1. Outline the demographic trends in the UK
2. Explain the implications of longevity and an ageing population on retirement planning
3. Describe both the ECJ Gender Directive and the ABI Compulsory Code of Conduct on Retirement Choices and the implications for clients and intermediaries
Jan Holt, Head of Business Development Team, JustRetirement
The UK’s population trends
This year in the United Kingdom 770,000 people will reach the age of 65, that’s the equivalent of 2,100 every single day. And we can see from this chart the numbers forecast to reach age 65 over the next five years, and they remain consistently high, over 660,000 every year. We’re currently on the crest of the wave generated by the post war population boom.
Presenter: So what does this mean for intermediaries?
Jan Holt: Well it has led to the increase in the demand for at retirement advice in recent years. Changes in the population, coupled with the shift from final salary provision to defined contribution arrangements, mean that more and more people are looking for support when it comes to making decisions about how to generate their retirement income. When you look at life expectancy, it’s easy to appreciate why these are such important decisions. For men in the UK life expectancy from age 65 averages 18 years. Now I will stress these are averages, and that some will die earlier whilst others will live even longer. As you can see from this map, there are regional variations for average life expectancy. The darker the colour on the map here, the longer average life expectancy will be in that local area. Now you’ll see that in some areas average life expectancy is actually between 22 and 25 years. In the very light areas average life expectancy falls to between 13 and 16 years.
For women reaching age 65, life expectancy is slightly longer than for men, at just under 21 years. And we can see similar regional differences. Longest life expectancy in the UK for both men and women is in the local area of Kensington and Chelsea. The lowest is in Glasgow City. And the difference between the two is about 10 years, regardless of whether you’re male or female.
Presenter: So the implication is that if we’re living longer the number of those in later life is set to increase.
Jan Holt: Exactly, in this chart we’re seeing how the number of the UK population aged over 85 will increase significantly between now and 2051. And this reflects the life expectancy of today’s baby boomers. By 2033 there’ll be more than 3.2 million people aged over 85 in the UK, and many of those will become centenarians.
Looking at the trends here, it’s very apparent that the number of centenarians has risen and will continue to do so. According to the Office of National Statistics, around a third of babies born in 2012 in the United Kingdom are expected to survive to celebrate their 100th birthday. Already 16,000 people are aged over 100, 81% of those are women. By 2033 it’s projected that the number aged over 100 will have increased to 92,000, but that the balance will have shifted somewhat with 65% of them being women and 35% men.
But of course there’s a difference between being alive and being healthy. The ONS routinely publishes two types of health expectancy. The first, healthy life expectancy, is defined as the number of years an individual can expect to spend in good or very good general health. The second, disability free life expectancy, is defined as the number of years an individual spends free from a limiting chronic illness or disability. And what the figures here are showing is that from aged 65 for both men and women, roughly half of their life expectancy will be spent in good health, the remainder not.
The implications for financial adviser businesses
Presenter: So taking all of the information about ageing, health and longevity into account, what are the key points for intermediaries to think about?
Jan Holt: First of all intermediaries may wish to think about how well their at retirement services are positioned to deal with the growing need for advice. But it isn’t just about at retirement planning; they’ll also need to deliver solutions that cater for a longer period of retirement and consider what later life services their clients may need as they move through retirement. They do also need to look closely at the retirement planning decisions that couples make. As we’ve seen there is a likelihood of a female outliving her male partner, and for those retiring today it’s often the male who has most or all of the pension resource. And finally with longevity and a strong chance of health deteriorating in retirement, the financial decisions being made at the point of retirement will need to be reviewed on an ongoing basis, as the clients’ needs and objectives are also likely to change.
The Gender Directive and annuity pricing
Presenter: So focusing in on the at retirement plan, we know that the use of gender in insurance pricing was a hot topic late last year, what’s changed?
Jan Holt: You’re quite right, this was a much discussed topic, and perhaps not everybody would agree with the comments of the Belgium consumer group about what a victory this has been. The need to price on a gender neutral basis from 21st December 2012 has raised many important questions.
Presenter: What’s the background of this change?
Jan Holt: Well the case originated from a challenge from the Belgium consumer association, Test-Achats. They’re like the Belgium equivalent of Which, and they asked whether the exemption in the 2004 directive, which allowed insurers to use gender when setting premiums and rates, was fundamentally at odds with discrimination on the grounds of gender. The European Court of Justice ruled on 1st March 2011 that the exemption was invalid. Now the ECJ allowed a transitional period of grace to allow insurers to implement gender neutral pricing, and 21st December 2012 was the deadline.
