TURNING UNCERTAINTY TO YOUR ADVANTAGE Making sense of the pensions world in 2015 and beyond LCP ANNUAL PENSIONS CONFERENCE 16 SEPTEMBER 2015

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1 1 TURNING UNCERTAINTY TO YOUR ADVANTAGE Making sense of the pensions world in 2015 and beyond LCP ANNUAL PENSIONS CONFERENCE 16 SEPTEMBER 2015

2 2 Lane Clark & Peacock LLP is a limited liability partnership registered in England and Wales with registered number OC The firm is regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are licensed by the Institute and Faculty of Actuaries. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Lane Clark & Peacock LLP 2015

3 3 We will help you to identify the key actions for your scheme over the next few months. #LCPpensionsconf

4 4 Bob Scott Senior Partner, LCP Bob is an experienced conference chairman. He has been a partner of LCP since 1988 and became senior partner on 1 April He is the Honorary Secretary of the Association of Consulting Actuaries. Bob is the author of LCP s Accounting for Pensions report and is a regular commentator on UK pensions issues in the media.

5 5 CHAIRMAN S INTRODUCTION Welcome to our 18th annual pensions conference: Turning uncertainty to your advantage - making sense of the pensions world in 2015 and beyond. The past 12 months or so have thrown up some unexpected results. Australia surrendering the Ashes to England. David Cameron s Conservative Party winning the general election. And, on a pensions note, the longest-serving pensions minister Steve Webb losing his seat at that election. More recently we ve had China s economy running into difficulty. A refugee crisis in Europe. And the prospect of further upheaval as the Chancellor consults over radical changes to pensions taxation. The 17th century playwright, William Congreve, said Uncertainty and expectation are the joys of life. Security is an insipid thing. That is not quite our message today, particularly at a time when so many of you are seeking to secure your pension scheme s liabilities. Rather, our aim this morning is to help you navigate today s uncertain pensions landscape, to help you gain those marginal extra percentages that add up over the longer term; and to position your scheme or company to take advantage of new opportunities as they arise. I am delighted to welcome our guest speaker Crispin Odey, the founding partner of Odey Asset Management to our conference this morning. Crispin will make the opening address and I am sure that he will regale you all as he talks about the economic challenges faced by investors today. Alongside Crispin, our panel of expert speakers will share their views on the latest developments within the pensions industry. During the course of today we will help you to identify the key actions for your scheme over the next few months, and give you practical guidance and tips on how you can turn the current uncertainty in pensions to your advantage. Bob Scott Senior Partner, LCP

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7 An event from the Financial Times 7 Unparalleled buy-in and buy-out expertise. LCP led over 50% of large buy-ins and buy-outs that completed in 2014* Want to know why? Contact us to discuss the work we have been doing and how we can help you identify opportunities for your pension scheme. Tel: +44 (0) enquiries@lcp.uk.com *LCP was lead adviser on 12 of the 21 buy-ins and buy-outs over 100m in 2014 Award-winning advice LCP is the only actuarial/investment firm to have won a buy-in, buy-out or de-risking award in the last five years. LCP has established itself as an authority in risk reduction strategies UK Pensions Awards 2015 judges comments Way ahead of the field in terms of the number of transactions, and for supporting smaller schemes through the de-risking process. FT PIPA 2015 judges comments WINNER Buy-in/buyout Consultant Lane Clark and Peacock

8 8 AGENDA SESSION 1 09:00-11:00 Bob Scott LCP CHAIRMAN S WELCOME Crispin Odey Odey Asset Management OPENING ADDRESS Nick Clark LCP A 2020 VISION OF THE FUTURE What will the pensions environment look like in 5 years time? What do employers and trustees need to do before then? Clay Lambiotte LCP GAINING A COMPETITIVE EDGE Why should investment be seen as a competition? How can trustees use better governance to position for better outcomes? What role might fiduciary management play in this? Jonathan Camfield LCP PENSION FREEDOMS 6 MONTHS ON How have members, trustees and employers responded to the biggest pension changes for 100 years? What actions pension schemes should be taking over the next 12 months as the pensions world continues to adapt to the revolution?

