FCA Annuity Review For financial advisers only – not retail clients

FCA Annuity Review

For financial advisers only – not retail clients

Agenda

• Why needed?

• Main findings

• What next for providers/advisers?

Agenda

• Why needed?

• Main findings

• What next for providers/advisers?

The Retirement Market - 2012

USP/VA£1.20bn

Annuity£14.05bn WP

£1.18bn

UL£0.12bn

Includes £4.5bn of ‘enhanced’ annuities

ABI, Q4 2012 Quarterly MSE Data

Are people getting a good deal?

Source: ‘ABI – Retirement Choices: Baseline to measure effectiveness of the code of conduct’ May 2013

• Aware of the OMO?

• People ‘shop around’?

• Change provider?

c91%

c63%

c30%

ABI Key Findings

c30% change provider

Agenda

• Why needed?

• Main findings

• What next for providers/advisers?

Providing certainty in uncertain times

SII

The cost of inertia

• How many consumers who purchase their annuity from their existing provider could get a better deal on the open market?

80%FCA Thematic Review of AnnuitiesFebruary 2014

The numbers

‘average’ increases - standard

FCA Thematic Review of AnnuitiesFebruary 2014

‘average’ increases - enhanced

FCA Thematic Review of AnnuitiesFebruary 2014

Important notes!

• We compared annuity rates offered to existing pension customers to the average of the top three rates available on the open market

• We used a single ‘health’ factor – smoking – to represent eligibility for enhanced annuities

FCA Thematic Review of AnnuitiesFebruary 2014

How income can vary between providers and types of annuity

Source: AMS portal and Partnership September 2013. Based on 65 year old with £50,000 pension fund, who has had a heart attack. Figures show best available income. Single life. Payable monthly in advance. No guarantee period. No escalation

Worst Standard

Best Standard

Enhanced0

500

1000

1500

2000

2500

3000

3500

4000

2574

31083434

Income

For illustration purposes only

Enhanced Existing0

10000

20000

30000

40000

50000

60000

70000

80000

Calculation to show fund needed to give £3,434 pa using existing rate on a pro-rata basis, using rates from previous slide.

For illustration purposes only

The value of advice

£16,705

….it is also important that they:

• Convert their pension to an annuity at the right time for them– (e.g. it may be more appropriate for them to use drawdown initially or to defer

taking an income)

• Buy the right ‘shape’ of annuity for them– (e.g. single life or joint life, level or escalating, enhanced or standard, and with or

without guarantee)

It’s not just ‘rate’

Annuity timing

• Pauline, aged 65

• Fund Value (after PCLS) £50,000

• Annuity available at 65 £3,482 pa

• Fund at age 68 £59,550

• Annuity available at 68 £4,001 pa

• Would take until age 88 to recoup the ‘lost’ income!

Source: Partnership November 2013 Single life annuity. Single life. Payable monthly in advance. No guarantee period. Level income. 6% net pa growth rate (net of 1% charge) assumed between 65 and 68. This forecast is not a reliable indicator of future performance and investments may grow at higher or lower rate than assumed Conditions: Diabetes, High Blood Pressure, Overweight.

For illustration purposes only

Level versus escalating income

Source: AMS portal and Partnership September 2013. Based on 65 year old with £50,000 pension fund. Figures show best available income. Single life. Payable monthly in advance. No guarantee period. Level income (no escalation) vs fixed increase of 3% pa

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 300

1000

2000

3000

4000

5000

6000

LevelEsalation 3% pa

For illustration purposes only

Acceleration in the last five years:

of the use of individual underwriting

and the growth of enhanced annuities.

.

Provider Behaviour

…Overall standard annuities offered to existing pension customers were expected to be more profitable than annuities written in the open market.

Profitability may be higher for standard annuities when compared to enhanced annuities….

Little competition in standard annuities

Competitive enhanced annuity market

Agenda

• Why needed?

• Main findings

• What next for providers/advisers?

• Retirement Income market study – (including annuities and drawdown)

• Identify ways of improving consumer engagement to prompt shopping around

• look at market dynamics – (for example, patterns of market entry and exit) to understand what drives the

high levels of concentration observed in parts of these markets

• look at how these markets are likely to develop in the future– in response to changing retirement patterns and needs.

FCA next steps

FCA Thematic Review of AnnuitiesFebruary 2014

More chance of losing out…

• Those with small funds – less choice

• Not shopping for Enhanced annuities

CHANCE

Your Annuity Matures

Collect £10

The effect of adviser charging

Fund after PCLS

Adviser Charge

Net Purchase Price

Income

Worst Standard

£50,000 Nil £50,000 £2,743

Best Standard £50,000 Nil £50,000 £3,076

Best Standard

£50,000 £1,000 £49,000 £3,014

Enhanced £50,000 Nil £50,000 £3,780

Enhanced £50,000 £1,000 £49,000 £3,704

Retiree aged 65, best rate from AMS and Partnership rates. December 2013. Based on fund after PCLS, pro-rated for adviser charge. Single life. Payable monthly in advance. No guarantee period. Level income

Enhanced based on diabetes, high blood pressure and overweight

For illustration purposes only

The effect of adviser charging

Fund after PCLS

Adviser Charge

Net Purchase Price

Income

Worst Standard

£20,000 Nil £20,000 £1,097

Best Standard £20,000 Nil £20,000 £1,230

Enhanced £20,000 Nil £20,000 £1,512

Enhanced £20,000 £500 £19,500 £1,474

Retiree aged 65, best rate from AMS and Partnership rates. December 2013. Based on fund after PCLS, pro-rated for adviser charge. Single life. Payable monthly in advance. No guarantee period. Level income

Enhanced based on diabetes, high blood pressure and overweight

For illustration purposes only

• Annuities remain the vehicle for most people

• Underwriting becoming a significant option

• Adviser-charging for ‘real’ cost available

Summary

Thank you

Partnership is a trading style of the Partnership group of Companies, which includes; Partnership Life Assurance Company Limited (registered in England and Wales No. 05465261), and Partnership Home Loans Limited (registered in England and Wales No. 05108846).

Partnership Life Assurance Company Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Partnership Home Loans Limited is authorised and regulated by the Financial Conduct Authority. The registered office for both companies is Heron Tower, 5 th Floor, 110 Bishopsgate, London EC2N 4AY

No liability or responsibility is accepted by Partnership for the use or otherwise of the statements in this literature in any individual situations regarding the giving of advice. The financial Adviser remains solely responsible for ensuring the advice provided is appropriate and meets all legal and regulatory requirements.

Tax may be subject to change in the future and depends on individual circumstances .