ASSE SSME NT O F ROYAL LO NDO N S DRAWDOWN G OVE RNANCE SERVICE MAY 2016

Transcription

1 ASSESSMENT OF ROYAL LONDON S DRAWDOWN GOVERNANCE SERVICE MAY 2016

2 C O N T E N T S 1 INTRODUCTION PROJECT BACKGROUND AKG ASSIGNMENT INFORMATION SOURCES RELIANCES AND LIMITATIONS CONFIDENTIALITY PROPOSITION ASSESSMENT MANAGING CUSTOMERS IN DRAWDOWN OVERVIEW OF ROYAL LONDON DRAWDOWN GOVERNANCE SERVICE CUSTOMER INFORMATION INPUT REQUIREMENTS SETTING AND MONITORING INCOME OBJECTIVES; PUTTING ACTION PLANS IN PLACE DRAWDOWN DASHBOARD CUSTOMER DISPLAY SCREENS AND KEY INDICATORS COMMUNICATIONS AND REPORTING ASSUMPTIONS AND CALCULATIONS AKG S CONCLUDING COMMENTS APPENDIX 1 EXAMPLE DGS SCREEN; DASHBOARD APPENDIX 2 EXAMPLE DGS SCREEN; CUSTOMER FILTERING OPTIONS APPENDIX 3 EXAMPLE DGS SCREEN; CUSTOMER FILTERED VIEW APPENDIX 4 EXAMPLE DGS SCREEN; CUSTOMER PLAN DETAILS APPENDIX 5 ROYAL LONDON RETIREMENT SUPPORT APPENDIX 6 STOCHASTIC MODELLING TOOL INFORMATION ABOUT AKG AKG Financial Analytics Ltd Page 2 May 2016

3 1 INTRODUCTION 1.1 PROJECT BACKGROUND This Report has been prepared for Royal London, the Client. The Client is launching a new service, the Drawdown Governance Service (DGS), and has a requirement for the proposition to be assessed by an independent third party. The Client has commissioned AKG Financial Analytics Ltd (AKG) to carry out an independent assessment of the DGS proposition. 1.2 AKG ASSIGNMENT The DGS is a service for use within financial adviser businesses which has been designed by Royal London to support the management of customer income objectives in retirement. AKG s assignment can be broadly summarised as carrying out an independent assessment of the DGS proposition taking into account and covering the following key themes and questions: Managing customers in drawdown establishing the key challenges and risks to managing customers in drawdown in the post-pension freedoms market. Overview of Royal London DGS what is the proposition being brought to market by Royal London, who is it available to and how is the service aiming to support its users? Customer information input requirements what level of adviser/customer input is required for DGS (at establishment and ongoing) and what content is automated? Setting and monitoring income objectives how does the service seek to support the setting and ongoing monitoring of income objectives for the customer? Drawdown dashboard what functionality does the service s homepage provide for its users? Customer display screens and key indicators what is the look and feel of the customer display screens, what do Royal London s income sustainability and income outlook ratings indicate and how do these ratings work? Communications and reporting how can the service support drawdown-related customer communications? Assumptions and calculations what assumptions and calculations are used to underpin the ratings and output from the service? AKG comments and observations independent summary of AKG s thoughts on the service, its characteristics, its potential benefits and the identification of any associated considerations for advisers engaging with the service. 1.3 INFORMATION SOURCES AKG has been supplied with the following information to support the assessment process: a) Internal Royal London stimulus material providing an overview of the rationale behind the development of the DGS proposition and its proposed functionality. b) Access to system demonstration screens illustrating the look and feel and highlighting the functionality of the Royal London DGS. c) High level overview and details of the stochastic modelling engine underpinning the Royal London DGS. AKG Financial Analytics Ltd Page 3 May 2016