Presenter: What are the implications?
Jan Holt: Well our view is that the outcome of the Gender Directive means that underwriting becomes absolutely paramount when considering an annuity for a client. At Just Retirement we believe that individually underwritten annuities are the only way to ensure that the retirement income a client gets is not only fair and just but accurate. As neutral pricing stabilises within the market during 2013, we’ll see that depth of underwriting is the biggest differentiating factor for clients to mitigate the risk of standard annuity rate changes.
Gender of course is just one of many factors that determine the annuity rate a client receives, so don’t forget that annuity pricing will also take account of other things including yields, interest rates, age, health and lifestyle. Overall we see the Gender Directive change as an opportunity to discuss how intermediaries can get the best outcome for their annuity clients. And they do this by considering enhanced annuities as the route to offset any underlying rate changes. It’s a great opportunity to emphasise the value that the intermediary service adds to the clients at retirement process.
Presenter: So what about underwritten annuities, can you give an overview of how they work and to what extent they’re affected by the ruling?
Jan Holt: Yes, providers of enhanced annuities underwrite each client on the basis of the medical and lifestyle information that’s provided. So the outcome that the client gets, that is their income, depends on the nature and the severity of the medical conditions and lifestyle factors that they disclose. As with all insurers, we can no longer use the client’s gender when we set our annuity rates, we can’t set different rates for men and women. Following the Test-Achats judgement, the European Commission issued guidelines outlining how the judgement should be applied.
So in these guidelines it was made clear that although insurers aren’t able to differentiate rate or premiums purely on the grounds of gender, gender can be taken into account when assessing risk factors including health status, providing the differences are based on physiological differences between men and women. The Commission clarified therefore that we can continue to consider gender specific conditions when we’re underwriting.
The ABI code of conduct on retirement choices
Presenter: The ECJ Gender Directive has clearly had an impact on pricing, but what about consumer behaviour when approaching retirement?
Jan Holt: You have to ask yourself what expectations clients have in terms of the at retirement process. Far too many clients have sleepwalked into retirement and poor annuity rates with their existing pension providers. According to the Association of British Insurers, over half of people don’t shop around when they reach retirement, and yet how many people do shop around for the best deal on car insurance, holidays or utility bills? So in March 2012 the ABI announced a code of conduct on retirement choices. And this was following research and consultation within the industry.
That research confirmed that fundamental changes were needed in order to help improve the situation. And compliance with this code became mandatory for all ABI member firms on the 1st March 2013. And this marks one of the biggest changes to the retirement process in recent years, which will have far reaching implications for both clients and their advisers.
The advantages of the open market option for annuity purchase
Presenter: So what’s the code going to do?
Jan Holt: Well the code’s aimed firmly and squarely at pension providers, and ensuring that they provide customers with clear communication as they approach retirement. Specifically the purpose of the code is to ensure that pension provider communications help every customer make an informed decision as they reach retirement by understanding his or her retirement choices including the options to commute or merge pension pots where appropriate, or even consider deferring retirement. The different ways to take their retirement income, for example enhanced, escalating or joint annuities, or the ability to keep money invested, and this should even include products they don’t offer themselves, and encouraging the customer to gather comparative quotes from different providers, with clear signposting on how this might be done and provision of all the information needed.
So through the various communications that are issued, providers will be highlighting the advantages of shopping around and using the open market option. Now we may wonder if we’ve heard all this before, and whether the information, the important information will end up buried in the small print on page 10, but there are some significant steps that have been taken that will start to make a real difference. Providers will no longer be able to include application forms in the wake up pack. This makes it incredibly difficult for clients to just roll over into the annuity that their existing provider might be offering. They’ll have to provide clear and prominent information about the value of the customer’s pot, and what type of annuity options or products are being offered by the provider, including any guaranteed rates or any guaranteed benefits or any market value adjustment that may be applied. Within the covering letter that accompanies the wake up pack, which incidentally may be no more than three pages long, the provider has to include three key questions.
Now these are questions designed to prompt clients to think about some really important retirement decisions and risks. Question 1 asks does your health or lifestyle allow you to access an enhanced annuity rate? Question 2: do you want to protect a spouse or dependent should you pre-decease them? And finally question 3: are you concerned about the impact of inflation on your income? This will go a long way towards stopping customers simply ticking a box because it appears the easiest or the quickest thing to do. For those who might have been thinking so what, we’ve heard this all before, this time it is different. This compulsory code means that for clients saving with providers who are ABI member firms, defaulting in a poor annuity rate will no longer be acceptable. The consumer will begin to demand a great deal more.
