Changing retirement landscape in Britain

Delegates at the BlackRock Retirement Conference in London this month heard how Britons were saving more now into pensions than ever before. Yet despite this positive message, there still remains a lot to be done in terms of education about contribution levels, understanding portfolio construction and ensuring a beneficial level of diversification during the accumulation stage, to help provide the best possible pension pot when it comes to decumulation. Add to this the need to help people understand how to make this pension pot last for the whole of their retirement, not just for the first 10 or so years, and the picture becomes far more mixed.

Learning from the US and Australia

Retirement saving in the US and Australia has been examined by policy makers and pensions think\-tanks for many years. The idea is that the UK can learn from both nations as to how we can create a pension solution that works for both savers and spenders in the run\-up to, and the years beyond, retirement. Claire Felgate, head of UK defined contribution investments for BlackRock; Anne Ackerley, head of US and Canada defined contribution for BlackRock; and Justin Arter, head of institutional client business for UK, Middle East and Africa at BlackRock, took part in a panel discussion on how retirement saving is structured in the US and Australia, and what the UK can learn from this. **US situation** In the US, the workplace pension system is voluntary, and employers do not have to provide a plan. Employees are not compelled to save into it. That said, Ms Ackerley said the majority of pension savings in the US are from employers, with a rising number of defined contribution \(DC\) schemes being used.

> Most investors do not have the experience to invest over a 40\-year journey

Moreover, she said where employers do offer automatic enrolment, there is more than 90 per cent participation. Within these workplace schemes, many US employers are choosing target date funds as their default pension scheme option, especially as they meet certain criteria set by the US government in the Pensions Protection Act. When it comes to investment, Ms Ackerley said: "People want 'do it for me'. Most investors do not have the experience to invest over a 40\-year journey; they are happy to have a 'do it for me'." However, she said the US needs to focus on the access \- with 40 per cent of workers in the US unable to access a workplace pension scheme, particularly those who work for small employers. If the US allowed multi\-employer plans, she said this would go a long way to helping reduce the cost and administrative burden for US employers. Secondly, she said the US needed to focus on the decumulation strategies, as the country was seeing a trend of Baby Boomers retiring. This means, therefore, that money taken from 401k pension plans is now exceeding what is being put into pension pots by the Millennials. "There's a notion of embedding an annuity into the 401k plan, in particular, into a target date fund", Ms Ackerley said. "We don't have an annuity culture in the US ... there is a view it could be very helpful for at least a portion of people or for a portion of their savings, which is a contrast with the UK, which is moving away from annuities." **Australian situation** In Australia, the situation is different to the US and perhaps more similar to the UK. Nearly 30 years ago, Australia brought in compulsion, which Mr Arter said took a "complex political process" to bring in a form of auto\-enrolment and the escalation phase. He told delegates: "Super, as it is known in Australia, is now embedded as part of a person's thinking. "Yet there is still, surprisingly, a lack of engagement among younger people and a higher engagement among older people." Worryingly, despite compulsory contributions going up to more than 9 per cent, government's means\-tested state benefits are still the principal source of income for 70 per cent of retirees over 45. "These structures take a very long time until they get up to a point where they are self\-sustainable in terms of people paying their own way", Mr Arter said. Moreover, he said the pots may not be enough to last well into retirement, with the vast majority of people retiring with a significant mortgage they have to pay off. After they have paid off their debt, they try to manage their pension quite carefully, he said, but people may not have the appropriate tools to manage their investments. Mr Arter added it was troubling that while the accumulation stage was good in Australia, the post\-retirement / decumulation phase was "not well set up for that", with the annuities on offer being "opaque", and "poor value". Culturally, he said, people do not like annuities or understand them. As a result of the Murray Review in Australia, there are now debates going on as to whether there should be some form of compulsory scheme in retirement which can provide a regular income without the risk of the individual spending too much. This could mean Australia is to bring in a new product being implemented, called MyAnnuity or My Pension. Ms Felgate showed a slide showing household saving as a percentage of disposable in the US, UK and Australia; the UK is at just 0.2 per cent. "This is a stark number" she said.

She added it was equally concerning that more than 24 per cent of this was in cash \- similar to portfolios of Australian savers.

Given interest rates and inflation, she said cash and deposit accounts were not a low risk choice for long\-term savers. The panel agreed more needed to be done to encourage individuals to put extra in and invest wisely to ensure a positive outcome in their retirement.