4 AKG has been in dialogue with senior members of the Royal London DGS development and marketing teams as part of the assessment process. AKG has also viewed some findings from a qualitative adviser research exercise, carried out on Royal London s behalf by NMG Consulting. The research exercise essentially tested the concept and functionality of the DGS with financial adviser participants. Information in respect of the retirement income market landscape and other companies operating in the market was obtained from AKG s internal library of information, which is maintained both by regular direct engagement with product providers and intermediaries and by other channels of market intelligence. 1.4 RELIANCES AND LIMITATIONS Much of the information upon which AKG s report and comments are based has been supplied directly by the Client. AKG has made every effort to ensure the accuracy of the content of this report and to ensure that the information contained is as current as possible at the date of issue, but AKG (inclusive of its directors, officers, staff and shareholders and any affiliated third parties) cannot accept any liability to any party in respect of, or resulting from, errors or omissions. AKG personnel are available to expand upon the comments in this report, if required. Whilst many aspects underlying AKG s comments are likely to change only slowly, the financial services industry is a competitive and dynamic marketplace, with new products and developments being announced regularly. As a result, AKG cannot guarantee that any particular comment will remain appropriate at any future date. Future developments in the market could have significant impact upon the comments. AKG information, comments and opinion, as expressed in the form of its analysis and ratings, do not establish or seek to establish suitability in any individual regard and AKG does not provide, explicitly or implicitly, through this report and its content, or any other assessment, rating or commentary, any form of investment advice or fiduciary service. Actuaries must comply with standards produced by The Institute and Faculty of Actuaries (IFoA) and the Financial Reporting Council (FRC). The FRC is responsible for setting technical actuarial standards (TASs) and the IFoA is responsible for setting and maintaining ethical standards, or Actuarial Profession Standards (APSs). In AKG s opinion, the work involved in this review does not fall within the scope of any of the Technical Actuarial Standards set by the Financial Reporting Council. 1.5 CONFIDENTIALITY This report has been produced for the Client s consideration. AKG is happy for the Client to reproduce all or part of this report in any internal or external published material, subject to prior written agreement of the content, context, duration and volume of such reproduction and of any reference, explicit or implicit, to AKG s involvement in producing this report. AKG Financial Analytics Ltd Page 4 May 2016

5 2 PROPOSITION ASSESSMENT 2.1 MANAGING CUSTOMERS IN DRAWDOWN Following the introduction of the pension freedoms changes in April 2015 customers now have more flexibility in terms of how they withdraw money from their accumulated pension fund(s) at and during retirement. Income drawdown has been available for a number of years as a mechanism, available through a personal pension or SIPP structure, which enables the customer to keep some of their fund invested while withdrawing income on a regular basis. Over time the rules applicable to the use of income drawdown have changed, including the fact that if a customer didn t want to take any income they could leave their entire fund invested, but before pension freedoms there had always been a cap on the maximum amount of income that could be withdrawn by a customer each year. This maximum withdrawal framework was informed by calculations made by the Government Actuary s Department (GAD). But with the arrival of pension freedoms, the GAD framework is no more and customers have full flexibility in relation to the withdrawal of money from their pension fund(s), subject to the taxation terms applicable. The latter piece on taxation is of key importance to advisers working with customers who wish to drawdown their monies at a more aggressive pace or indeed in one fell swoop. This brief drawdown history lesson is important as it underlines the fact that advisers will be dealing with a wide range of drawdown customers with differing requirements, each requiring support and guidance with their respective drawdown plan. Add to this the fact that drawdown flexibility might now be enticing more customers who had previously been likely annuitants and the range of customer types expands further. The consideration and potential mitigation of risks is crucial when delivering retirement advice regardless of the type of retirement income solution being considered for the customer. From a drawdown perspective the adviser and customer need to consider a number of key items including income budgeting (based on customer resource and requirements), taxation (optimising customer situation), longevity/morbidity outlook (for the customer), potential impact on capital/income from the outside world (inflation, interest rates, investment markets etc) and investment approach (drawdown portfolio construction, attitude to risk and appetite for loss, impact of market movements and different sequences of investment return). Advisers can add real value here but they will need to have a coherent and robust approach to drawdown advice and management within their businesses. Drawdown strategies will need to be established and monitored in a cost effective way for both the customer and the adviser business. AKG Comment: Drawdown increasingly important post pension freedoms Changes bringing more customers into consideration for drawdown with potentially lower fund sizes Regulatory requirements on drawdown processes are rightly increasing Drawdown planning potentially harder and more time consuming for advisers to deliver Lots of issues and risks for advisers and customers to consider in retirement planning discussions Advisers can add real value in drawdown advice and management but they will need to have a coherent and robust approach to this within their businesses. AKG Financial Analytics Ltd Page 5 May 2016