9 9 SESSION 2 11:20-13:00 Karen Goldschmidt LCP THERE S NOTHING AS CERTAIN IN LIFE AS TAX With the Government looking to raise money by limiting pension tax relief, there are new traps for the unwary but also opportunities. Karen will help you steer a course through some of these. Mary Spencer LCP ENHANCING INVESTMENT PERFORMANCE How can you navigate today s tumultuous markets? Mary will discuss our latest investment ideas for controlling risk and exploiting market opportunities. Michelle Wright LCP WHAT DO I DO NEXT? What can schemes do short of a full buy-in? Can longevity hedging help? Why might it pay you to think of insured solutions now rather than later? Jeremy Dell LCP HOW TO BRING CLARITY OUT OF UNCERTAINTY Jeremy will leave you with an action plan to help you turn uncertainty into clarity in Bob Scott LCP CHAIRMAN S CONCLUSION AND QUESTIONS

10 10 GUEST SPEAKER Crispin Odey Odey Asset Management Crispin Odey is the founding partner of Odey Asset Management.

11 11 SESSION 1 OPENING ADDRESS Crispin established Odey Asset Management in 1991 and today heads Investment Management. Before founding Odey, Crispin managed the Baring European Growth Trust and Continental European pension funds at Barings Asset Management and Framlington Fund Managers. Crispin graduated from Christ Church, Oxford in 1980 where he read History & Economics. We are very happy to have Crispin delivering the opening address at our conference. At a time of pressure on investment markets, we are keen to hear his insights on the current economic situation, and look at what pension funds should do now to take advantage of this uncertainty.

12 12 Nick Clark Partner, LCP Nick has helped trustees and employers run their pension schemes smoothly for over 15 years. His collaborative style means he is well suited to help all stakeholders approach the future with confidence. Better use of technology lies at the heart of future benefit provision.

13 13 SESSION 1 A 2020 VISION OF THE FUTURE Nick was chosen to do this presentation because his role at LCP is a diverse one. As a Scheme Actuary, Nick advises trustees and helps steer them through valuations and address the new Funding Code of Practice. As an adviser to employers, he has been closely involved in reviewing future benefit provision as the pension landscape changes. Nick has a keen interest in challenging the way actuarial valuations are undertaken. He wants to bring a sharper focus to the valuation process so that all parties are able to focus on the wider context. Better use of technology lies at the heart of future benefit provision and he believes that there are simple steps all employers can take to prepare themselves more effectively for the future. Contact +44 (0) nick.clark@lcp.uk.com nickclark Specialist areas: Strategic Consulting Defined Benefit Scheme Funding Nick is married to a lawyer. He sees his children as an interesting social experiment of what you get when you cross an actuary and a lawyer!

14 14 Real-time control of your pension scheme LCP Visualise combines our pensions consultancy with intuitive technology and real-time facts and figures. We invite you to see the benefits. Look out for our LCP Visualise experts who can show you a demo today.

15 15 Benefits to you Dashboard Real-time analytics showing you what you need, when you need it What if? Real-time scenario tests so you can make quicker and better decisions on funding and investment Triggers Monitor your journey plan and switching triggers, to ensure investment opportunities are seized Cashflow Instantly understand how the scheme cashflows develop over time Investment Allows you to get to grips with risk metrics and the impact of changing your investment strategy Recovery See progress of the recovery plan, and what action you can take to keep on track Pensioner buy-in Identify when to approach market, based on a range of indicative insurer pricing Print Flexibility to print information at any date and generate PDFs to streamline your reporting

16 16 Clay Lambiotte Partner, LCP Clay provides a wide range of investment advice to both trustees and corporate sponsors, with a particular focus on setting and implementing investment strategy. He is also involved in LCP s manager research, where he leads the absolute return research team. Getting your governance right so you can evaluate and act quickly.

17 17 SESSION 1 GAINING A COMPETITIVE EDGE Virtually every pension scheme has a plan to de-risk. A nice idea in theory, but is the market capable of meeting this demand? