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Otto Thoresen towards a new retirement


Society of Pensions Consultants annual conference

[Check Against Delivery]

Otto Thoresen Good Morning,

All of you in this room are committed to the successful delivery of UK pension reform.

You are helping employers, big and small, set up automatic enrolment schemes, and you are providing them with much needed advice and guidance.

You all know, better than most, how the 'pension revolution' is playing out on the ground.

My perspective is as someone who has been involved from a life and pensions insurer's point of view for many years. And as ABI Director General, I continue to work hard to address some of the practical challenges of the current system and open the debate on the longer term issues we face.

And that's what I'd like to talk about now.

We're over a year into auto-enrolment and in 2013 the subject of pensions has managed to dominate the political, regulatory and news agenda.

As millions are enrolled, important questions are being asked about how the system is working for them now and how it will meet their future needs.

As an industry we have been listening and acting.

Contract based Defined Contribution schemes originated from the pension plans of the 60s and the 70s. They were aimed predominantly at the self-employed and those in 'the professions' who didn't have access to Defined Benefit schemes.

They evolved (through the personal pension legislation of the 80s) into the group personal pension schemes of the 90s, and the new post pension reform contract DC schemes of today.

But not all aspects of the DC pension system have evolved at the same rate.

This morning I will spend quite a bit of time on the 'decumulation' phase of pension saving, because I think it is this area which needs particular focus as we look ahead to making pension reform work.

The UK savings agenda is one of the most important public policy challenges of our generation.

The insurance industry wants to contribute fully to making the pension reform policy response a success.

So throughout 2013, the ABI and its members have delivered a sustained effort of change.

Change that makes a difference to customers.

  • Helping them to shop around for the best annuity deal
  • Making it much easier for commentators and customers to compare the annuity rates of all providers on the open market
  • And bringing more transparency on pension charges.

And while we have focused on today, we have not lost sight of tomorrow.

We're doing some big thinking on the further reform needed for savers and retirees of the future.

What will be their most pressing needs and how do we adapt to meet them?

For example, the increased likelihood of long-term care in their retirement years.

How best do industry, Government and regulators respond to helping people fund this?

How will the development of enhanced annuities that are increasingly personalised and underwritten affect the retirement income decision process people go through?

And how will we deal with the sheer numbers of individuals we will see approaching retirement with a defined contribution pot they want to convert into an income for their later life?

We are moving into a world where people will demand more flexibility from retirement income solutions, and as a result, they will have more choices to make.

So as the market changes forever, how will we help people get good outcomes at retirement?

Particularly when we have not yet really addressed the contradiction between nudging people to save through inertia and wanting them to engage and take ownership of their futures.

These are the big challenges we face.

But there will be opportunities too.

Firstly, employers will be far more actively involved than they are now.

So they will be well aware of their employees' imminent retirement and will be dealing with pensions decisions alongside other human resource issues.

Next, the provider - whether it is a large insurer, NEST or a sector wide collective scheme - will, in most cases, have a long-term relationship with the employer and their employees.

With auto-enrolment, it is likely that the employee will have consistently saved right up until their retirement and saved more, as the years have passed, as a proportion of their salary.

And, for all these reasons, workers will probably accumulate a significantly bigger pot than is currently the case, particularly with a pot-follows-member solution.

And, as I've said, they are likely to have a wider range of options available to them at retirement, and their income calculation will almost certainly extend to a consideration of total assets, rather than just the pension pot.

So there will be more people with bigger pots making more complicated decisions.

So finding a way for all of these people to access financial advice and guidance will be essential, and there are opportunities for the workplace to play a big part in making this work effectively.

It is clear that we will need a different approach.

The pension industry will have to respond to demand for increased choice and flexibility.

And Government, will have a role to play working with the industry to ensure that the millions of people it has automatically enrolled are prepared for and guided through the decisions they will have to make at retirement.

And the regulators (all three of them) will have the dual role of supporting the pensions and advice industry to deliver products for the changing needs of employees, and making sure employees are able to get the advice and guidance they need to get the best outcomes.

At the ABI, we want to hear from everybody who has something to say about how this new retirement market should operate.

The ABI at-retirement review

So we have launched a comprehensive review of the UK's retirement needs - the first review of its kind.

We are asking questions about how effective current policy will be at catering for what will be more dynamic needs.

And looking at how current products will stand up to future requirements and what changes are needed.

We need to address how people view their retirement prospects - or should I say lack of retirement prospects

One in five workers think they will never retire according to an ABI consumer survey.

We need to create a world where people are confident about their financial position in retirement, not concerned and fearful about it.

Actuaries, like me and some of you, will know a lot about life expectancy. But the Office for National Statistics predict that by 2030 we can expect the number of people aged 65 or over rise by nearly 50% to just under 16 million - equal to the entire population of the Netherlands.

And rising life expectancy means that increasingly, people will be drawing pensions for longer than they are paying off their mortgage.

So we are inviting views from far and wide - consumer groups, the public, charities, health support groups, pensions experts, think-tanks, unions and politicians.

And I will encourage you all to contribute your thoughts, via the ABI website.

The ABI pension tax incentivisation principles

Our review looking at in retirement solutions is part of wider work we are doing to identify exactly where we need radical reform to support the UK savings agenda.

One very important area is the way in which the tax system works for pension savers.