6 2.2 OVERVIEW OF ROYAL LONDON DRAWDOWN GOVERNANCE SERVICE Royal London is a key player in the income drawdown market, offering an income drawdown product Income Release with a range of investment solutions including the Royal London Governed Retirement Income Portfolios (GRIPs). The Royal London Drawdown Governance Service (DGS) is a new service which has been developed to work in conjunction with Royal London s Income Release product and associated investment solutions. It is a service which has been specifically designed for use by financial advisers and, more widely, by staff within financial planning businesses who might be dealing with income drawdown related planning activities and issuing related customer communications. DGS has been designed to support the delivery of drawdown planning on an initial and ongoing basis, essentially enabling adviser businesses to project manage their Royal London drawdown plans. It enables advisers to view customer details on an individual and aggregated basis. The service is seeking to put a user friendly efficient framework around the ongoing management of drawdown customers. Advisers can choose which of their Royal London drawdown customers, existing and new, to include within the DGS. No external drawdown products or other sources of customer retirement income can be factored into or recorded within Royal London s DGS. Some advisers who deliver holistic wealth and retirement planning solutions to their customer base may find the service limiting in this respect. While the service is underpinned by a sophisticated stochastic modelling tool, provided by Moody s Analytics, DGS has purposefully been designed to be quite a simple and straightforward service to engage with, lending itself to a range of users within a financial planning business. Royal London s DGS flags whether drawdown plans are on track and, where there happen to be kinks in the road, it seeks to put the adviser on the front foot for tackling changes and being able to ensure timely customer interaction. In the new pension freedoms world it will enable customers to understand the impact of ad hoc payments and investment growth (or loss) on the sustainability of retirement capital and income. DGS seeks to provide adviser businesses with a framework for the ongoing management of drawdown plans for Royal London customers. It may help to provide a form of continual appraisal of drawdown suitability for customers and also provide useful support for adviser businesses in relation to drawdown advice processes. AKG Comment: The service can meet a need in the market to provide support for drawdown planning processes in order to meet customer income objectives The service is likely to be useful for a proportion of customers and a certain type of advice process, or within a wider process as it can complement a range of advice processes It should provide a useful component part in terms of helping advisers to meet regulatory and process requirements in an efficient way DGS is limited to Royal London drawdown products plans only It incorporates a sophisticated engine without exposing the adviser and customer to it, albeit there should be greater articulation of its underlying limitations and reliance The service helps to bring home some of the realities of drawdown planning discussions which will not always be easy with customers, providing a balance between what they might want and what can realistically be achieved with the drawdown plan Once in place the service can act as the core for professional and best practice management of drawdown. AKG Financial Analytics Ltd Page 6 May 2016

7 2.3 CUSTOMER INFORMATION INPUT REQUIREMENTS Core customer details are automatically fed through to the DGS from Royal London's online policy servicing system. This includes: Customer name Income Release policy number Fund value Income level Contributions Charges. This means that the adviser need only confirm which customers he or she wishes to include in the DGS along with each customer s income target. Initially Royal London will calculate the income target using the Income Planning Tool for all existing customers. All of these parameters relate to the strategy being employed for the customer s income drawdown plan with Royal London. These will be available for the adviser to alter throughout the course of the customer s drawdown plan, and linked to ongoing adviser/customer dialogue, via the Edit nomination pop-up screen within the DGS. There is no automation between DGS and the other Royal London tools. As such, where the customer s targets are being reviewed and a change made, the pertinent output from the Royal London IPT will need to be manually input into the DGS. The core customer information to be stored in the DGS at outset is as follows: The amount of income that is to be taken from the plan Any payments made to the plan The customer s investment choice The customer s target for income The customer s income sustainability probability percentage. Quarterly review notes can be manually added to and stored within DGS for each customer. These will appear in the individual customer profile and are available for future reference. AKG Comment: Although key to the service, the level of customer data input is relatively low, with most data being fed through from Royal London s online policy servicing system New inputs from adviser and customer have therefore been kept to a minimum Interaction between the Royal London Retirement Planning Tool, IPT and DGS is key and needs to be understood by advisers and users (Royal London s Retirement Support range is detailed in Appendix 5) At launch of DGS there is no automation between these tools. AKG Financial Analytics Ltd Page 7 May 2016

