Andrew Tully Pensions Technical Director MGM Advantage The changing face of the retirement market

Today Whats happening in the market? Solvency II EU Gender Directive Retail Distribution Review

Standard annuity rates over last 20 years Source: Billy Burrows Annuities, male 65, single life, G5

7% drop since June 2012 Source: MGM Annuity Index, October 2012

What does the future hold? Solvency 2 Increasing Longevity MARKET DRIVERS Solvency 2 pushing all annuity rates down EU gender ruling pushing down male annuity rates, which is 82% of volume Enhanced annuity growth and increasing longevity of healthy lives pushing conventional annuity rates down Healthy males suffering biggest decline If gilt yields increase, rates could spike up. Depends on Euro Debt and Quantative Easing. Declining Annuity Rates MARKET IMPACT EU Gender Ruling Growth of Enhanced Annuities Gilt Yields

Drawdown sales decline: will it improve? Drawdown sales figures from ABI

Advised market % 38.4% Source: ABI, based on premium Advised market H Total sales = £4.5 bn (out of total market of £9bn) Total sales = £4.3 bn (out of total market of £7.1bn) 9.4% 10.1% 36.2% 44.2%

Increasing popularity of Investment-linked annuities Source: ABI.

Gender Directive

Annuities and EU Gender Directive Gender neutral pricing from 21 December 2012 Only applies to new contracts from that date Annuities bought from occupational pension schemes not affected Conventional Annuities Male ratesFemale rates approx 3-4%approx 1-2% Enhanced annuities Impact not as significant as gender only one of many factors used Income drawdown New unisex GAD tables needed Interim solution: use male GAD tables for all

Gender Directive & processing business MGM Enhanced Annuity – current 45 day guarantee With effect from 6/11/12 will move to guarantee ending on 20 December 2012 – Need fully completed forms and all funds received by 20/12 New gender-neutral quotes available mid-December Back to 45 day guarantee period MGM Flexible Income Annuity Currently has no guarantee period Fully completed forms and all funds received by 20/12

Solvency II

What is it? EU legislation, due to come into force 1 January 2014 Will force annuity providers to hold greater capital reserves, or invest in risk-free assets (ie gilts) Ongoing developments so position not finalised as yet Impact on annuity prices Uncertain until final rules received Some changes already being priced in, and will be a gradual impact All rates, possibly up to 10% Income drawdown Indirect impact as IDD based on market annuity rates

Solvency II Trialogue was not able to reach agreement Negotiations are continuing Delay poses challenges in terms of timing EIOPA are consulting Impact assessment 15 th October to 10 th December Report expected to be published end of March 2013

RDR – impact on advisers and consumers

RDR Overview What does it mean for advisers Impact on products How will customers buy in future? What could the advised market look like?

RDR – three key objectives Consumers are offered a transparent and fair charging system for the advice they receive Consumers are clear about the service they receive Consumers receive advice from highly respected professionals

RDR Professionalism - Journey Ahead Initial and ongoing knowledge – qualifications Qualification Gap-fill Statement of Professional Standing Evidence advisers subscribe to professional standards CPD 2013 and Beyond 35 hours of CPD (21 hours must be structured) Focussed on learning outcomes Must be measurable and relevant Evidence of learning activity completed

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What will RDR mean? Will change how advisers present their services All advised sales will be fee based Non advised sales are commission based Need to ensure this doesnt not create barriers to clients taking advice Without advice, risk that clients will make poor decisions resulting in undesirable outcomes

RDR impact on products

Annuity quotations after RDR Advised Sale Fee as % of Annuity Fixed fee from Annuity Invoiced fee from client Additional fees may be charged for on going reviews for flexible annuities Advisers will need to agree fees with client before requesting annuity quotes

No – AdviceGross Annuity*Commission 1Full Commission £6,071 £1,500 Advised saleGross Annuity*IncreaseFee on quote 2 Fee as % (1.5%) of fund & paid by product provider £6,071£0.00£1,500 3 Fee – fixed of £ 1,000 and paid by product provider £6,101£30£1,000 4Fee – fee of £ 1,000 (nil cost quote) and paid by client £6,162£60£0 *Based on male aged 65, £ 100,000, single life, G5, level payments Impact on lifetime annuities