The communication process with clients prior to retirement
Presenter: So the deadline for the code to be implemented was 1st March 2013, what’s the communication process to clients now that the requirements of the code are in place?
Jan Holt: In terms of the communication process, this has to start at some point between two and five years prior to the client’s selected retirement date. With at least one communication within this timescale to encourage the customer to start considering their retirement options and the decisions they’ll need to make. So this could be done through the annual pension statement for example, or it could be part of a separate communication. If a provider has not already been approached by the customer about retirement options, they must also send out a wake up pack at least four months prior to selected retirement date, and a follow up pack at least six weeks prior. And that’s for those in contract based schemes. The timescales are six months and 10 weeks for those in trust based occupational schemes. The packs must be clear, they must be jargon free, and they must also highlight the benefits of shopping around.
Intermediaries might wish to consider their role in this communication process. What steps are you taking to talk to your clients in the run up to their selected retirement date to ensure that they’re aware of the services available to them to help them make their decisions? When it comes to the actual provision of illustrations and buying an annuity, the code sets out clear requirements. Unrequested illustrations in wake up or follow up packs must only be for the purpose of encouraging the customer to consider which annuity is most appropriate for his or her circumstances, and demonstrating the impact that their decisions will have on their retirement income.
They must clearly state that rates are indicative if that’s the case, and they must show a rate that the customer is able to access. They have to be clear and concise, and clearly and prominently state that the customer may be able to obtain a higher rate by shopping around. Unless an alternative is requested an illustration must also very clearly set out any applicable guaranteed annuity rates or any other guarantees, and both a single life annuity and a joint life annuity. They must also include escalating annuities and enhanced annuities. However, recognising that not all providers will offer all of these options, if they don’t they must state prominently that it’s not included or they don’t offer it, and an explanation of what it is. They must say that such an illustration is available on request, and reiterate that an enhanced annuity could offer a much higher level of income.
Presenter: And you said the providers can no longer include application forms in the packs, but what if a client does want to proceed with an annuity purchase from their existing provider?
Jan Holt: Yes, this can still happen, and there may be good reason to say with the existing provider. And the code states that providers can’t send an annuity application form until some form of contact has been made between the customer and the provider. They’ll also have to have provided a personalised illustration before the sale of an annuity takes place, and this can be by telephone, in writing or any other appropriate method. They also have to collect information to provide the personalised illustration, which includes specific questions for example about health or the need for either death benefits or escalating income. The provider must again highlight the benefits of shopping around. If an enhanced annuity is not offered a prescribed statement about enhanced annuities must be included. Payments must be made promptly and accurately, and cancellation rights must be clear.
The implications for the annuity market
Presenter: So what impact do you think that this might have on the shape on the annuity market?
Jan Holt: Well let’s first remind ourselves of the size of this market. At retirement planning in the UK is one the fastest growing sectors in financial services, and this has been fuelled by the arrival of the baby boomer generation into retirement, and the rise in the number of defined contribution schemes as final salary schemes start to shrink away. According to ABI statistics, the annuity market is valued at just over £14billion in 2012. But how does that break down? Well let’s look at the case numbers involved and how many people use the open market option or stay with their holding provider.
In 2012 over 420,000 annuity transactions were undertaken, 48% of those or just under 200,000 cases were transacted on the open market. Of those 91,774, which is 22% of the total but 46% of the open market transactions, are enhanced annuities. The remainder were either standard annuities or in some cases with profit or unit linked annuities. Now that means of course that over half, almost 221,000 annuities, were purchased with the holding provider. There are two key questions here.
First of all how many clients who might historically have stayed with their holding provider, in the chart here don’t forget this represented 52% of transactions, how many would be encouraged onto the open market by the ABI compulsory code of conduct? Noting of course that there will always be clients who might be better off staying with their holding provider, because of guarantees or other benefits that they might not get if they were to transfer. The second question is what percentage could be securing enhanced annuity rates? Just Retirement research shows that up to 50% of cases could qualify for an enhanced annuity. For intermediaries who are active in the retirement market, it’s worth taking time to review the proportion of your cases that do quality for an enhanced annuity. If it’s not around the 60% mark does that mean that some of your clients could be missing out on achieving their best income. There’s clearly a significant opportunity here for intermediaries.
Advantages of the ABI Code for adviser-client relations
Presenter: And what else should intermediaries do as a result of the ABI code of conduct?