8 2.4 SETTING AND MONITORING INCOME OBJECTIVES; PUTTING ACTION PLANS IN PLACE This is at the crux of Royal London s DGS, the ability to set, record and monitor the customer s income drawdown plan, and is driven by two core items below. These are both recorded in the DGS and subsequently displayed within the DGS dashboard. The customer s target for income The adviser and the customer need to discuss and agree a core income target. This could be defined as income delivery to a target age or income delivery for life, which means drawdown and then purchasing an annuity at a specific age. The customer s income sustainability The stochastic model calculates a nominated income sustainability probability figure for the customer, expressed as a percentage figure, essentially assessing the likelihood of the customer s income drawdown plan meeting the stated objectives. This is based on the amount of income that the customer wishes to withdraw over the specified income target timeframe, and taking into account the projected performance of the customer s selected investment(s), the tool calculates a nominated income sustainability probability figure (expressed as a percentage). For adviser businesses the Royal London DGS is aiming to provide a servicing framework for drawdown customers at an individual and pooled level. It enables advisers and other relevant staff within the planning business to have key drawdown data and information at their fingertips to support the delivery of the ongoing drawdown planning service that is being provided to the customer. Typically advisers will brief customers about the risks associated with drawdown planning. But as hard as advisers, and product providers, try to reinforce this key messaging, in reality, some of the risks and the associated decision points are only brought into contextual focus when the drawdown plan is up and running for a little time. This is one of the areas where the service is helpful in that having established a nominated income for the customer at outset the service enables the adviser and the customer to keep abreast of the progress of the drawdown plan against the objectives agreed between the adviser and the customer. The service enables the adviser to look at progress of the drawdown plan over the last 12 months in terms of comparing the nominated plan with the actual performance/outcome. This allows advisers and other relevant staff in the financial planning business to put tangible actions in place. Organisational functionality is also provided in terms of the ability to mark off quarterly or annual drawdown reviews that have been completed for Royal London drawdown customers, along with a facility to record notes attaching to each customer. AKG Comment: The ability to set clear drawdown objectives and parameters is an important area As is the importance of monitoring ongoing performance of the drawdown plan against the original objectives Advisers and users need to be clear about what these objectives mean and how they should be sensibly tracked Keeping a good record of objectives and actual progress against these is important from an audit trail perspective Clear presentation of performance against objectives and associated consequences will form a key part of the ongoing dialogue between the adviser and the customer. AKG Financial Analytics Ltd Page 8 May 2016

9 2.5 DRAWDOWN DASHBOARD The adviser is presented with a Your dashboard home screen which provides a status update for customers selected for the DGS. An example screen is provided in Appendix 1. Through the design and colouring of graphics this headline information is presented in a clear and concise manner. The ratings and the associated action status messaging are clearly outlined in the dashboard. The dashboard summarises the plans included in the DGS, any reviews carried out during the quarter and any nominated changes made since the previous quarter. Beneath these graphics the dashboard also presents a summary list of customers. This summary lists: Customer name Income Release plan number Income target Income sustainability probability nominated and current illustrated Last reviewed date Nominated changes in the last quarter Income outlook rating. There is a filter facility to allow a tailored dashboard view. Example screens of the filter options and a filtered view are provided in Appendix 2 and Appendix 3 respectively. From the dashboard the adviser/user can then launch into customer specific views relating to an individual s drawdown plan. An example screen of a customer specific view is provided in Appendix 4. AKG Comment: The dashboard is a helpful summary and a good launch pad screen for the service DGS is easy to use, to grasp key threads and hence to talk through key items and actions required with relevant staff in the adviser business But advisers and staff do need to understand exactly what the key indicators mean and hence what the impact of variance in performance against established parameters and benchmarks might mean for the customer (Royal London s key indicators are described in section 2.6) There is a good link between adviser summary screens and individual customer details and associated input to communications with customers Clear information and calls to action are presented in DGS It provides immediate view of drawdown plan status at aggregated customer level. AKG Financial Analytics Ltd Page 9 May 2016

