Bandwagon. BWCI Staff in Paris Marathon Team. Quarter Inside this issue: The BWCI Group Newsletter. Island Global Research Launched

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1 Bandwagon The BWCI Group Newsletter Quarter Inside this issue: Island Global Research Launched 2014 BWCI Innovation Award QROPS Update Creating a Secondary Annuity Market New DC Charge Cap Isle of Man Pensions Guernsey s New Insurance Rules What s your VaR? BWCI Staff in Paris Marathon Team

2 2 Quarter Island Global Research launched Stephen Ainsworth (left) and Chris Brock Further details on Island Global Research s services can be found at: BWCI has extended its range of services with the launch of a new data analytics company, Island Global Research Limited. The expansion sees the creation of four new roles within BWCI. Chris Brock joins as the managing director of Island Global Research, together with three former Island Analysis staff. BWCI Senior Partner, Stephen Ainsworth said: We are delighted to welcome Chris and his team. We look forward to developing synergies with other BWCI companies. Island Global Research has been created to develop the island research, monitoring and benchmarking services previously provided by Island Analysis. Chris Brock said: Our services cover both specific Channel Islands and Isle of Man research functions, as well as the provision of benchmarking and best practice bespoke reports for particular markets and industry sectors. BWCI s membership of Abelica Global, the international network of actuaries and consultants, provides an ideal opportunity to extend these services to island locations globally. He went on to say We also produce regular Island Monitor reports, which enable governments and other commercial and charitable organisations operating in islands to compare and assess best practice BWCI Innovation Award Winner Avenue Clinic, a collection of independent healthcare professionals providing a multidisciplinary healthcare practice, were very worthy winners of the 2014 BWCI Innovation Award. The judging panel, which included BWCI s Stephen Ainsworth, highlighted their innovative approach to out of hours treatment, as well as their computer-based exercise programme to engage and encourage patients. The judges were also impressed by the innovative business model that embraces collaboration between the practitioners, whilst encouraging them to develop their own practices within Avenue Clinic. The winning team from Avenue Clinic. QROPS Update April In the last edition of Bandwagon we highlighted that HMRC had published proposed changes to the QROPS (Qualifying Recognised Overseas Pension Scheme) legislation for a four week technical consultation. Two key changes had been proposed: 1) Removal of the requirement that 70% of QROPS funds are used to provide an income for life. (This currently applies to non-eu QROPS.) 2) Where a jurisdiction does not have a pensions regulator, the introduction of a requirement for scheme managers to be regulated in the country in which the scheme is located. Surprisingly, neither of these changes made the final regulations. HMRC said: the 70% rule. remains in place temporarily. This is so that, in the light of subsequent events, the legislation to replace the 70% rule can be targeted more precisely to ensure that the principles behind allowing transfers to be made free of UK tax can continue to operate as Parliament intended. HMRC have however introduced a requirement that the minimum pension age in all QROPS is no lower than applies in the UK (currently age 55). To date, this had applied to some, but not all, QROPS jurisdictions. There have also been important changes to the reporting requirements for QROPS scheme managers which are effective from 6 April 2015 also. Please contact your usual consultant if you require further information on these.

