1. Testing the mettle of the defined benefit advice process
Delivering your client’s income needs
May 2018

2. ‘Mettle is the courage to carry on
‘Mettle is the courage to carry on. If someone wants to "test your mettle," they want to see if you have the heart to follow through when the going gets tough.’
Source: vocabulary.com

3. 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 May 2018, 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. Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling, FK9 4UE. Registered number SC Authorised and regulated by the Financial Conduct Authority. This presentation contains past performance information which is not a reliable indicator of future performance. The value of investments 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.

4. Our learning objectives for the session
To be able to demonstrate an understanding of: 1 2 3
How to
overcome procedural bias
in advising on DB cases
The context to
regulatory concerns with regards to DB advice
Why death benefits are a key driver to transfer

5. Transfer activity - The new norm?
Source LCP Quarterly Review Feb 18 Issue 10

6. Transferring pensions
What the client sees…
What the adviser now thinks…
Pension

7. Transfer risks and considerations

8. Freedom & Choice has added transfer drivers
Investment control
TVAS
TFC
Flexibility
Spouse and Health
Advice Opportunity
Concerned over health of scheme
Lump sum death benefits

9. Post-Freedom death benefits – Drawdown
Scheme rules, RULE!
This example represents a typical situation. Not related to any particular individual It does not recommend that course of action.

10. Key driver to transfer - Transfer of Wealth
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.

11. Cascading of pension wealth
Gerry, HR tax payer spends £10,000 net on his pension =
He retires, and becomes a basic rate taxpayer (BRT)
He takes the income of £667 (after tax) for 10 years
He dies and passes the fund to his spouse
She takes the income tax free (as Gerry was under 75) for a
further 20 years
She dies (over 75) and passes the fund to her daughter (BRT)
She takes the income(after tax) for another 16 years
She dies (pre 75) and passes it through to her son who takes
it as a lump sum
£16,667
£6,667
£16,667
£10,672
£16,667
£50,673
The above example assumes 5% pa growth with income taken at the same level.

12. TATA fallout and advice concerns…

13. House Of Commons Select Committee on BSPS TVs…
Worrying evidence regarding financial advice provided to members of the British Steel Pension Scheme (BSPS). BSPS members have, over the past year, been exploited for cynical personal gain by dubious financial advisers in tandem with parasitical so-called “introducers”
Many BSPS members were shamelessly bamboozled into signing up to ongoing adviser fees and unsuitable funds characterised by high investment risk, high management charges and punitive exit fees.
Another major mis-selling scandal is already erupting and we therefore call on the relevant bodies to treat this as such and take urgent action. A key driver of poor advice is contingent charging.
Source: House Of Commons Select
Committee Report Jan 18 (Emphasis added)

14. Transfer concerns… Transfer ‘bias’/conflict of interest.
Contingent charging
Hyperbolic discounting
‘Bird in the hand? ‘
FAD’s the answer…what was the question?
Behavioural bias
Sausage factory /chicken & chips?
Commoditisation of advice
Implied change in 17/16?
DB Transfer start point
Client perceptions
Life expectancy
Investment returns

15. The ‘lottery win’ & hyperbolic discounting
High CETV-Client feels like they’ve ‘won the lottery’?
Hyperbolic discounting? ‘overly valuing money now in preference to money in the future’.
Example demonstrating the value of deferred benefits in terms of cash
CETV
£500,000
Deferred pension
£14,600pa
PP/SIPP fund needed
to buy annuity*
£615,000
Source: Personal Finance Professional Summer 2017 thepfs.org Rory Percival article ‘Buried treasure or a minefield’?
This example represents a typical situation It is not related to any particular individual It does not recommend that course of action

16. The regulatory background
Safe to say

17. The harm being addressed…?
Shortcomings
Specialist transfer firms
License suspensions
Source :
We’re not responsible for contents/reliability of the websites

18. PS 18/6 and CP18/7 Key Points PS 18/6 DB starting position
PTS role/responsibilities
Investment gap-fill
APTA
TVC
Gilt yield/risk-free return Product but not adviser charge
Stochastic modelling
TVAS? Inducement?
CP 18/7
Concerns re suitability
PTS qualifications-Investment Oct 20-(Gap-fill?)
Update old (G6o/AF3?) Gap fill/exams update?
Triage role?
ATR concerns (but C4L?)
Pension increase assumptions CPI/RPI cap/collar
Contingent charging further concerns but some lack of clarity in how to deal?
Stagings April/Oct….18/2020
TVC AIR rolling 3 month

19. PS 18/6 Continuing supervisory work Starting point Timetable
Key points
Continuing supervisory work
Starting point
Timetable
Reiteration of CP17/16 aspects
Personal recommendations
PTS Role and wider responsibilities
APTA requirements
TVC Refinements
Provider TVAS

20. The APTA Plan for a reasonable period beyond life expectancy
Accurately assess ceding scheme benefits Compare with receiving scheme
Plan for a reasonable period beyond life expectancy
Taxation & State benefits
Balanced approach to PPF/FSCS
Balanced approach to scheme funding/covenant
Transfers considered to be a transfer of value
2 Year rule applies
No case law on what value would be
Could be nominal (ie return of fund to return of fund)
Likely to be substantial where transfer greatly increases death benefit
Basis is “loss to Transferor’s estate”
Broadly, it is the difference in value of the death benefits and the retirement benefits of the receiving scheme
Need to calculate a “before” value and an “after” value