Aspirations v reality: what your clients need to know about pension saving

More people in the UK have started to save for retirement but there needs to be better education if they are to achieve a sizeable pension pot. These were among the findings of BlackRocks latest Investor Pulse and DC Pulse surveys, which aimed to assess levels of engagement, understanding and saving among adults in the UK. Presenting the results at BlackRocks Retirement Conference in London, Ali Bernat, head of EMEA retirement marketing for the fund manager, told delegates people needed to do more to fund a comfortable retirement. He said: Historically, a lot of people would have relied on state benefits and their defined benefit scheme to sort them out, but things are shifting. There are not as many certainties as there were. All this, coupled with rising longevity, means Britons need to start putting money aside as early as possible to help fund their retirement. A big part of this pension provision, Mr Bernat said, is the workplace pension scheme. According to Mr Bernat, it is fantastic that more people are saving into some form of pension scheme, especially since auto\-enrolment came into force in 2012.

> The question is how can we put more pressure on people to increase their contributions?

But while he praised the effect of auto\-enrolment for helping to get a further 8.3 million Britons saving into a workplace pension, he also warned there was a huge danger people were overestimating their contributions into pensions. Overall, people are not putting that much in, he said, drawing delegates attention to data from the Office for National Statistics \(ONS\) on weighted\-average contribution rates to private sector occupational pension schemes. The ONSs 2015 Occupational Pension Schemes Survey revealed the average employee member contribution in defined contribution \(DC\) schemes was 1.5 per cent, with 2.5 per cent on average from employers. This compares unfavourably with career average schemes and defined benefit \(DB\) schemes, where the employee contribution is 5.5 per cent and 5 per cent respectively. Ideally, people should be paying higher contributions. As a rule of thumb, the Department for Work & Pensions has said 15 per cent is a minimum recommendation, although contribution rates will depend on circumstances such as age, income level, expected provisions and the replacement rate. Mr Bernat added: We know people are not putting that much in, so the question is how can we put more pressure on people to increase their contributions? We need to find a way to tailor this message to different people, as their circumstances will be very different, Mr Bernat concluded.

How to increase pension savings

**The magic number?** Getting people on track for retirement

Tim Hodgson, director of unit linked and platforms for BlackRock, interviewed three industry specialists to discuss how people can save more, what can be done to improve education and how to help clients when it comes to drawdown. According to panellist Ben Piggott, defined contribution \(DC\) plan secretary for the Royal Mail, getting the message across to employees that "15 was the magic number" \- in other words, that 15 per cent contribution would help secure enough in retirement \- was paramount for getting staff to stay enrolled in the pension scheme. He explained: "We felt that people want to be told. As an industry, we are good at being exactly wrong, but not very good at being broadly right when it comes to getting messages out there." To help people, Mr Piggott said: "We have used good old\-fashioned posters, one of which was showing the value of the plan, with the strapline: 'Turn 8 into 27.50'." For Romi Savova, founder and chief executive of PensionBee, it was important to focus on life moments, when people might be "very susceptible to thinking about pensions and where they might like to get to in retirement". For example, this might be when an individual gets a new job or have a child. PensionBee will use searches on social media to find people, and link what is going on with them in their personal life to their retirement.

> It is amazing how many people we deal with do not have an understanding of the complexities of drawdown and defined benefit transfers

Jonathan Walker, managing director of The Pension Drawdown Company, said it was clear that, post\-pension freedoms, some people had little idea what it meant for them, with only a few people opting to increase their retirement savings pot as a result. All three said it was hard to get people to think about putting more money into their pension pots, even with the use of online calculators showing that increasing contributions really will help boost their savings pots. Moreover, they said it could be difficult for people to understand what exactly is meant by such terms as 'tax relief'. Ms Savova said: "It's that level of demonstrating to people what they get and how they get rewarded in the short term that can encourage saving in the long term." Mr Hodgson asked whether there was an element of "language" that needed to change in order to make it clearer to people. Mr Piggott said trustees of Royal Mail Defined Contribution Plan had redesigned the pension statement, making it clearer and easier to read. Likewise, Mr Walker commented: "\[When someone walks through the door\], we have to start at the very beginning, and assume they know nothing. "This can be very patronising for someone who knows something, but it is amazing how many people we deal with \- solicitors, bank managers and even financial advisers \- who do not have an understanding of the complexities of drawdown and defined benefit transfers." All agreed the introduction of the pensions dashboard \- a technological development allowing people to see all their pensions in one place, which is expected in 2019 \- will be very helpful in enabling people to see the value of their pension plans, and enabling them to take more control of their retirement savings. "If they don't know there's a gap", says Mr Walker, "they can't take action to close the gap."

**Breaking out** Following the panel session, delegates were given the option of choosing two out of five different breakout sessions to attend. The sessions were: 1\) Multi\-asset strategies revisited. 2\) The evolution of Beta. 3\) Unlocking the power of portfolio analytics. 4\) Downside protection and upside potential. 5\) Rethinking fixed income in the retirement journey. Armit Bhambra, vice\-president of institutional business development, and Flora Harries, index equity investment strategist at BlackRock, explained how index investing had evolved from straightforward market cap\-weighted index tracking to tailored smart beta, factor investing, environmental, social and corporate governance, and using an FX overlay.