3 Bandwagon The BWCI Group Newsletter Creating a Secondary Annuity Market consumers will need to be protected Debra Smith Key Issues for Secondary Annuity Market Sellers need protection Categories of purchasers to be restricted Intermediaries likely Timely notification of annuitant s death will be needed When George Osborne delivered his final budget before the UK general election on 18 March, he announced a further pensions change from 6 April 2016; pensioners will be able to sell annuities in payment to a third party. This latest development follows on from last year s change, that has just come into effect, which allows new retirees full access to their pension savings from age 55, with no requirement to purchase an annuity. Whilst this flexibility was welcomed by those approaching retirement, pensioners who had already purchased an annuity were unable to take advantage of the new freedoms. However, the chancellor has now said that there is no reason to prevent those who already have an annuity from selling their right to future income streams for an upfront cash sum. The creation of a potential secondary market in annuities is not without its challenges and the government issued a consultation paper alongside the budget, seeking feedback on how this reform could be implemented in practice. Responses to the consultation are invited by 18 June, with legislative changes expected to be implemented by April Secondary annuity market challenges So what are the key issues? They will be different, depending on whether you are a buyer or seller of annuities. In addition, as this is a completely new market, it will need time to get established and develop the necessary infrastructure. Sellers Firstly, an individual s annuity provider would need to be willing to allow them to sell their income stream. Where this is permitted, the government recognises that consumers will need to be protected from accepting annuity purchase offers that may not be in their long-term best interests. Options under consideration to address this are: requiring annuitants to take financial advice from an Independent Financial Advisor before selling an annuity extending the remit of Pension Wise (the new guidance service established to help individuals with pensions flexibility from April 2015) to provide free and impartial guidance on selling annuities ( requiring insurers to provide warnings on the risks and factors that consumers should consider before selling an annuity Buyers The government does not consider retail investors to be suitable buyers of secondhand annuities, due to the complexity and difficulty in determining a fair price. Therefore, it is proposed to restrict the categories of eligible buyers. However, it is recognised that institutional investors may only want to purchase second hand annuities in bulk. Consequently there may be a need for intermediaries to enter the market to purchase individual annuities, repackage them, and sell them on to the end investor. The government is minded to prohibit the original annuity provider from buying back their annuity. This is to avoid insurers coming under pressure from annuitants to buy back annuities when they may have insufficient liquid assets to do so. In addition, the government believes that permitting buy-back may give consumers the impression that they can only sell their annuity to their original provider, which could prevent individuals shopping around to find the best deal. Operational Issues Once a third party has purchased an annuity, the insurer will be obliged to make payments to the new investor for as long as the original annuitant remains alive. However, as the insurer will no longer have a connection with the original annuitant, they will not automatically be notified of the death of the original annuitant. Therefore a mechanism will need to be put in place so that the insurer knows when to cease payments. The consultation paper provides three examples of possible solutions to this problem: the original annuitant is required to put in place arrangements so that the executor of their estate notifies the insurer on their death the insurer and investor agree a maximum age beyond which payments will cease unless contact can be made with the original annuitant the insurer makes a nominal payment to the original annuitant on a semi-regular basis as a way to be informed of their death or at least trigger further investigation Conclusion Whilst a potential vote-winner, several issues will need to be resolved if an efficient secondary annuity market can develop from April 2016.

4 4 Quarter New DC Charge Cap there is considerable variation, depending on the size of an individual member s pot. Margaret Boucher Flat Charge per member pa UK Charge Cap Charge on fund nil 0.75% 10 or less 0.60% 10 to % 20 to % The UK Government s cap on pension charges has just come into force and covers the member charges that can be applied to the default investment option in defined contribution arrangements used for auto enrolment purposes (1). Including all charges on member savings, other than transaction costs, the headline cap is a flat 0.75% pa of funds under management. However, the legislation sets out some alternatives with three possible charging structures permitted: a single charge as a percentage of the member s accumulated fund of not more than 0.75% pa; or a (lower) fund-based charge, plus a percentage of contributions allocated under the default arrangement (maximum 2.5%); or a (lower) fund-based charge, plus a flat per member charge (maximum 25 per annum); The underlying principle is that charges should be limited where members have not made any active investment choice. However, the cap does not prevent members from actively choosing an alternative (more expensive) investment option. In particular actively managed investment funds, which tend to have higher charges, can still be included to provide additional member choice within the overall plan structure. However, the cap means that the default investment fund or strategy option is likely to include passive or index-tracking funds, due to their lower charges. Channel Island Plans The charge cap restrictions do not apply locally but we thought that it would be interesting to consider how Channel Island plans might be expected to compare, since they are unlikely to benefit from economies of scale to the same extent as UK arrangements. Local plans will typically have much smaller membership numbers than their UK counterparts. 