement from the state is simply unaffordable in the face of an ever increasing and ageing population.
Even those who have been conditioned to save for their retirement through the workplace descend from a generation whose grandparents retired with a comfortable defined benefit pension – more of a ‘time served’ model. Today’s working population will rely almost entirely on defined contribution schemes – what you get out is determined from what you put in - and so the need to encourage sensible, prolonged, saving is now more critical than ever. Pension saving is, after all, simply deferring part of your salary for when you no longer work.
And this clearly has not yet struck home – because over the long term, our savings ratio has fallen – from a peak of 14% of disposable income in 1980 to around 7% today. Put simply, if this is not improved, then society will simply not enjoy financial security in their retirement regardless of the new options now open to them.
This is the uncomfortable truth, and good cause therefore to consider again what can be done, by Government and by industry to promote saving beyond they key auto-enrolment initiative.
We must all embrace these new freedoms to reframe society’s savings philosophy. We must share the message that it is safe to save, and that it is a personal responsibility.
And whilst, it is Government’s challenge to provide a stable framework that fairly incentivises long term savings, it is our role to provide the products and services in which people can entrust their savings.
To achieve that, our watch words must be INNOVATION and TRUST.
We must innovate so that managing your finances as you save, and as you retire, is as intuitive as other elements of our day to day lives. We need to simplify what we do, make it easier to understand, and hen deploy it in a way our customers can engage in – through mobiles and tablets – not reams of unintelligible paper.
If we don’t, others will. I mean, who would have thought that a company which started life as an internet search engine would today be pioneering driverless cars?! What God given right do we have to serve this market? If we do not innovate, we will be pushed aside.
We’ll also be pushed aside if we do not rapidly re-earn the trust lost over the past decades – decades during which the business model was quite different due to the impact of adviser commission; and yet the legacy from which is an open sore which continues to undermine trust in the value for money of what is now a completely different value proposition. That our sector has lower consumer trust than the banks after all their troubles is embarrassing; that we are trusted less than estate agents is frankly humiliating!
Social media, customer online reviews, peer to peer recommendations – we operate in a digital world where the consumers’ voice has never been louder. The ability to track everything, in the moment, on your Iphone, transparent charges, easy access, easy switching, engaging experiences – these are all things which customers now take for granted and will expect from us to help them engage first in savings, and then in retirement.
Moreover, customers have grown to expect their loyalty to be rewarded through product upgrades, and assurances they are paying the lowest tariff. A customer buying a new mobile phone fully expects that after a few years they will be offered an upgraded phone, and the latest tariff deals.
Wouldn’t it be wonderful if we could upgrade our customers to our latest pension product offering? OK, there would be commercial challenges to consider when it comes to some of our legacy products, but surely that would be offset by a reduction of the rampant estate of IT systems many of us maintain. Instead, at the very notion of an upgrade, regulation bites with a new advice point and a mountain of approvals.
I believe that such an upgrade capability merits a closer look - certainly the cost benefit analysis says this should be in our armoury. We would be able to offer existing customers our latest digital products and lower charges, whilst rapidly accelerating the decommissioning of old systems and reduce our costs.
I am very proud of our industry and I am passionate about the role that we play in society. Our social purpose is a clear and noble one – but we must work harder to preserve it by innovating our products and business models, and by re-earning trust in what we do, and how we do it.
Likewise, Government has made a bold step, but the next administration will have to work just as hard to build a stable and sustainable environment from which to nurture long term saving and help society plan their retirement.
That's it from me. Thank you for listening.
I hope you all enjoy today’s conference.
I would like to thank the team at the ABI for all their hard work in putting this conference together; all our guest speakers; and our sponsors KPMG.
I would particularly like to thank, and indeed welcome Steve Webb, the Minister of State for Pensions, who will be joining us on stage shortly.
I hope you enjoy the day, and will now hand you over to your host – Andrea Catherwood.