Ni-hao. (Hello)
Fei Chaang Gao shing Jin Tian Neng Zei Jerr Li (I’m happy to be here).
I would like to thank the Insurance Association of China for their extremely kind invitation for me to speak at this prestigious summit.
It is an honour for me to be here to represent the Association of British Insurers, particularly given the importance of the Chinese insurance market for my members – the British insurance companies providing insurance and long-term savings products both in the United Kingdom and globally.
Introduction to the ABI
For those of you less familiar with the Association of British Insurers, it is probably worth saying that we speak on behalf of around 250 insurers and long-term savings providers across the United Kingdom. Our membership spans across both non-life and life insurers, as well as insurers operating in the London Market providing the more complex, speciality insurance for which London is renowned.
The United Kingdom’s insurance industry is the largest in Europe and the fourth largest globally. In 2018, the non-life market had grown substantially to £99.9 billion in terms of Gross Written Premium. Comparatively, our long-term savings sector was worth £205.7 billion.
While many of the Association of British Insurers’ members provide products for the domestic market, we have a number of large insurers and reinsurers who are active globally, including in China. As such, we are very engaged on international issues, such as on recent discussions on digital taxation or with the International Association of Insurance Supervisors, to make sure that our members views can be reflected.
I would like to add that, regardless of the politics at the moment in the United Kingdom, with a potential new government and Brexit, we remain open to working with our global partners, and in particular with China. Brexit has only served to accelerate our international engagement and development of relationships. So, you are always all welcome to the United Kingdom.
Importance of China-UK relationship
China is a very important partner for the United Kingdom and we hope to further deepen and build on the ‘Golden Era’ of UK-China relations. I would echo the words of the Chinese Ambassador to the UK [1], in that mutual respect between our two nations is the ‘anchor’ of this relationship and will ensure the sustained development of this important relationship.
The Golden Era has already seen both the United Kingdom and China benefit greatly with around £40 billion worth of deals having been agreed in 2015. However, I believe there is much more we can do together.
The annual Economic and Financial Dialogue held between the United Kingdom and Chinese governments demonstrates the strong partnership between our nations and the desire to strengthen bilateral ties. This is a truly valued meeting by the financial services sector in the UK, and in particular my members, as it presents a unique opportunity to discuss how we can increase our cooperation, collaboration and learn from each other.
I am pleased that a number of the Association of British Insurers’ members have been established in China for many years, showing their dedication and commitment to support the Chinese insurance market. I can say that we are very happy that this same commitment is also felt in the UK from China.
Shared experience - the problem of an ageing population
It is clear to me that China and the UK have a lot in common and as a result there is a lot that we can learn from each other and work together on. And most notably with financial services, given that China has a world-leading insurance market, being the second largest globally – ahead of the United Kingdom.
Like many other major economies, China and the United Kingdom are both experiencing similar demographic challenges with people living much longer and having a rapidly ageing population, and so are perfectly placed to help each other address this issue. While living longer is something to be celebrated – thanks to advances in medicine and healthcare, and having lower mortality rates – the impact on the economy is huge. The size of this challenge for our countries cannot be underestimated.
Let me set this out more clearly.
In the United Kingdom, life expectancy in the mid to late 1980s estimated that 1 in 10 men and 1 in 5 women aged 55 would live to be 100. Since then, the proportion of the United Kingdom population reaching the age of 100 almost doubled between 2002 and 2016.[2]
In 2016 there were approximately 11.8 million people aged 65 or above,[3] and this has been projected to rise to 18.9 million by 2046. To put this in context, this really is significant for the United Kingdom as this will be a quarter of our population.
With people living longer, this inevitably has put pressure on the state who are now paying pensions to people who are living much longer than anticipated making it unaffordable in the long-term.
In 2016, the United Kingdom had one of the lowest net replacement rates of the nations belonging to the Organisation for Economic Cooperation and Development at 29% (for a full time worker on a UK average salary across their career) [4], compared to the Organisation for Economic Cooperation and Development’s average of 63%.[5] This means that we expect that the current pension system in the United Kingdom will provide a retiree 29% of his pre-retirement earnings in retirement.
For the wealthy few, they can compensate this with private pensions which can bridge this gap. However, for the majority who rely on the state and workplace pensions, it is not something which we can be proud of. Coupled with an ageing population, the United Kingdom has relatively high levels of poverty for those over aged-75.[6]
For insurance and long-term savings, the sector that the Association of British Insurers represents, there is a clear opportunity to collaborate with like-minded partners on addressing our mutual challenges of an ageing population and the desire to ensure that people have enough retirement income to live with dignity.