Saving more for longer makes the biggest difference to someone's outcome at retirement.

Delaying pension saving by just two years can reduce your pension pot by 7%, with the figure rising to 17% for someone delaying for 5 years.

And it's simple arithmetic. 25% higher contributions mean 25% more in a pension pot at retirement.

But times are tough, so how do we convince people to save more?

For auto-enrolment to be a success, we need a pension tax system that better incentivises people to put their hard-earned money away.

So this September, we set out the principles we thought should inform a system that doesn't just reward people for saving, but motivates them to save more.

We think a new system must:

  • Be fairer, simpler and easier for people to understand. The more working people that can benefit, the better.
  • Encourage people, particularly those on low to middle incomes, to save more.
  • Be straightforward to implement, including for employers and the industry.
  • Command cross-party support as a stable long-term settlement which can last a minimum of two Parliaments from implementation.
  • And demonstrate good value for money to the Exchequer by being revenue neutral or lower cost than the current system, without being at the expense of people's overall savings.

We are keen to open up the debate more widely on this important subject.

Driving down costs

And as the industry looks at how the system can evolve to help people save more, let's turn our attention now to the schemes they are saving into.

The DWP recently launched a consultation on capping pension charges.

We accept that as millions are enrolled, Government quite rightly wants to see them saving into schemes that offer good value.

But trying to create a pension system offering good value via state-regulated price caps could have the opposite effect and bring serious unintended consequences.

The OFT were against charge caps. They were concerned about old legacy schemes, some of which had high charge levels, but even then they wanted to ensure that where there were valuable employee benefits in these schemes they were preserved, if that was appropriate.

Pension charges are at their lowest ever levels - an average AMC of 0.51% for new auto-enrolment schemes, according to the OFT.

And it is competition in the market over the last 12 years that has driven charges to these low levels.

So it is important that the DWP Command Paper does not result in a less competitive market and poorer outcomes for scheme members.

Competitive markets are the best way to improve service to customers and encourage good value.

The OFT report raised some important questions about how do this.

It identified the need for continued oversight on the

value employees get from their pension schemes.

And it highlighted that some older schemes set up before auto-enrolment - when distribution costs were much higher - may not be giving people the best value today.

So ABI members have committed to setting up independent governance committees to ensure products are continually reviewed against emerging standards from the Pension Regulator and the DWP.

And so we can have proper analysis of how older pension schemes are delivering for savers, our members have also committed to carrying out an extensive audit of legacy schemes.

Giving people confidence that they are saving into good value schemes will be crucial to the success of pension reform.

We are in an era when people demand a new level of transparency.

And in response to that, ABI members have, over the last year, driven initiatives to improve transparency so that customers are better equipped with information on pension charges and annuity rates.

  • An agreement with 14 of our largest members will see pension charges disclosed annually, to employees for newly set up automatic enrolment schemes. This disclosure will be in pounds for the first time.
  • We have launched a web tool to help SMEs choosing pensions for auto-enrolment compare the impact of different levels of charges on their employees' pension pots.
  • And in the summer, we launched the ABI 'annuity window', publishing specimen annuity rates to give interested parties transparency on the rates that are available right across the market to help them shop around for the best annuity deal for their circumstances.

We will continue to work with the FCA, the Pensions Regulator, the DWP and the OFT on this important agenda, again with the aim of creating a more effective pensions market for employees and employers.

Helping people get a better deal at retirement

Much of what I have talked on today has been about the auto-enrolment generation.

The changes and reforms I have been discussing will take years to deliver and longer to make a difference.

But each day hundreds of people are making decisions about their retirement income - we need to do all we can to help these people today.

And with only two thirds of people shopping around (48% of them switching) before they set up an annuity, there is a pressing need to address this.

March this year saw the ABI Retirement Choices Code come into force.

Annuities are an important irreversible decision made once and impacting someone's income for their rest of their life.

Our Code makes it easier for savers to make the right decisions.

As part of it, pension providers give customers clear and timely information on their options, encouraging them to consider their choices well ahead of their planned retirement date.

Providers explain the different ways to take a retirement income.

And they clearly highlight the benefits of shopping around and give sources of further advice to help customers.

Altogether, the requirements under the ABI Retirement Choices Code are the biggest set of changes influencing the way people make decisions about their retirement income.

In response to media input we recently made some revisions to the Code. And we will continue to work to make the system better with a full review of the Code early next year.


So, to close, our world is changing and the people within it are changing too - different working patterns and lifestyles and different needs.

Government has started pension reform and we all want to see through successfully.

It will create a new 'auto-enrolment generation', more volume in the market, bigger pots and an increased need for flexible solutions to meet what will be very different lifestyles in retirement.

It is clear that we will need as radical an approach to meet the in-retirement needs of this new generation as the Turner Commission was to pension saving ten years ago.

The ABI and its members intend to be amongst those leading this thinking.

Our review of UK retirement needs invites views from across the spectrum for good reasons - we know how wide and deep the expertise is in our sector.

We need to pool the expertise of the pension industry, consumers, the regulators, politicians of all parties and the DWP to develop a sustainable and workable approach to the massive challenge of retirement in the 2030s and beyond.

2013 has been a big year for pensions but the years ahead are likely to be even more demanding.

But we must maintain the balance in dealing with today's challenges and preparing for the even bigger challenges to come.

Thank you.

Last updated 01/07/2016