Should I stay or should I go now? Part two of pension switching For advisers only – Not for use with retail customers    

Important information This presentation is for adviser use only and not for retail customers, and contains some forward thinking statements which should not be taken as fact. Information given is based on our current understanding, as at April 2017, of current taxation, legislation and HMRC practice, all of which are liable to change and subject to an individual’s own circumstances. Terms and conditions of products are available on request. The level of charges may change in the future. For webex presentations, the event may be recorded for training purposes. No reproduction, copy, transmission or amendment of this presentation may be made without the written permission from Prudential. PAC - Prudential" is a trading name of The Prudential Assurance Company Limited. This name is also used by other companies within the Prudential Group. The Prudential Assurance Company Limited is registered in England and Wales. Registered office at Laurence Pountney Hill, London EC4R 0HH. Registered number 15454. Prudential Retirement Income Limited is registered in Scotland. Registered office at Craigforth, Stirling FK9 4UE. Registered number SCO47842. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This presentation contains past performance information which is not a reliable indicator of future performance. Investments are not guaranteed and can go down as well as up. Clients may not get back what they put in. Any examples included are designed to represent a typical situation and are not related to any particular individual. They do not recommend that course of action.    

Our learning objectives for the session To be able to demonstrate an understanding of : 31st March 2017 and the great switching opportunity 1 Getting the best from best advice systems Dotting the i’s and crossing the t’s 3 Recent FCA guidance on transfers and switching 2    

What happened on 31st March 2017? FCA introduces cap on early exit pension charges The Financial Conduct Authority (FCA) has today announced its final rules on capping early exit charges for consumers eligible to access the government’s pension reforms from age 55. From 31 March 2017, early exit charges will be capped at 1% of the value of existing contract-based personal pensions, including workplace personal pensions. Early exit charges that are currently set at less than 1% may not be increased. Firms will not be able to apply an early exit charge to personal pension contracts entered into after these rules take effect.  Need to mention MVRS / MVAs etc   Sources: FCA  

FCA introduces cap on early exit pension charges Christopher Woolard, Executive Director of Strategy and Competition at the FCA said: “People eligible for the Government’s pension reforms should feel able to access them as they wish. The 1% cap on early exit charges for existing pensions, and the 0% cap for new contracts, will mean that current and future savers will not be deterred by these charges from accessing their pension pots.”   Sources: FCA  

How many clients have exit penalties? The FCA investigation showed that nearly 700,000 (16%) of customers in contract based pension schemes face early exit penalties! Number of customers Exit charges before 31st March 2017 358,000 0 - 2% 165,000 2 - 5% 81,000 5 - 10% 66,000 10% Source: www.theguardian.com/money/2016/may/26/pension-exit-charges-capped-1-percent-fca-proposals-retirement   We are not responsible for contents/reliability of the website(s) shown.  

SimplyBiz events Q4 2016 Brief summary of what was covered by Royal London in Q4 2016 To switch or not to switch – That is the question Looked at the Thematic review 2008 and the positive compliance sessions from 2013 Drivers for why people do and don’t switch, analysis of WP funds and how to conduct it Suitability reports, client aims & objectives for switching & transfers    

Unclear = FOS likely to rule in favour of client 2012 Key Findings Extra product costs without good reason Loss of benefits without good reason Recommended funds not suitable for client Ongoing reviews not put in place 52% Suitable 48% Unsuitable or Unclear Unclear = FOS likely to rule in favour of client   Source FCA Positive Compliance workshops October 2013  

Beginning – Understanding the Need Middle – Establish the Solution The story of advice Beginning – Understanding the Need Middle – Establish the Solution End – Presenting the Solution Source FCA Positive Compliance workshops 2016/2017  

The Beginning - Know your client information Objectives Individual needs Term Why Growth/Income – level, increasing, decreasing Comments sections Hard / Soft facts Knowledge and Experience Specific sections Client reviews Prioritisation Suitability reports   Source FCA Positive Compliance workshops 2016/2017  

The Middle - Selection process / research Some considerations….. Provider’s: Reputation and financial standing Investment style / approach / performance Approach to investment selection / due diligence Terms and conditions Charges Funds, tax wrappers and other products / flexibility Asset classes Functionality Additional tools Support services Not exhaustive   Source FCA Positive Compliance workshops 2016/2017  

The Middle - Selection process / research Evidence – all providers considered? Evidence – all products considered? Centralised research? Same product or provider used reasonable explanation? Existing product / product explored? Some considerations….. Provider’s: Reputation and financial standing Investment style / approach / performance Approach to investment selection / due diligence Terms and conditions Charges Funds, tax wrappers and other products / flexibility Asset classes Functionality Additional tools Support services Not exhaustive   Source FCA Positive Compliance workshops 2016/2017  

The End - Suitability reports Client needs and objectives Loss of benefits? More expensive – why? Why is advice suitable? Provider choice – why? Reference to documents Client ATR & reconfirmation of Risk descriptions Client reviews Comparison of old and new    

File Checklist What is a ‘good’ file Advice process / file checklist Disclosure Key features illustration Know your client – factfind? Attitude to risk Capacity for loss Research Suitability report Client reviews File Checklist   Source FCA Positive Compliance workshops 2016/2017  