The question that remains is how can Governments cope with providing a sufficient state pension for the retired if there are fewer people working? How can we reduce the overreliance on the state pension in the United Kingdom and encourage people to increase their workplace pension savings?
And this is where I believe insurers have an opportunity to help be part of the solution, and this is where we would particularly welcome to deepen our partnership with China.
UK pension reform
Addressing the challenges of an ageing and longer living population has been at the centre of debate in the United Kingdom in recent years. And for a very good reason.
The UK has a three-pillar pension structure, similar to China – the state pension, workplace pension, and personal pension.
The state pension provides a flat rate pension to those who have paying 35 years of national insurance, a form of tax, between age 16 and their retirement.
Typically, when an individual is employed, they would be offered to join their workplace pension scheme and a portion of their pre-taxed salary will go towards their pension, along with a contribution from their employer. However, the United Kingdom has had two main types - defined benefit and defined contribution pension schemes.
Defined benefit pension schemes, where you are guaranteed an amount from your employer upon retirement, has now become a thing of the past. In recent years, there has been a dramatic shift to defined contribution pension schemes. This is a shift that a number of other markets have also experienced.
Typically, people in the United Kingdom have relied on the state and workplace pensions they would have accumulated over their lives in retirement, with very few having their own private or personal pension savings. In 2014, around 50%[7] of a retirees’ income came from the state pension, with a third from workplace pensions and the remaining from personal pension savings.
Financial crisis – 10 years on
Before I talk about how our pension system in the United Kingdom has changed, it is important to explain some of the factors that have impacted it – notably the financial crisis in 2008 and the general negative perception of pensions by consumers as a result of some high profile scandals and failures of companies.
In some respects, the dramas of 2008 seem a very long time ago. Ten years on, the dramatic bank crashes, stock market dives and frantic recapitalisations all seem far in the rear-view mirror. But the reality is that the financial crisis is still having a profound impact on the United Kingdom ten years later .
The first wave of action during the financial crisis saw the rescues, insolvencies and forced sales of the troubled institutions. The second wave saw the focus on stabilisation with the policy of quantitative easing being pushed in the United Kingdom and across the members of the Eurozone, along with the recapitalisation of some of the major banks.
The third wave is the one we are in now in the UK, where the crisis is still very much driving the prudential and conduct regulatory framework for insurers, with a whole range of new laws being enacted to protect their customers and work towards ensuring another financial crisis could not happen again.
This negative feeling added to the existing concerns of pension savers – with cases such as the infamous Robert Maxwell. He was a Member of Parliament in the United Kingdom and then a high-profile media owner, and after his death it was revealed he had been stealing money from the company’s pension fund to pay for his flamboyant lifestyle.
I should say that this is not the norm but really the exception, who are rightly punished but their stories are always top of the newspaper headlines, and this is what people remember.
This has not only had an impact on how insurers manage their capital and on their governance rules, but also how consumers view financial services and a result, all insurers.
Lack of trust and transparency in financial services
Seismic events such as the financial crisis of 2008 and historic pension scandals in the UK where pension savings have not been paid or even stolen by those who managed the pension fund, sadly continue to shape how insurers and long-term savings providers are viewed.
Ten years later, and despite efforts by our Government to put in new consumer protection rules to reassure consumers that their pension savings are safe, a number of recent surveys in the United Kingdom still indicate a very low level of trust with pension providers. This is regrettable and is something which the Association of British Insurers has focused a lot of its efforts on addressing.
To give you a bit of an idea of how consumers feel - one piece of research conducted in the UK [8] found that the word pension scares people, and that it is confusing, makes them feel worried, and are perceived as unreliable. And that it does not matter who is providing the pension – an insurer or pension fund – it is all considered the same by consumers. I imagine most people around the world find pensions confusing as, including here in China.
Another report conducted in September this year in the UK, worryingly revealed that of the 2,000 employees they questioned, six in ten savers found pensions confusing, were unsure how much to save, and did not have a specific retirement goal. Three quarters said they did not know enough about pensions to make informed decisions. Further, 96% of them called for more transparency from employers about pension shortfalls and the realities of retirement.
And this is a theme that runs across the United Kingdom.