Impact on Flexible Annuity Annual policy charge (levied monthly) Includes cost of standard commission – 2% initial commission (2.25% if online quote) 0.25% per year trail commission These will no longer be included in APC

Advised FIA - £100k Before RDRAfter RDR TFC £25,000£25,000 (as long as all advice related to annuity purchase) Adviser receives upfront £2,000 (if standard commission) Whatever is agreed with client Eg £2,000. Amount used to buy annuity £75,000 (if standard commission) £73,000 (if £2,000 charge taken from fund) Adviser receives ongoing 0.25% (if standard commission) Whatever is agreed with client Eg 0.25% APC Higher as commission included Will be lower as doesnt include cost of initial or trail commission OVERALL Costs around the same if adviser paid same amount

Example of TFC calculation PRE-RDR and commission (non-advised) cases after RDR Jack has a £100,000 pension fund. IFA receives commission of £2,000. TFC calculation today = 25% x £100,000 = £25,000 tax-free lump sum AFTER RDR WHERE FEES (ADVISER CHARGE) DEDUCTED FROM FUND £100,000 fund, £2,000 adviser charge paid from fund so £98,000 used to buy annuity Need to understand why the client is paying adviser charge 1. TFC = 25% x (£98,000 + £2,000) = £25,000 tax-free lump sum If the advice relates solely to the purchase of the annuity 2. TFC = 25% x (£98,000 + £800) = £24,700 tax-free lump sum If £1,200 relates to wider pension advice which simply happens to be given at same time, eg advice about investment of pension funds being left in force.

Advised FIA - £100k Before RDRAfter RDR TFC £25,000£25,000 (as long as all advice related to annuity purchase) Adviser receives upfront £2,000 (if standard commission) Whatever is agreed with client Eg £2,000. Amount used to buy annuity £75,000 (if standard commission) £73,000 (if £2,000 charge taken from fund) Adviser receives ongoing 0.25% (if standard commission) Whatever is agreed with client Eg 0.25% APC Higher as commission included Will be lower as doesnt include cost of initial or trail commission OVERALL Costs around the same if adviser paid same amount

Advised FIA – impact on income Before RDRAfter RDR Amount used to buy annuity £75,000£73,000 Market annuity prices Lower as annuity prices include commission Higher as annuity prices exclude commission Income range Should be broadly similar. Although less invested, average annuity price in market should be better as commission free rates.

Impact on advisers

Independent Advice Whole of Market If youre advising HNW clients youre likely to offer full advice These clients should find fees acceptable and be willing to pay If you choose this option then you must consider whole of market but may operate a panel Panel Could be used to offer a more competitive price proposition Panel needs to be broad enough to attract fee paying customers Independent advice - considerations

Restricted Advice Whole of market Might be appropriate for mass affluent Still a discerning group so whole of market would be attractive Whole of market also helps with fee proposition Panel Could be used to offer a more competitive price proposition Panel needs to be broad enough to attract fee paying customers Single Tie Difficult to envisage single tie as part of a fee paying proposition Does it work for annuities? Restricted advice - considerations

96% of advisers believe a restricted annuity panel should have 4 or more providers Panel requirements – restricted Research amongst advisers, June 2012

How will RDR affect market Firms will need to change their Advice Proposition Necessary to agree fees in advance Explain scope of advice - independent or restricted Explain what advice is and what is involved in advice process Justify additional work / advice if an annual fee (trail) is charged Fees received will match cost of each case Cross subsidies will go Advisers wont be able to reach some parts of the market Fewer advisers as some will exit market, fewer people getting advice

How will customers buy retirement income solutions in future?

Whats changing? 1. Retail Distribution Review 2. ABI code of conduct

The customers view – ways to buy 1. Do nothing / buy with original provider 2. Search around for better rates – DIY 3. Non-advised to search for better rates 4. Contact adviser

Do nothing – buy with the original provider New ABI code of conduct will make this more difficult – Fully effective March 2013 But many will still choose this route Partnerships with specialist annuity providers – Customers gain access to enhanced annuity – Simplified questions so not full market, or individual rate Opportunities Accumulation providers retain client x Risks Customers are denied access to full range of market rates and enhanced conditions

The customers view – ways to buy 1. Do nothing / buy with original provider 2. Search around for better rates – DIY 3. Non-advised to search for better rates 4. Contact adviser