2,000 Consequently, the need to spread fixed overheads between fewer members is expected to lead to higher per member charges locally. However, this does not necessarily mean that Channel Island employees are facing excessive charges when the overall charging structure is considered. How does BWCI s Blue Riband compare? We compared the annual charges on our Blue Riband Channel Island Retirement Plan (2) default strategy with the UK equivalent charge cap for a mixed flat fee plus annual management charge structure. The cap for this type of combination charge structure can take a number of forms as illustrated in the table. We looked at the impact for a range of funds starting from 30,000 (the trivial commutation limit in both Jersey and Guernsey). The chart shows the annual charge under each of the fee structures. The orange line is the new 0.75% UK charge cap and the blue line is the Blue Riband annual charge. The remaining lines are the other UK permitted charging structures within the monetary flat fee option. The chart illustrates that even within the UK cap structure there is considerable variation in the annual charges that comply with the legislation, depending on the size of an individual member s pot. The chart shows that the Blue Riband default strategy charges compare well with the UK capped charges as the fund size increases. So is this all good news for members? Whilst it is laudable to ensure that members pensions savings are not eroded by excessive charges, there could be some unintended consequences. For example, trustees may focus much more on a default investment option s charges, and less on the suitability of that investment option. The default investment strategy itself could potentially have a much greater bearing on a member s future retirement income than a small difference in the investment charges. 1,500 Annual Charge 1,000 (1) It also applies to funds which attract 80% of contributing workers (2) For details see ,000 80, , , ,000 Fund Size 0.75% % % % Blue Riband

5 Bandwagon The BWCI Group Newsletter Isle of Man Pensions: Is compulsion best? without compulsion many people will fail to engage Erin Bisson Triggered by the need to consider what changes were needed to deal with the financial burden of an ageing population, the Isle of Man s report on the wide-ranging review of their social security system was published towards the end of A consultation has now been launched on the radical changes proposed covering four key topics: - State pensions - National Insurance - New work-based pensions - Working age benefits While the proposals for a gradual increase in State Pension Age to 74 made the national headlines, in this article we focus on the proposals for work-based pensions. Key work-based pension proposals Employees earning over 9,500 pa enrolled into a qualifying retirement saving scheme Employee contributions: 6% Employer contributions: 4% on earnings up to 60,000 pa Employers and employees share responsibility for choice of retirement savings scheme Government would assist in enrolment process to reduce employer administration Certain workers excluded (eg under 21 and those close to retirement) The only consultation question on this aspect of the proposals is quite simply: Should the Government introduce a compulsory scheme for people without workplace and personal pensions? The UK s Experience The UK introduced their workplace pensions initiative in October remember the I m in TV campaign fronted by familiar faces from Dragons Den and The Apprentice? Since 2012, well over 3 million people have started saving for retirement for the first time through their employers pension arrangements. The UK took a semi-voluntary approach to autoenrolment, giving employees the choice to opt out, but only after they have been autoenrolled. Statistics published by the UK s Department for Work and Pensions indicate that the autoenrolment opt-out rate has been between 9%-10% so far. However, there is speculation about whether this rate will rise once smaller companies are phased into the auto-enrolment process over the next couple of years. Isle of Man Proposal Compared with the UK, the Isle of Man s proposals go much further, with all employees meeting the criteria being enrolled and required to contribute to a compulsory retirement savings scheme. There will be not be any choice to opt out. Impact on Employers As well as the compulsory 4% employer contributions, there will potentially also be an administrative burden on employers to automatically enrol their employees. The Isle of Man government has estimated that the cost of implementation will be 1.3m with a 0.5m pa ongoing cost. On average, these are equivalent to costs of 400 and 150 respectively per employer. However these additional costs would be mitigated via an overhaul of the existing National Insurance (NI) system, with a reduction in employers NI contributions indicated. Does Compulsion Work? There are varying approaches to the problem of encouraging private pension provision around the world. Australia is quoted as a good example of the success of a compulsory system with a coverage rate of almost 86%; employers are required to pay 9.5% (rising to 12% by 2025) of each employee s salary into a pension scheme; employees are not forced to contribute and only about 25% choose to do so. What about the economic impact? The economy could potentially be affected by reduced levels of disposable incomes and consumer spending due to compulsory contributions. The Isle of Man would seek to address this by phasing in compulsory contributions over 10 years. Conclusions There are many factors at play and it may be difficult to find a solution that satisfies everyone. What is clear, however, is that the upward trend in life expectancy makes the importance of saving for retirement so much greater. The key question for governments is whether employees should be given choice and responsibility for their own retirement provision without intervention from the State? While a mandatory system will face resistance, evidence suggests that without compulsion (or at least making it difficult to opt out) many people will fail to engage and take the necessary action to prepare for retirement. The consultation document and full review can be found at