10 2.6 CUSTOMER DISPLAY SCREENS AND KEY INDICATORS Royal London has purposefully tried to keep the DGS simple and easy to use. There is choice in terms of how the user can view the customer income outlook on screen and the information is presented in a concise manner. The DGS essentially looks at three key income indicators for each customer: Income outlook rating expressed as 1 to 5 with associated indicator definition Income sustainability expressed as a percentage figure; Nominated and Current sustainability shown When could income run out? expressed as a specific customer age. When the adviser/user selects an individual customer at dashboard level and clicks on more details they are taken to a display screen which focuses on the drawdown positioning of that individual customer. The key graphic at the top of this screen illustrates the performance of the customer s drawdown plan against the three key income indicators listed above (see example screen provided in Appendix 4). The graph view enables some level of interaction as the adviser can move the Timeline Selector to look at the customer s drawdown position at the latest and other previous quarter points. The adviser can also look at income sustainability outlook over the longer term, e.g. last 36 months. Income outlook ratings explained As one of the key drawdown indicators provided by the DGS it is important for advisers, staff within the adviser business and the end customer to have an understanding of what the income outlook rating means. This is outlined below and can be found via a link on the dashboard for quick reference purposes. In constructing the ratings methodology, in collaboration with Moody s Analytics, AKG understands that Royal London has carried out reviews of a few key time points over the past 10 years in order to capture and consider events that would represent normal market fluctuations over this time period as well as factoring in some abnormal events. In order to highlight cases that are moving off track, Royal London reviews the potential sustainability of a customer s income against their target as follows: Risk rating 1 The customer s plan is likely to be on track. The difference between the nominated and current sustainability percentages is within plus or minus 10%. Risk rating 2 The customer s plan is moving off track. The difference between the nominated and current sustainability percentages are within plus or minus 20%. Risk rating 3 The customer s plan is moving off track. The difference between the nominated and current sustainability percentages is within plus or minus 20% AND the investment growth achieved over the last 12 months has failed to match inflation (RPI). AKG Financial Analytics Ltd Page 10 May 2016

11 Risk rating 4 The customer s plan is moving off track. The difference between the nominated and current sustainability percentages is outside plus or minus 20%. Risk rating 5 The customer s plan is moving significantly off track. The difference between the nominated and current sustainability percentages is outside plus or minus 20% AND where the investment growth achieved over the last 12 months has failed to match inflation (RPI). The plan versus the reality The DGS enables the adviser to look at progress of the drawdown plan over the last 12 months in terms of comparing the nominated plan with the actual performance/outcome. Beneath the image at the top of this individual customer screen there is a progress table which illustrates core items including: Nominated versus actual contributions made in past 12 months Nominated versus actual gross income taken in past 12 months Ad hoc payments taken out Nominated versus actual target for income delivery this would indicate whether the customer was on schedule to meet their long term objective for the delivery of income or whether income could actually run out at an earlier age Nominated versus actual investment growth the stochastic modeller accounts for the investments a customer holds. Interaction with other Royal London tools and materials The DGS provides basic links to other tools within the Royal London range. Where for example the key indicators from the DGS, or a change in customer circumstances or requirements, point towards a potential change in retirement planning approach the adviser can link to and make use of the relevant Royal London tool to support these considerations. The tool which is probably most closely aligned to Royal London s DGS is the Income planning tool (IPT) which is where the adviser would go to reassess the customer s income requirements and/or perform what if scenarios. At launch the DGS will not link data directly from the service to the income planning tool. To support some form of interaction the adviser will be able make changes by editing all parameters in the edit plan nominated field. From an investment perspective the adviser might wish to reappraise the customer s attitude to risk and by association might need to look again at the customer s investment choices and details. AKG Financial Analytics Ltd Page 11 May 2016

12 AKG Comment: The customer display screens are clear and not too cluttered, and it is generally easy to understand what is being displayed Sufficient features and deliberately unsophisticated user functionality, albeit overlaying a sophisticated engine at its heart (see section 8 for details of the stochastic engine) Valuable facility to compare nominated versus actual performance of drawdown plan The way in which DGS is presented should help to reduce misunderstanding and bring clear messaging to the resulting discussions which need to be held between the adviser and the customer The methodology behind Royal London s income outlook ratings (detailed earlier in this section) does need to be clearly understood so that advisers and users appreciate key drawdown indicators and associated actions The way in which the methodology is described by Royal London should be relatively easy for users to grasp Definitions of key indicators and hints are made clearly available to advisers and users when using DGS. AKG Financial Analytics Ltd Page 12 May 2016

13 2.7 COMMUNICATIONS AND REPORTING For the customer Royal London has prepared some template documents which can be accessed through the DGS to help advisers tell customers how their Income Release plans are performing. The core content for these template communications is driven by the customer data and details included in the DGS but there is also an opportunity for the adviser to personalise the output further, in relation to the adviser business and/or to the specific customer. The templates are designed to help the adviser deliver a succinct income review to their Royal London drawdown customers. The financial services industry has a general challenge on its hands in terms of how it improves the standard of communications to its customers. Royal London s templates are designed to support the adviser in the delivery of clear messaging to the customer about how their drawdown plan is progressing. Furthermore it seeks to provide some key warning flags, through the income sustainability rating and other metrics, when the drawdown plan is not performing to plan and hence when action might need to taken by adviser and customer. This contributes to the action plan style encouraged through Royal London s DGS and enables the adviser to set a qualified and focused agenda for the customer s annual review meeting. For the adviser business Staff within the adviser business can also use output generated by the Royal London DGS to support internal communications including preparation for customer meetings and internal reporting purposes relating to the wider drawdown customer portfolio held with Royal London. From the opening dashboard screen advisers and admin staff can download a drawdown governance report which provides a handy overview of the customers who feature within this service and updates users on the headline status of each customer s income sustainability outlook. Individual customer plan details can also be downloaded from the DGS. Quarterly review notes can be added to the DGS to record the activity and engagement with the customer. These notes are stored and historic quarterly review notes can be accessed to support the composition of the customer s annual review report and potentially support queries relating to historic decisions that were made. AKG Comment: DGS benefits from the availability of automated customer report templates The output from DGS supports the ongoing review of customer s drawdown plans to ensure that they continue to meet their short and long term objectives DGS provides useful automated reporting capability to the adviser and staff in the planning business Customer letters are clearly positioned and enable the adviser to tackle drawdown plan positioning and associated actions head-on At times the key performance indicators in DGS may uncover some painful truths in relation to how the drawdown plan is progressing and the adviser s associated approach with customer communications and discussions will need to be considered. AKG Financial Analytics Ltd Page 13 May 2016

14 2.8 ASSUMPTIONS AND CALCULATIONS Royal London s DGS is underpinned by a stochastic modelling tool. It is important therefore for advisers to acknowledge this and to gain a broad understanding of what stochastic modelling is, what it does and its potential limitations. At a high level stochastic modelling can be defined as follows: A stochastic model is a tool for estimating probability distributions of potential outcomes by allowing for random variation in one or more inputs over time. The random variation is usually based on fluctuations observed in historical data for a selected period using standard time-series techniques. The stochastic modelling which underpins Royal London s DGS is provided by Moody s Analytics and is designed to provide an outlook on a range of items, including: Investment performance outlook the outlook for the performance of the key asset types/sectors which underpin the range of investment options Macro economic outlook the outlook for key items pertinent to customer objectives and outcomes when engaging with drawdown strategies including inflation, interest rates and longevity. A brief description of how the modelling works and what it seeks to cover, supplied by Moody s Analytics, is provided in Appendix 6. The benefits and drawbacks of stochastic modelling mechanisms have been widely discussed by industry stakeholders. We live in challenging times and there has been evidence of some extraordinary financial events in recent years presenting critical challenges to output from such tools. Advisers therefore need to be cognisant of the fact that some events may occasionally challenge the stochastic modelling which underpins this Royal London service. These models have to respond to challenge and change over time to accommodate economic and market fluctuations. Ongoing dialogue between the adviser and the customer remain crucial, with tools such as DGS available to support qualified discussions, to ensure that ongoing drawdown reviews take place and that a customer s income expectations are continually managed. AKG Comment: The stochastic model is at the heart of the service and its importance cannot be understated The stochastic model is provided by a market leading source Moody s Analytics has an acknowledged expertise and experience in this area Moody s Analytics carries out constant checks and uses external sources to assist with the review of underlying assumptions and calibrations This is positive but a fault in the model would clearly have a significant impact on the output generated by Royal London s DGS Advisers should recognise that DGS is a support tool/service and hence it does not necessarily provide THE definitive answer Conversation and communication remains key as changes in a customer s lifestyle and requirements are critical to the ongoing management of the drawdown plan Confidence in the output from the service should be contextualised with an understanding of its assumptions and potential limitations These assumptions, factors and considerations need to be articulated to advisers through the DGS proposition support material prepared by Royal London. AKG Financial Analytics Ltd Page 14 May 2016