In the United Kingdom, we have a long history of where firms had pension schemes in place, workers were put into that scheme automatically, rather than individuals taking active decisions or responsibility for their financial future. Again, this is not unique to the United Kingdom but a very common theme in many developed countries, like China.
In the past, this system has worked very well for many, especially those individuals enrolled in defined benefit schemes by their employers and who had long tenures and had a lot of career progression. It required next to no engagement from individuals and better still, delivered fantastic outcomes.
Other than in the public sector in the United Kingdom, defined benefit pension schemes are now the exception not the rule. Defined contribution pension schemes are the typical experience of those now in their twenties and thirties, and those who have yet to enter the workplace. In fact, fewer than one-in-five people under the age of 29 will have any element of defined benefit in their savings.
UK pension developments
So, with this backdrop of a shift in type of workplace pensions, lack of trust in pensions and a whole new range of laws impacting insurers and pension funds, pensions began to look less attractive.
However, people were now living longer, and in better health, giving rise to an ageing population, as in China. If people did not trust pensions, and as a result paid no attention to their workplace pension if that was offered or did not have their own private savings, then they would have to rely on the state pension to retire upon.
In the United Kingdom, the state pension provides enough money to an individual so that they can afford the minimum. Clearly, this is not enough.
Further, the state pension had become unsustainable given that the Government had dramatically underestimated how much longer people were living.
So, the only option to address this was that people need to save more themselves for their retirement. We needed to shift the mindset to create a nation of savers.
So, what did the United Kingdom’s Government do. Firstly, the state pension was reformed.
The United Kingdom’s pension sector underwent some dramatic reforms in 2012, which continue to shape our market today. As mentioned, the aim of these reforms was to increase pension savings and reduce the burden on the state – the state pension was reformed, a new workplace pension scheme was introduced and a new concept of ‘freedom and choice’ at retirement was announced.
In 2015, we simplified our state pension, moving away from the previous complicated system of having one basic state pension with an array of supplementary benefits. Today, retirees receive one amount based on their tax contributions during their working life.
But this was not enough, as similar to China, there was too much of a reliance on the state pension.[9] While China has been looking at pillar three, the focus in the UK has been the second pillar – I’m sure there are lessons that we can both share with each other.
Automatic Enrolment
In the United Kingdom, we looked at how we could get more people saving while they were employed. Not all people in work were offered a workplace pension scheme, as this was considered to be an additional benefit by many employers. This is where the concept of automatic enrolment came in.
The beauty of automatic enrolment is that is relies on nudge economics, meaning that individuals are enrolled into a pension scheme, unless the individual actively asks to opt-out of it. Initial amounts that an individual contributes to their new pension scheme are low, so that they would not necessarily notice it and is matched by their employer to a limit. Gradually, the amount an individual contributes is increased to 8% of their pre-taxed salary - although we, the Association of British Insurers, believe this is still not enough, it should be around 12 or even 14% of their pre-taxed salary.
Automatic Enrolment harnesses inertia, makes the decision less complex for the individual and gives a financial incentive. In reality, few people have opted out - only around 8% of those enrolled. Between 2012 and 2019: the number of private sector employees in a workplace pension increased by 10 million.
This change did not happen overnight. In fact, it took 13 years from conception to implementation. The Pensions Commission initially made recommendations 2005 with Automatic Enrolment being officially legislated in the Pensions Act in 2008. Employers gradually implemented this policy by automatically enrolling their employees into a workplace pensions between October 2012 and February 2018.
The impact of this relatively simple initiative cannot be overstated. Even if you employ one person, you are legally obliged to set up a workplace pension. This means that a whole part of society who had not been offered a workplace pension were now actively saving. This had a bigger impact on smaller employers, who may otherwise encourage employees to opt out to save the cost of providing the pension in the first place.
Further, more people in their twenties are now saving into a workplace pension and it has also helped to reduce the gender gap in pension savings. Historically, women would stay at home to look after the children and so would not be saving into a workplace pension. However, more women are now in employment and so actively saving into their own workplace pension.
The Pensions Regulator in the United Kingdom revealed in a recent report on automatic enrolment that this is where the biggest impact has been seen – from an increased participation from 24% in 2012 to more than tripling to 84% in 2018.
The challenge of getting people into the habit of saving is now being met with some success, particularly with the young where habits can set in early.