21. The APTA All charges to be disclosed
Have regard to likely pattern of taking benefits from both schemes
Consider how each arrangement could meet income needs/death benefits
Consider the trade offs that may occurs by prioritising different objectives
Analysis on different assumptions allowed
Transfers considered to be a transfer of value
2 Year rule applies
No case law on what value would be
Could be nominal (ie return of fund to return of fund)
Likely to be substantial where transfer greatly increases death benefit
Basis is “loss to Transferor’s estate”
Broadly, it is the difference in value of the death benefits and the retirement benefits of the receiving scheme
Need to calculate a “before” value and an “after” value

22. CP 18/7
Key points
Discussion aspects (Triage/2 adviser model/ATR model)
‘Harm being addressed’ (Unsuitable advice?)
PTS (Qualifications/Investment knowledge/Roles/Models)
ATR vs ATTR?
Risks and biases? Sustainability/Safeguarded benefits
Contingent charging
Advice models/Affordability/Suitability
Conflict of interest?
Separation of advice segments (TV/Invest/Implementation)
Key Points PS 18/6
DB starting position
PTS role/responsibilities
Investment gap-fill
APTA
TVC
Gilt yield/risk-free return Product but not adviser charge
Stochastic modelling
TVAS? Inducement?
CP 18/7
Concerns re suitability
PTS qualifications-Investment Oct 20-(Gap-fill?)
Update old (G6o/AF3?) Gap fill/exams update?
Triage role?
ATR concerns (but C4L?)
Pension increase assumptions CPI/RPI cap/collar
Contingent charging further concerns but some lack of clarity in how to deal?
Stagings April/Oct….18/2020
TVC AIR rolling 3 month

23. ATTR Risks & Benefits of staying in scheme
Risks & Benefits of transferring
Client’s attitude to certainty of income
Impact on sustainability of unplanned access
Client’s attitude to being restricted on access
The risks and benefits of staying in a safe-guarded benefits scheme
The risks and benefits of transferring to a flexible benefits scheme
The client’s attitude to certainty of income in retirement
Whether a client will access funds in an unplanned way and the impact on sustainability
The client’s attitude to being restricted on access to benefits in a safe-guarded benefits scheme
The client’s attitude to managing investments or paying for them to be managed in a flexible benefits scheme

24. The APTA and the specified TVC format
Example of transfer value comparison
The transfer value offered instead of your pension income is £120,000
How does this compare with the amount you need to buy the same income on the open market?
It could cost you £140,000 to obtain a comparable level of guaranteed income on the open market.
This means the same retirement income could cost you £20, more by transferring

25. Case study and income modelling…

26. Case study – TVAS calculation and the TVC
Worked for Big Pharma Plc
20 years membership in 60th DB scheme
Leaving salary £45,000
Left in 2013
Leaving pension
20/60 x £ 45,000 = £15,000
Payable from age 65
June, age 45
This example represents a typical situation. It is not related to any particular individual. It does not recommend that course of action.

27. Transfer value – calculation
Calculate the pension at NRA
£ 26,400
Revaluation (scheme rules/legislation)
£18,200
£15,000
2013-DoL
2018 – Date of TV Calculation
Age 65
This example represents a typical situation. It is not related to any particular individual. It does not recommend that course of action.

28. The transfer value comparator – TVC
Prescribed discount GY minus 0.75% charge
£881,000
£776,000
£353,000 shortfall
£423,000
TV offered
Estimated current cost of replacement
NRA
This example represents a typical situation. It is not related to any particular individual. It does not recommend that course of action.

29. The transfer value comparator – TVC
£881,000
Adviser “selected” discount rate of 3.25%
£549,000
£126,000 shortfall
£423,000
TV offered
Estimated current cost of replacement
NRA
This example represents a typical situation. It is not related to any particular individual. It does not recommend that course of action.

30. Drawdown matching the scheme pension…?
Fund £600k
at L/E
Starting income
£26,400
26400 pa income esc 2% 1% IC plus 0.5%OAC £600 fund at l/e PFG 65
116
This example represents a typical situation. It is not related to any particular individual. It does not recommend that course of action. Source Prudential Retirement Modeller

31. Alternative decumulation…?
Income £63,600
Starting income
£35800
750k fund dob NRA 65 Income 27980pm 2% Esc 1%IC plus 0.5% OAC 65 95
This example represents a typical situation. It is not related to any particular individual. It does not recommend that course of action. Source Prudential Retirement Modeller

32. Mapping alternatives…?
Peak income
£64000
Starting income
£46400
State Pension
Reductions % £42k starting income 65 80 95
This example represents a typical situation. It is not related to any particular individual. It does not recommend that course of action. Source Prudential Retirement Modeller

33. How important is “drawdown” in Drawdown?
Source: FE Analytics

34. How important is “drawdown” in Drawdown?
Maximum Drawdown represents the worst possible return over a period — for example, buying at the maximum price over the period and selling at the worst price.
Maximum Loss represents the worst running return over a period — for example, the longest running consecutive loss without making a gain.
IA: Mixed sector
Years to 31/12/17
Maximum Drawdown
Maximum Loss
Volatility
Return 20
22.12
15.08
6.42
5.00 10
20.21
6.12
4.83 5
8.80
4.29
4.97
Volatility
Max DD + Withdrawal = 20.21%+4.00% = 24.21%
‘back to par’ => 30.09% increase
Source: FE Analytics. Table relates to the IA Mixed Asset sector

35. IA Mixed vs 4.5%
Source: FE Analytics. Period 01/01/08 – 01/01/18

36. IA Mixed 20-60 vs 4.5%: £4500 pa income (qtrly)
Source: FE Analytics. Period 01/01/08 – 01/01/18

37. Our learning objectives for the session
To be able to demonstrate an understanding of: 1 2 3
How to
overcome procedural bias
in advising on DB cases
The context to
regulatory concerns with regards to DB advice
Why death benefits are a key driver to transfer

38. Thank you speakernotes@prudential.co.uk
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