15 3 AKG S CONCLUDING COMMENTS Income drawdown is playing an increasingly important role post pension freedoms, with the changes it introduced bringing more customers into consideration for it and with potentially lower fund sizes. This widening of drawdown application and increasing regulatory requirements serve to make planning potentially harder and more time consuming for advisers, with multiple issues and risks for both advisers and customers to consider in their retirement planning discussions. This means that advisers can add real value in drawdown advice and management. But to deliver this effectively there is a real need to have a coherent and robust approach to this within their businesses. The Royal London Drawdown Governance Service helps in meeting this need and provides support for drawdown planning processes and in putting drawdown strategy frameworks in place. In doing so it acts as a component part in terms of helping advisers to meet regulatory and process requirements in an efficient way, whilst bringing home some of the realities of drawdown planning discussions (i.e. illustrating the balance between what clients might want and what can realistically be achieved) for customers. The service then succeeds in providing clear presentation of performance against objectives and associated consequences that go on to form a key part of the ongoing dialogue between the adviser and the customer. The service overall is relatively easy to use, making it useful in grasping key threads, with the customer display screens being clear and information displayed being easily understood. However, this deliberately unsophisticated user functionality, overlays a stochastic model at the heart of the service and its importance cannot be understated. As with all such models, advisers should recognise that this is a tool and not necessarily THE definitive answer, even when working correctly/effectively. In delivering the Drawdown Governance Service, Royal London has sought to meet a tangible need in a changing market. To do this Royal London has produced a service that delivers an effective component to assist advisers in managing the process of drawdown and in assisting them in enhancing customer understanding of, and thus benefit from, the drawdown opportunity. AKG Financial Analytics Ltd Page 15 May 2016

16 APPENDIX 1 EXAMPLE DGS SCREEN; DASHBOARD This example screen shows the homepage viewed by the user when logging into the Royal London DGS. AKG Financial Analytics Ltd Page 16 May 2016

17 APPENDIX 2 EXAMPLE DGS SCREEN; CUSTOMER FILTERING OPTIONS The user can carry out customer filtering from the DGS dashboard, by applying a range of fields, in order to create varying customer views. AKG Financial Analytics Ltd Page 17 May 2016

18 APPENDIX 3 EXAMPLE DGS SCREEN; CUSTOMER FILTERED VIEW This shows an example screen of a filtered customer view in DGS. AKG Financial Analytics Ltd Page 18 May 2016

19 APPENDIX 4 EXAMPLE DGS SCREEN; CUSTOMER PLAN DETAILS This example screen shows the specific customer plan details and progress update displayed to the user. AKG Financial Analytics Ltd Page 19 May 2016

20 APPENDIX 5 ROYAL LONDON RETIREMENT SUPPORT Royal London operates a range of Retirement Support services for advisers designed to help with the planning and implementation of plans and now, following the launch of the Drawdown Governance Service (DGS), to help with ongoing monitoring. Alongside Royal London s customer service support, which is available for advisers and customers at the end of the phone to answer any retirement questions they have, Royal London also provides some tool based support. At Retirement tool The range starts with Royal London s At Retirement tool, which is designed to help an adviser establish what income their customer needs in retirement and to demonstrate the options available to meet these customer needs. The tool can do the following to support the adviser and the customer: Life expectancy The adviser can understand how long the customer is likely to live for, giving a date to plan around Preference for certainty The adviser can get an idea of how important certainty of income is to the customer, helping the adviser to find the right solution to meet the customer needs Income requirements Help the customer to understand what their minimum and aspirational levels of income are Other income The adviser can take into account other sources of customer income, e.g. state pension Professional customer reports An unbranded and editable report that will help the adviser demonstrate the work they ve done and the level of expertise they re providing to the customer. It gives the adviser the flexibility to make changes and helps to ensure that it meets compliance requirements Flexibility The adviser can use as much or as little of the tool as they wish to suit their needs and the needs of the customer. Customer data is stored, meaning that advisers don t need to re-enter details each time they use the tool. There are some things for advisers to consider when using the At Retirement tool. The tool is based on a number of assumptions and so things could work out differently to what is shown. Taxation All withdrawal and income amounts are given gross of income tax Annuities The tool assumes a standard single life Royal London annuity, escalating in line with RPI and with a 5 year guarantee, but the basis can be changed within the modeller. It doesn t take into account any guaranteed annuity rates Health and lifestyle No account is taken of any health and lifestyle factors. The adviser will need to consider this when discussing options with the customer Investment Royal London assumes the same growth rate is achieved each year. The default rate is 5% p.a. but this can be changed within the modeller. This tool should not be considered as Royal London providing a recommendation or giving advice. AKG Financial Analytics Ltd Page 20 May 2016