There are also as many women as men saving into workplace pensions now – a remarkable 85% [10] of eligible men and women today are saving into a workplace pension from the previous 49% in 2008 before these reforms were introduced.[11]
Automatic enrolment has fundamentally changed the number of women now saving into a pension with only 46% saving in 2008 to this doubling a decade later to 87%.
Freedom and Choice
On top of automatic enrolment, because the view that annuities were not good value for money for retirees in a climate of very low interest rates, the Government of the United Kingdom sought to remove the requirement to annuitize upon retirement. Thus, giving the freedom and choice to the individual to decide what to do – for example an individual could take their pension savings as a lump sum, in chunks, get an adjustable income, purchase an annuity or leave their pension savings untouched.
There had been an initial worry that those individuals taking out their pension savings would spend it recklessly, such as on sports cars, rather than gradually over their retirement. Or even, as people often underestimate how long they may live, they would run out of pensions savings sooner. In both scenarios, people would need to rely solely on the state pension, having run out of their pension savings.
Now that it has been a few years since the policy of freedom and choice has been implemented, there are some noteworthy trends [12] and lessons that we can learn ourselves in the United Kingdom. And thankfully, retirees taking out a lump sum did not end up buying sports cars!
The popularity of annuities has almost completely diminished making up only 16% of retirement purchases. While this could be explained by the persistent low growth environment impacting annuity rates, it really has transformed the annuity market and has impacted my members.
Another worrying trend was for consumers to choose the option to invest their cash for long periods of time meaning that their pension savings are slowly being eroded by inflation. Our regulator has tried to address this by making sure that consumers actively choose this option and are warned about the impact on their savings.
More still needs to be done. While the market in the United Kingdom is still responding to the plethora of changes and in turn consumers are adjusting to their new choices, one observation of freedom and choice is that people now need to make more complicated decisions about their retirement than before. Now this is worrying and obviously is not the intent of the policy.
People are often put off the idea of engaging with their pensions until retirement and by then are faced with an overwhelming amount of complex decisions, much of which they may not understand.
Changes with labour market
Another issue that we are now looking at in the United Kingdom is that workers are no longer likely to stay with a single employer anymore. Long gone are the days where you would expect people to remain with one company for the majority of their career.
It is commonplace for people to have many jobs throughout their career, with people in the UK now being projected to have around 11 jobs during their career - I for one have already had several. That is a lot of pension pots to keep track of, thus making the issues of pensions even more complex.
If you read some of the predictions about the future, we can expect to spend more time retraining and taking different jobs as our working lives extend much further, and artificial intelligence and robotics shake up the labour market, further disrupting our pension journeys.
As a result, people will end up with quite a few different pension pots from different employers. And that is a problem unless we radically change the way we go about communicating with pension scheme members, because people can easily lose touch with their pensions.
We asked the Pension Policy Institute in the United Kingdom, a think tank, to conduct some work for the Association of British Insurers into this. The aim of this project was to estimate the number of pension pots lost to their owners – lost in the sense that individuals have lost touch with their pensions provider or providers struggle to find them. The scale of the lost pension mountain is huge.
The Pension Policy Institute also estimated that 1.6 million pension pots could remain unclaimed, amounting to almost £20 billion. The real figure is likely to be even higher as the research did not look into defined benefit pension schemes.
The UK Government have also predicted that there could be as many as 50 million dormant and lost pensions by 2050.
To help address this, the members of the Association of British Insurers have suggested innovative ways in which the sector can support their customers through clearer and more easily understandable communication about an individual’s retirement options. One example is through the concept of a Pensions Dashboard.
This is an innovative project in which the Association of British Insurers has led on for a number of years. The idea was to develop a platform where individuals could view their pension savings across state, workplace and personal pensions. Data would be drawn from a number of providers and sources to do this. And the dashboard would eventually show the projected annual retirement income for that individual.
For me, one of the reasons why pensions dashboards are so crucial for people is that it will improve the perception of insurers and the wider sector, as well as help them engage with the pensions in a more accessible way.
Once all pension schemes are connected to an infrastructure that allows people to find all their pensions easily by inputting minimal information about themselves – their name, date of birth and national insurance number – I truly believe that engagement with pensions will change fundamentally.
This is quite an ambitious project and I’m really proud of the Association of British Insurers’ leadership and continued involvement in this revolutionary project.
Normally, people only see their annual statement from their workplace pension provider and then forget about it, as often it can be just too complex to understand. We felt that this was not good enough and individuals needed to have the right tools to understand what they could expect to get when they retired – giving them the realisation of how much more they needed to save.