6 6 Quarter Guernsey s New Insurance Rules a transition period may be necessary Clair Le Poidevin Transitional Arrangements Under New Rules YES Comfortably able to meet both PCR and MCR? YES No immediate action needed Has Workbook been completed? YES No Complete Workbook No Will immediate action be taken to increase RCR or reduce PCR? No Apply to Commission for transitional relief They have been a long time coming, but the new Guernsey Insurance Business (Solvency) Rules are finally upon us! In previous issues we described the proposed regulatory changes for Guernsey insurers and looked at the more technical details of the new solvency calculations, but what do insurers need to do ensure compliance with these New Rules? Background The New Rules, which are effective from 1 May 2015, have two regulatory capital requirements: The Prescribed Capital Requirement ( PCR ) the Minimum Capital Requirement ( MCR ) Both capital requirements must be calculated using the new Regulatory Solvency Assessment workbook. This workbook then forms part of the annual return to be submitted to the Guernsey Financial Services Commission ( the Commission ) for all financial year ends falling on or after 1 May The Insurance Business Law requires an insurer at all times to maintain capital resources in excess of its capital requirements. Consequently, on 1 May 2015, an insurer should be holding sufficient regulatory capital resources ( RCR ) to cover both its PCR and MCR. The New Rules also include enhanced Own Risk and Solvency Assessment ( ORSA ) requirements. In practice, for the majority of insurers there will be little or no change compared to the current requirements. However, for large insurers*, additional work may be needed to document their risk management framework. Transitional Arrangements To be confident that the new capital requirements can be met from the outset, all insurers should have completed the workbook prior to 1 May However, the Commission recognises that a transition period may be necessary before full compliance can be achieved. As such, transitional relief is available for up to a year from the implementation date. However, if an insurer wants to make use of this transitional relief, they must apply for it by 31 August In practical terms, this transitional relief may allow the insurer additional time to complete the workbook for the first time. However, the insurer must still determine what their RCR and PCR are under the New Rules and identify whether they have any solvency issues. Therefore, it should be a priority to complete the workbook well before 31 August 2015, so any transitional issues can be addressed. Having completed the workbook, if the RCR is comfortably in excess of the PCR, then no further immediate action is required. However, if the RCR is less than (or only just in excess of) the PCR, the insurer has two options: 1. Rectify the problem immediately by either increasing the RCR or reducing the PCR. 2. Apply to the Commission for transitional relief, thus obtaining further time to rectify the problem. When doing this the insurer must submit the following: the latest management accounts the completed workbook an action plan for how the insurer will meet the MCR and PCR by 30 April 2016 Alternatives to using the Guernsey Standard Formula Under the New Rules an insurer has the option to use one of the alternative Recognised Standard Formulae listed in Schedule 4 of the New Rules, or even an internal model, to calculate its solvency requirements. We understand that both of these options will also be covered by the transition relief arrangements. However, it is likely that more detailed and individual specific discussion will be required with the Commission. Further Information A copy of the New Rules can be found on the Commission s website. For further information, please contact Clair Le Poidevin at clepoidevin@bwcigroup.com Category of Insurer Category 1 - life insurer Definition of Large Annual gross written premium income over 25m or Gross technical provisions over 250m * See table for definition Category 3 - General insurer (domestic) Annual gross written premium income over 5m

7 Bandwagon The BWCI Group Newsletter What s your VaR? an increasingly important measure of risk Carl Stanford How much could a pension scheme deficit grow in a year? Not an unreasonable question for trustees, employers and even regulators to ask. However, the answer depends on the risk within a particular scheme. Pension scheme risk Intuitively for a scheme with just pensioners and the assets well-matched with the appropriate bonds, any fluctuations would be expected to be much smaller than if the scheme were invested purely in equities and hedge funds. But how can this volatility be quantified? Quantifying Risks - Stress testing Stress-testing can be used to illustrate the effect of one-off shocks, such as a 30% fall in equities or a 1% fall in bond yields, on a scheme s funding level. However, stress tests in isolation may not provide all of the answers since they do not indicate how likely particular events are, or indeed, the likelihood of them occuring at the same time. Quantifying Risks - VaR An alternative risk measure is Value at Risk (VaR). VaR is a single figure that quantifies the maximum loss over a certain period with a specified degree of confidence. For example, VaR could be calculated for the next 12 month period with a 95% confidence level. The VaR would be the maximum loss