21 Income Planning Tool This tool can help the adviser select an income sustainability figure to track against or to review the current income sustainability figure. This can support advisers in a number of ways. IPT has been designed to simplify the advice process for customers using income drawdown. IPT makes use of a powerful stochastic model provided by Moody's Analytics to produce a realistic picture of the risks to customer s future income. This information is presented in a way that is accessible to a customer. The IPT helps to: Assess customer s attitude to risk and capacity for loss Determine an appropriate amount of regular income, using a powerful stochastic model to illustrate risk Choose a portfolio with an appropriate balance of risk and return Understand the risks to customer s future income Create a report to help explain those risks to a customer. Through this tool and Royal London support it is possible for an adviser to not only understand their customers risks but also to understand the likely ongoing work required from them, especially following the launch of the DGS. Those customers with a highly sustainable income will be less likely to be flagged under Royal London s DGS and will be more resilient to market shocks leading to an easier engagement model for the adviser. Royal London s new business team will help manage the implementation process for any new plans ensuring that the adviser is kept informed at all stages. To engage with the new DGS all an adviser has to do is tell Royal London that their customer is part of this service, confirm their income target and the age for this target. Once implemented a plan, which is part of the service, will automatically be added to the next review carried out by Royal London and from this point onwards, unless otherwise notified, will be included in the DGS. AKG Financial Analytics Ltd Page 21 May 2016

22 APPENDIX 6 STOCHASTIC MODELLING TOOL A brief description of how the tool which underpins DGS works and what it seeks to cover, supplied by Moody s Analytics, is provided below: The tool uses Monte-Carlo Simulation to generate stochastic projection scenarios for an individual investor s assets and liabilities. A set of stochastic projection scenarios covering a range of economic variables (interest and inflation rates) and asset returns is stored within the tool. This stochastic scenario set is produced quarterly by Moody s Analytics Moody s Analytics uses stochastic models to represent the financial variables driving the assets and liabilities underlying a financial planning problem. For most realistic financial planning problems, there are a number of risk factors which need to be captured if we are to understand risk from the perspective of the customer: Market risk Credit risk uncertainty in the future number of private and corporate loan defaults Liquidity risk most notably affecting property and credit markets Interest rate risk Inflation risk many long term financial objectives (e.g. pension income) will be specified in real terms Mortality risk pension income levels have been eroded due to unexpected increases in life expectancy. AKG Financial Analytics Ltd Page 22 May 2016

23 INFORMATION ABOUT AKG AKG is an independent consultancy specialising in the provision of ratings, information and market assistance to the financial services industry. A wide range of Clients Within a specialist focus on the financial services industry, AKG has developed a broad, complementary range of clients including: Intermediaries (Financial Advisers and EBCs), Life Companies, Friendly Societies, Adviser Networks, Regulators, Fund Managers, Trade Bodies, Service Providers, Banks, and Building Societies. Support for Product Providers AKG assists Providers in: Financial Strength Analysis and Presentation Data and Information Provision Actuarial Consultancy Distribution Consultancy Assistance to Financial Intermediaries AKG assists Intermediaries in: Financial Strength Analysis and Ratings of Product Providers Best Advice Panel Services Data and Information Provision Actuarial and Technical Support Regular Reports AKG publishes the following reports to assist providers and intermediaries: AKG Company Profile & Financial Strength Reports (Covering UK life assurance companies, friendly societies and similar providers) AKG Offshore Profile & Financial Strength Reports (Covering Offshore life assurance companies) AKG Platform Profile & Financial Strength Reports (Covering platform operators) AKG UK Life Office With Profits Report (Providing further depth in the assessment of with profits funds) For further details on any of the above please contact AKG: Tel: +44 (0) , akg@akg.co.uk Or online at AKG Financial Analytics Ltd Page 23 May 2016

24 Produced by: AKG Financial Analytics Limited Anderton House, 92 South Street, Dorking, Surrey, RH4 2EW Tel No: AKG Financial Analytics Ltd Page 24 May 2016