And that’s the point. Even with our recent pension reforms, people are still not saving enough. Or even worse, people are completely unaware how much they are saving for their retirement.
The fear for us in the United Kingdom is that poverty in retirement will increase, as more and more people depend on the state pension. With people living longer, the state pension will inevitably become less generous and so, we, as an industry need to enable people to take responsibility for their own retirement.
It’s an uphill battle to get people interested or talking about pensions. But the hope is that the Dashboard, a simple and easy to access platform, will appeal to those who already view their bank accounts on their mobile phones on the go.
The dashboard has the support of our Government and we hope for it to be launched in the next few years.[13] While it may take some time for the dashboard, or a number of dashboards, to be launched and available for all, given the technological infrastructure and governance requirements that need to be developed, we are hopeful that it will be a useful tool and help rebuild trust and confidence in pensions.
Future looking - impact of reforms in the UK
However, we also need to make sure we do not misuse the little consumer trust that exists in the pensions sector. And in that context, the long-term consequences of the freedom and choice policy really matter.
We have been looking at what people do with their pension pots ever since the policy was introduced.
The data from the Association of British Insurers’ members initially suggested that consumers were making sensible decisions. Broadly speaking, they were accessing small pension pots as cash, and leaving larger pension pots untouched.
However, more recent data shows a trend towards people taking larger proportions of their pot through regular withdrawals: 44% of customers took more than 8% each year in the year to March 2019.
At the same time, a growing number are unadvised. Other evidence shows consumers are making complex choices in drawdown without fully understanding how it works. And this is another issue which our market will be looking at – advice and how to access it.
Freedom and Choice has also led to a surge of transfers from defined benefit to defined contribution pension schemes which has exposed huge flaws in the advice market in the United Kingdom.
ABI proposals going forward
Going forward, the Association of British Insurers believe that four measures should be put in place now in the United Kingdom to help customers manage those risks more safely:
- Firstly, the minimum pension age should be increased from 55 to 57 over the near term. This was already part of the United Kingdom’s Government’s original plan in 2015, but with the change happening only in 2028. The Government should also review the minimum age regularly.
- Secondly, a later life review of retirement options should be introduced at age 75.
- Thirdly, providers should be enabled to provide more help to customers without giving advice.
- Finally, employers should be required to give standard information about their defined benefit pension scheme before someone is able to transfer out so they understand fully any benefits they may lose.
The Association of British Insurers will be doing more detailed work on this and we plan to publish our findings next year.
Future cooperation
We are encouraged by our ongoing close and cooperative relationship between the UK and China, and we stand ready to support the development of the insurance market and customers as best we can.
Equally, we want to learn from China’s remarkable experience as a leading FinTech centre. China has long been at the forefront of fintech innovation and growth, and impressively has one of the largest fintech markets in the world. We are keen to learn from your experience – with four of the top five FinTech 100 now located in China.[14]
This crucial component of technology will be pivotal in helping to address some of the challenges we face with pension savings and ageing societies. If we can make pensions more engaging, particularly using technology to increase its appeal, then this will make a positive contribution to helping people save more for their retirement.
End
I would like to thank you all once again for your attention, and for the opportunity to present today. It is clear to me that we can achieve many common goals from the special China – UK relationship.
I sincerely hope that the relationship between the Association of British Insurers and the Insurance Association of China will go from strength to strength in the coming years.
Finally, I would like to extend an open invitation to all of you to come to London so that we can continue our cooperation and further deepen the China-UK relationship.
Thank you very much, it has truly been an honour.
[1] http://www.xinhuanet.com/english/2019-09/10/c_138379244.htm
[4] C. £28/29k
[5] https://data.oecd.org/pension/net-pension-replacement-rates.htm
[7] HoC briefing: http://researchbriefings.files.parliament.uk/documents/SN00290/SN00290.pdf
[8] By the Wisdom Council
10] https://www.ipe.com/news/regulation/auto-enrolment-irons-out-gender-gap-in-uk-pensions-participation/10034097.article
[11] DWP stats: https://www.gov.uk/government/statistics/workplace-pension-participation-and-saving-trends-2008-to-2018
[12] Retirement Outcomes Review
[13] As soon as legislation has been passed.
[14] https://www.ey.com/Publication/vwLUAssets/ey-china-and-uk-fintech/$File/ey-china-and-uk-fintech.pdf