Client aims and objectives   Source: PruAdviser  

Advising on Pension Transfers – FCA expectations January 2017 This alert highlights our requirements when you provide advice on pension transfers, including advice in particular circumstances FCA 24-01-2017. FCA ‘concerned’ over IFAs DB transfer processes New Model Adviser 24-01-17 Advisers back FCA pension transfer guidance on critical yields and insistent clients Money Marketing 24-01-17    

Advising on transfers - FCA Expectations Investments Concerns regarding funds/investments Need to consider likely returns/risks/charges Critical yields Not just a ‘hurdle rate’ Client circumstances/’specific factors’ Permissions Care re responsibilities Liaise re investment suitability Insistent clients ‘Three step’ process Suitable advice/risks/document actions Sbiz issued a publication on this – Mark will send over. Other Aspects Overseas transfers/Pension scams   Source FCA Update Jan 2017  

FCA Advising on pension transfers – January 2017 expectations Advice on pension switches Where advice is provided and the advice is either to proceed or not to proceed with a proposed switch, taking into account the client’s personal circumstances, the firm is making a personal recommendation. The firm will need to comply with our requirements regarding the suitability of the advice provided, as noted above. Where the firm recommends a pension scheme knowing that the client will switch from a current pension arrangement to release funds to invest through the scheme, then the suitability of the assets in which the client’s funds will be invested must form part of the advice given to the client.   Source: https://www.fca.org.uk/news/news-stories/advising-pension-transfers-our-expectations  

Product Selection Tools    

An example of good practice What the FSA said about comparing costs The firm set out a section in its template suitability report outlining any switch penalties on the ceding scheme and clearly explained the impact of charges of the switch. They did this by comparing the reduction in yield (RIY) figures for the ceding and new scheme (they used a software system to calculate the RIY of the ceding scheme).   Source FSA switch review 2008  

Product Selection Tools – case study Hugh age 50 Pension switch SRA 60 £ 100,000 Default funds No advice charges O&M Pensions Profiler & Selecta pension This example represents a typical situation It is not related to any particular individual It does not recommend that course of action    

“League Tables” using Default Funds “But I can’t use you, you’re not in first place!” Provider System 1 Provider rank Projected fund System 2 Projected Fund A 1st £ 156,000 B 2nd C 3rd D 4th E 5th F 6th G 7th H 8th I 9th £ 155,000 J 10th 7th £156,000 10th £152,000 3rd £156,000 “My compliance says I have to use top three companies only!” 11th £155,000 6th £156,000 4th £156,000 “What has this analysis really achieved?” 5th £157,000 13th N/A 9th £155,000 Source: Selectapension 1085417 & O&M created 10/01/2017 – Male age 50 £100,000 FV 10yrs to SRA, Default settings and no advice charges, Personal Pensions selected We are not responsible for contents/reliability of the website(s) shown.  

What the FSA said about comparing costs FSA Switch review Some examples to think about… Poor Practice The firm included a table in its suitability reports setting out and comparing the projected retirement fund value from the ceding scheme and the new scheme. These typically showed that the new scheme had lower charges. The advisers indicated that the new scheme involved lower costs and therefore this formed part of the reason for switching. However, the projection of the new scheme was often on the basis of 100% investment in a cash fund (which had no charges) where the fund was to be managed by a discretionary fund manager. The projections left out the cost of the discretionary management service and any underlying funds. Therefore the comparative table and advice were misleading Source: FSA Switch review 2008    

External portfolio £100,000 case study CF Woodford equity income M&G Episode income Threadneedle equity & bond Artemis global income 25% holding in each This example represents a typical situation It is not related to any particular individual It does not recommend that course of action Source: Selecta Pension   We are not responsible for contents/reliability of the website(s) shown.  

Software system 1 – Portfolio v Default Provider Portfolio Rank Default Rank A 1st B 2nd C 3rd D 4th E 5th F 6th G 7th H 8th I 9th N/A 2nd N/A N/A 32nd 5th 29th N/A N/A Male age 50, SRA 60, £100,000 transfer, Selecta Pension, and O&M PP & Hybrid SIPP 4 fund external portfolio, (M&G, Woodford, Artemis & Threadneedle)   We are not responsible for contents/reliability of the website(s) shown.  

Default vs Portfolio Software System 1 Software System 2 Provider Default Rank Portfolio Rank A 1st B 2nd C 3rd D 4th E 5th F 6th G 7th H 8th I 9th Provider Default Rank Portfolio Rank A 1st B 2nd C 3rd D 4th E 5th F 6th G 7th H 8th I 9th N/A 1st 2nd N/A 11th N/A N/A N/A 6th 11th N/A 15th N/A N/A N/A 2nd N/A N/A Male age 50, SRA 60, £100,000 transfer, Selecta Pension and O&M/. , PP & Hybrid SIPP 4 fund external portfolio, (M&G, Woodford, Artemis & Threadneedle)   We are not responsible for contents/reliability of the website(s) shown.  

Screenshot of the Portfolio Table 58 products available (originally was 128) Male age 50, SRA 60, £100,000 transfer, Selecta Pension, PP & Hybrid SIPP 4 fund external portfolio, (M&G, Woodford, Artemis & Threadneedle) We are not responsible for contents/reliability of the website(s) shown. Source: Selecta Pension  

What comes first funds or filters What comes first funds or filters? Provider multi asset fund £100,000 case study Client age 50 Recommendation for multi asset fund Online submission Requires flexible access Hugh requires phased drawdown options Expresses concerns for high financial strength ? This example represents a typical situation It is not related to any particular individual It does not recommend that course of action    

Prudential Dynamic Focus 40 – 80 Portfolio    

Provider multi asset fund 52 products available (originally was 128) Male age 50, SRA 60, £100,000 transfer, Selecta Pension, PP and Hybrid SIPP Prudential Dynamic Focus Fund 40% - 80% We are not responsible for contents/reliability of the website(s) shown.  

Provider multi asset fund 31 products available (originally was 128) UFPLS and Flexi access available, Online submission, Phased drawdown option, No filter for financial strength Male age 50, SRA 60, £100,000 transfer, Selecta Pension Prudential Dynamic Focus Fund 40% - 80% Plus filters   We are not responsible for contents/reliability of the website(s) shown.  

Should Hugh decide on a ‘smoothed’ return & product filters Source: Selecta Pension 12/01/2017   We are not responsible for contents/reliability of the website(s) shown.  

Justifying a switch to a more expensive plan Why is the old plan no longer suitable? Better fund performance Why should this be expected in the new product? What alternatives were available in the old product? Why were they discounted? Product features not available How do they link in to the client’s objectives? Consolidation to a single plan Do the benefits of efficiency outweigh the additional costs? Capacity for loss Does the benefit of guarantees outweigh the additional costs? Concerned about the effect of investments becoming unbalanced? Source: FCA Positive Compliance workshops 2014    

Quality investment governance Cost vs Value Quality service Flexible access Guarantees Specific assets 3.10 Additional costs may be justifiable where they are associated with a specific benefit that is valued by the client Death benefits Quality investment governance Predictability Non FP As I mentioned earlier The FCA does not recommend you must always switch to a cheaper plan. There are many reasons why the extra cost is worth paying. The adviser just has to justify it. I’d like to bring you up to speed with the latest findings from the regulator…. Quality service, Guarantees, Multi- Asset funds (read all bubbles on the slides) etc Discuss the FSA’s final guidance on assessing suitability (April 2012) : “Where additional costs apply, firms must judge whether they are suitable in light of the needs and objectives of the client. Additional costs may be justifiable where they are associated with a specific benefit that is valued by the client. Firms should disclose any difference in the cost in a way that is fair, clear and not misleading.” Smoothing Source: FSA Finalised Guidance. Assessing Suitability. Replacement Business and Centralised Investment Propositions April 2012  

Another common misconception - RU64 “I can’t use you. RU64 rules still apply and you’re more expensive than stakeholder!” Remember – it’s costs without good reason… Does Stakeholder offer …..? Guarantees? Drawdown and/or flexible access? Smoothed returns? Financial strength? Multi asset or wide investment choice? Flexible death benefits? And as for RIY …. OAC?    

Adviser Charging Old PP New PP Old PP Ongoing service Old PP ‘A client should be able to make an informed decision about whether they wish to take up or cancel a firm’s ongoing service’. TR13/5 Old PP New PP Old PP Ongoing service Old PP Ongoing Adviser Charge What, when & how much? Review + Research + Switch Initial adviser charge  

Pension Switching – SimplyBiz held on the Vision website – reports and checklist all held here. Most of them will be aware of Keely – head of pensions technical – most advisers spoke to her at some stage.    

Prudential Retirement Modeller Reference to other providers General Assumptions Growth rate is 6.2% - PruFund Growth Adviser charging: 3% initial + 0.5% OAC Source: Prudential Retirement Modeller www.pruadviser.co.uk/retirementmodeller   For Adviser Use Only - Not Approved For Use With Clients  

Introducing the Prudential Retirement Account Simple & efficient process Adviser charging options Manage plans securely online A single account Freedom & choice flexibility Access to guarantees Death benefits Manage business book online Phased Retirement Extensive investment options Adviser Model Portfolios Range of reports  

Summary Switching can be extremely useful for the right client Filter & Funds to narrow use systems more effectively Highly Personalise Suitability Reports Consider ATR & C4L Failure to confirm Client Objectives Unclear Advice 31st March 1% exit fee cap opportunity Original Thematic reviews still relevant Help Client make an Informed Decision Consider all other Options    

Support   Source: www.pruadviser.co.uk  

Our learning objectives for the session To be able to demonstrate an understanding of : 31st March 2017 and the great switching opportunity 1 Getting the best from best advice systems Dotting the i’s and crossing the t’s 3 Recent FCA guidance on transfers and switching 2    

Thank you for your time speakernotes@prudential.co.uk If you would like to give us feedback directly or request information not covered elsewhere please e mail us at speakernotes@prudential.co.uk Here are the learning outcomes Read through them