Search around for better rates Some customers will do-it-themselves – Search online for better rates – Prompted by wake-up pack – Similar approach to other insurance products Price comparison websites will benefit Danger of customer mis-buying – Not aware of all solutions Opportunities Price comparison websites x Risks Customers may buy wrong retirement solution

The customers view – ways to buy 1. Do nothing / buy with original provider 2. Search around for better rates – DIY 3. Non-advised to search for better rates 4. Contact adviser

Contact broker to search for better rates New type of broker emerging – Non-advised under RDR – Can charge commission Simplified enhanced annuity questionnaire Operate NEST-style panel – Nationwide – Some providers Opportunities Banks; providers; rate brokers x Risks Customers are denied access to full range of market rates and enhanced conditions Customers only get advice on rates not suitability

The customers view – ways to buy 1. Do nothing / buy with original provider 2. Search around for better rates – DIY 3. Non-advised to search for better rates 4. Contact adviser

Independent and restricted advice Two distinct areas – but customer may not recognise Opportunity for adviser to create USP Specialise - eg in areas such as long term care, equity release Qualifications on Opportunities Advisers working on independent or restricted basis Customers will get holistic solution x Risks Not all customers can benefit – lack of supply Not all customers willing to pay for full advice

Agree objectives Present optionsRecommendations Implementation Your retirement savings have to last you for the rest of your life State benefits in the UK are among the lowest in Europe There are around a dozen different product types, with different features depending on which company you choose What shape suits individual circumstances best? Theres usually nothing you can do if you make a poor decision Its could also effect your dependants if you make the wrong choices The stakes are too high Its too easy to make a mistake Mistakes cant usually be rectified Its crucial you make the most of your retirement savings… Few people have much experience of what to do. After all, you only retire once!, How would your client feel if you knew you could be receiving more money each month? Why clients need advice at retirement

Its not just the best rate Identify the best rate Transfer penalties Consolidation Guaranteed annuity rates Protecting your partner Protection on death Countering inflation Flexible drawdown / capped drawdown / phased drawdown Investment-linked annuities / WP annuities / variable annuity Fixed-term annuities / conventional annuities Lifestyle annuities / impaired annuities / postcode annuities The right company The right questions The right options The right product

What could the advised market look like?

Market split – smaller pots £40,000 to £50,000 £0 Pots of this size are likely to annuitise Although there may be occasional cases where other income or individual circumstances mean a different outcome

Shopping around is crucial All figures for £50,000 pot, 65-year-old, single life, 10 year guarantee, moderate enhancement. Figures from Moneyfacts data for MGM Advantage £3,436 £2,805 £2,882 £2,417 £3,235 £2,752 £2,787 £2,212 42% for males 46% for females Enhanced Standard Enhanced Standard

How will advisers help clients in this market 96.2% 2.1% 0.8% 0.9% Advisers will help selection of appropriate product consider other issues such as transfer penalties and guaranteed rates shape of annuity find best rate vast majority of enhanced sold through advisers Source: ABI

How we can help you Adviser meets or calls client and ascertains they have a medical condition which may qualify for an enhanced annuity Adviser completes quote with client using MGM on- line system MGM contact client and produce quotes for Adviser Adviser arranges a telephone interview with MGM Advantage OPTION 1 OPTION 2 Pre-populated ECQF now available to send to other providers

Time saving Immediate decision on qualification Ability to capture all you need in one meeting Quotes system only asks questions relevant to medical conditions selected No more laborious paper filling Pre-populated ECQF available to send to other providers Benefits of ECQF

The benefits of choice

Market split – larger pots £40,000 to £50,000 £0 Pots of this size are likely to use blended solutions Pots of this size are likely to annuitise Although there may be occasional cases where other income or individual circumstances mean a different outcome

Blended solutions at outset

Move to new solutions as circumstances change

Summary PP /11 Not For Use With Retail Customers More future pressure on annuity rates People will need help Important to consider all options Customers will change the way they buy retirement products Danger of mis-buying RDR means advisers need to position their services differently offering a range of products from a wide range of providers is likely to give customers best solutions some providers helping advisers do this cost efficiently

Any questions? PP /11 This presentation is based on our understanding of the HMRC rules & regulations as they stand but these regulations are still subject to change. (Copyright - MGM Advantage 2012) Not For Use With Retail Customers