> Constructing portfolios and meeting investors' objectives will be challenging

More trustees and pension scheme managers were looking to match their liabilities, lower their overall portfolio risk and help to improve returns, therefore, by incorporating these different beta strategies into their investment mix. He said: "There are two challenges \[facing pension schemes\] at the moment. "On the one hand, we have suppressed fixed income yields and then if you overlay on that age expectancy, you have a line which goes the other way. "We have falling yields, defined benefit liabilities shooting up unless you have hedged out, and you are living longer. Even if you do take risk, that risk is not being rewarded as well as it used to be." He said this was the context of the conversations around beta and FX hedging, where the opportunity exists to reduce risk in the portfolio while providing some means to lowering cost and helping to improve returns. **What's in a portfolio?** Ursula Marchioni, head of BlackRock Portfolio Analysis and Solutions \(BPAS\), EMEA, said schemes could use BPAS to drill down into a portfolio and understand where the risks and returns are coming from. She said: "The lower for longer environment that we have been talking about will continue. "The view we have is that, certainly, constructing portfolios and meeting investors' objectives will be challenging going forward due to this situation." She explained it would be hard to continue matching this macro\-backdrop with the investor's needs which will remain the same as before, if not higher thanks to the economic situations. Therefore, many managers have made conscious decisions to help investors understand and deepen their understanding of risk.

> When designing the NEST product, we were told not to look in the mirror and design the product for that person

Also, another way to solve the conundrum is to focus more on the construction of a portfolio. By way of an example, she outlined two anonymised case studies. In one case, a life office had diversified its portfolios so much by buying lots of multi\-managed funds, that it had diversified away its alpha. Moreover, many of the underlying managers were acting similarly to each other, which was eroding returns. By using BPAS to understand where the returns were actually coming from, the portfolios could be restructured and rebalanced to create a better risk/return profile and improve the overall alpha, the team said. "BPAS is a way to empower you by letting you have a look at the picture through a different set of lenses", Ms Marchioni added. **Fawcett by the fire side**

The last session of the day was an interview with Mark Fawcett, chief investment officer for the National Employment Savings Trust \(NEST\). Talking to Claire Finn, head of UK DC, unit\-linked and platforms for BlackRock, Mr Fawcett explained how he came from managing Japanese hedge funds for Lehman Brothers to developing the government's default auto\-enrolment pension scheme. With more than 5 million Britons enrolled into the NEST scheme through their employers, Mr Fawcett said it was important for him to understand what members really needed. "The key thing is I had learned all the academic stuff but coming in and having a blank sheet of paper, and trying to understand what our members need, was different to what we had learned. "When designing the NEST product, we were told not to look in the mirror and design the product for that person. "We had to do research into our members and try to find out what they need, what they think about saving, what their fears and aspirations are." He said some of these features had been built into the default fund, adding that the fund was also designed on the basis its use would be high \- in the event, more than 99 per cent of NEST savers are in the default \- thanks to inertia. "As a result, we knew we had to design a high quality product. There were a lot of expectations that our default fund would be cheap, cheerful and pretty rubbish, but we did not agree with that. "We felt it had to be a really good product." For the lowest\-earning, youngest members, the foundation stage of the default is lower risk, getting people to start investing but not giving them so much volatility they will be "scared off", said Mr Fawcett. After the conference, Mr Fawcett added: "This approach debunks investment orthodoxy that says you should maximise risk when you're young and is based on analysis that shows what really matters are investment returns later in life once a pension pot has been built up." The fund also has factored real estate into its mix, as well as managing environmental, social and governance risks. Earlier this year, NEST announced it had taken action to respond to the investment challenges of climate change by investing in a new climate aware equity fund. He explained this was important, especially given the youngest member in the scheme was just 16, and for her, the impact of climate change would be significant over the next 40 or so years. When it comes to the future for saving, Mr Fawcett was positive about the impetus of auto\-enrolment. He predicted opt out rates will stay low, as a result of inertia combined with the growing knowledge among people that they need to save more, even when the contribution rates rise. Yet Mr Fawcett also warned there are bigger challenges to be addressed to help people make the most of the new decumulation rules in the UK. Mr Fawcett argued that, following the abolition of compulsory annuitisation, some form of pre\-set decumulation solution would reassure most members and avoid them having to make ongoing complex decisions if they didnt want to. **Conclusion** Ultimately, putting money away for a pension is "physically easy and emotionally hard", Mr Fawcett said, echoing sentiments expressed throughout the day as one of myriad pensions challenges facing advisers, providers, government and individuals in the UK. However, it is clear from the overall sentiment of the conference that, if the pension investment strategy is right, contribution rates improve and people are better educated and aware of the need to accumulate more, then maybe they will be better able to take control of their money, and manage their pots wisely, in the all\-too\-important decumulation stage. _Simoney Kyriakou is content plus editor for FTAdviser_

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