Jan Holt: Well the opportunities should not be understated. As the changes start to impact the wake up packs, there’ll be a clear correlation with an increasing number of customers reaching retirement age each year, and an increasing demand for quality advice. For intermediaries there are some actions that can be taken to ensure that they get the call for help and advice from a customer when they receive their wake up pack.
First of all tie in the communication strategy with the customer wake up packs. So for the client the planning process can start two to five years out from final retirement; however the wake up packs will usually arrive four months prior to the selected retirement date with a follow up pack six weeks before. So these are the obvious trigger points to pick up the phone to the client and get a copy of the pack as soon as the client does.
Provide a focus on enhanced annuities, now’s the time for intermediaries to get better acquainted with how enhanced annuities work. How many enhanced or impaired providers do they regularly get quotes from, are they familiar with the difference that not only medical conditions make but lifestyle as well. Now smoking’s the obvious one but what about things like high blood pressure, asthma, even where a client lives.
Demonstrate the depth and range of the retirement proposition, because the wake up packs will highlight different options available, but only an advisor can actually bring that to life for a client. And they’ll do this by the use of personalised underwriting and discussing the range of products and rates available, and showing how the different benefit choices affect the eventual outcome.
Articulate the value of advice, providers will now encourage customers to seek advice, and there are many ways to demonstrate the difference that advice can make to a client’s retirement income. But it’s crucial for the intermediary to ensure that they’re the first port of call.
Creating more value for the adviser’s retirement proposition
Presenter: So thinking about a firm’s overall retirement proposition, what sort of things could they be looking for to ensure its best placed to create value?
Jan Holt: There are several key elements that a firm could consider when creating or reviewing a retirement service. Does that service have an objective to deliver a personalised fully underwritten annuity quote to every single client who’s about to generate retirement income. And do the underlying process and scope of the proposition support that goal? How much is being charged for the service, and how much profit does the intermediary derive from this type of business? Is the process as efficient as it can be, and are they making best use of the technology available? Is there a robust client communications plan in place, particularly one that dovetails with the communication the clients will receive from their pension provider?
Presenter: What type of support is available for firms wishing to undertake this kind of review?
Jan Holt: Well specialist providers such as Just Retirement are always willing to offer help and support to intermediaries. In addition Defaqto recently published a guide to help those creating or refining their at retirement service, in particular the annuity proposition. And this guide offers help on making sure that the post RDR proposition is able to profitably deal with all client cases. What to look for when assessing the provider behind the product, some of the regulatory and legislative changes that will affect the annuity, and avoiding some of the pitfalls that might occur along the way when building a proposition.
Now from that guide I just want to share part of the checklist that helps structure an approach both to selecting annuity providers and ensuring that the proposition is robust and fit for purpose. When it comes to keeping up to date with legislation, are the providers you use on the ball or behind the curve? What are you doing to track market developments including provider entrances or exits and product launches and withdrawals, and how does this impact your clients? What research and information services are available to support these market intelligence requirements?
In terms of articulating the post retirement advice service, have you decided on what type or level of retirement planning your firm is offering to clients, for example independent, restricted, execution only or indeed a combination of all of these? Is the firm clear about how it determines which levels of service are most appropriate for each of its client segments? Are the retirement planning services that you offer to clients and the impact of these clearly articulated, especially the choice of products from which you’ll be sourcing a solution, again independent or restricted. Are you making clients aware of any limitations on the proposition so that they make an informed decision? And are you communicating this clearly as part of the disclosed process, and what evidence can you provide to support that? Do you alert clients to instances where the approach taken by a particular level or type of retirement planning service might have a potential impact on their retirement income? How do you identify health and lifestyle issues? What’s the best process for your firm to follow to help identify eligibility for enhanced annuity rates? And have you established a robust consistent and repeatable process?
Do you use a broad range of providers? Some companies are more competitive on different conditions. And if you’re considering using or already use a panel approach, are your selection criteria clearly defined and can you provide an audit trail for the initial and the review process that’s being followed? If considering a single tie, is there an alternative in place for clients who request and are prepared to pay for a whole of market service? How will you monitor competitiveness for providers not on your panel? How are you going to assess the financial standing of the annuity providers that you consider placing business with? Are you able to deal with increased numbers of clients looking for help and advice, and does your proposition allow you to deal with all fund sizes including small pension pots profitably? Are all of these profitable in their own right, and if not how do you review your pricing or your service to create value to your business?
Presenter: So they’re just some of the considerations for intermediaries who might be gearing up for increased at retirement business, and further information is in the guide?
Jan Holt: That’s correct. Anybody wishing to read this report can download it from the Defaqto website, defaqto.com.
Presenter: Jan Holt, thank you very much.
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