expected in 95% of situations. The 99% VaR figure would be higher, reflecting the greater confidence of only a 1% chance that the loss would be exceeded. Calculating VaR for Pension Schemes VaR is commonly used by investment managers to determine investment risk within a portfolio of assets. However, it is more complex for a pension scheme, as VaR represents an increase in the pension scheme deficit. Therefore, it is necessary to consider the interaction of the effects of individual risks on both the assets and liabilities of the scheme at the same time. There are various ways to calculate VaR. However, for a pension scheme, it is normally calculated by modelling a large number of economic scenarios. The resultant distribution of projected funding outcomes is used to calculate the likelihood of future events. BWCI VaR Model The chart below illustrates what a 95% VaR output for a sample scheme might look like. The right-hand bar shows that there is a 95% chance that the deficit will not grow by more than around 4m over the next year. The effects of the individual risks are shown to the left. For example, the yield bar incorporates the net effect of an interest rate reduction on the scheme s fixed interest asset holdings and its liabilities. The total VaR for the scheme is less than the sum of the individual components because of the interaction between them. This offset is shown as the correlation effect. The expected level of losses that exceed a 95% VaR figure (ie those in the worst 5% of outcomes) may also be of interest. These can be assessed by considering VaR on a range of confidence levels or by using alternative VaR measures which incorporate this information. 95% VaR - Increase in deficit m year 95% VaR How does this help? VaR helps risk management planning and can also prompt action. For example, if the VaR looks too high, then the sensitivity of the results to alternative asset allocations could be considered. This would help to identify alternative options with a smaller VaR. Conclusion VaR is becoming more widely used by pension schemes to quantify and communicate investment risk. It is likely to become an increasingly important statistic as the UK Pensions Regulator has recently begun asking for VaR statistics to be included as part of their annual scheme return where this information is available. 0 Yield Equity Property Credit Pension Scheme Risk Correlation effect Total For more details about calculating VaR for your pension scheme please contact your usual consultant.

8 8 Quarter Bandwagon The BWCI Group Newsletter International Marathon Team The Abelica Global Marathon runners together with our international Abelica partners On 12th April 54,000 runners took to the streets of France s capital city for the 39th annual Paris Marathon. Having only recently all met for the first time, the 8 runners in the Abelica Global team, representing 5 member firms in Europe and North America, waited on the start line on the Champs-Élysées to put themselves through the world s third largest marathon. In the true spirit of the event the runners were representing a charity close to their hearts, the Multiple Sclerosis International Federation; an international charity with goals to research into the cause and cure of MS and the development of better treatment and rehabilitation for people with MS. Having both spent most of their winter nights pounding Guernsey s roads, clocking up miles in preparation, BWCI s pensions manager Chris Drake and investment analyst Ben Saul lined up at the start of the 26.2 mile race ready to find out if their hard work had been enough. At 9am they set off and were treated to close ups of countless sights in what is often described as the most beautiful city in the world. With the bright April sun beating down on them, all 8 Abelica Global runners completed the course. On his marathon debut, Chris clocked in at 5 hours and 54 minutes, whilst Ben crossed the line in 4 hours and 42 minutes. In total, the Abelica team raised the equivalent of over 5,000 for their charity, with the BWCI Foundation matching BWCI staff s sponsorship of the team. BWCI s 30 Makes in 30 Days The BWCI Knitting Circle in action Work in progress Always striving to find new and imaginative ways to raise much needed funds for Guernsey s Les Bourgs hospice, their latest challenge has been particularly well-supported. The hospice s themed series of 30 somethings in 30 days fundraising campaign saw BWCI staff swimming in 30 different Guernsey bays last summer, followed by 30 runs in 30 days later in However their latest 30 Makes in 30 Days challenge has been particularly popular at BWCI, with 20 staff from across the business picking up their knitting needles and crochet hooks. We aimed to make one square a day each for 30 days. These would then be joined together into blankets and sold by the charity to raise funds. A simple idea, but one that was particularly challenging for those who had never knitted or crocheted before! Fortunately BWCI can also boast some experienced and very patient knitters who were more than happy to pass on their skills at our weekly lunchtime Knit ins. While not everyone quite managed to complete 30 squares, several of the best knitters made considerably more. Overall BWCI s volunteers produced enough squares to make more than a dozen blankets. Special thanks go to the BWCI Foundation which supported the initiative by covering the cost of entry to the challenge, as well as providing an endless supply of wool. Finished blankets Readers are reminded that nothing stated in the newsletter should be treated as an authoritative statement of the law on any aspect, or in any specific case and action should not be taken as a result of the newsletter. We will be pleased to answer questions on its contents. Guernsey Tel Fax PO Box 68, Albert House South Esplanade, St Peter Port Guernsey, GY1 3BY +44 (0) (0) Jersey Tel Fax Kingsgate House, 55 Esplanade, St Helier Jersey, JE2 3QB +44 (0) (0) BWCI Group Limited Web Web Front cover image courtesy of VisitGuernsey A member of Abelica Global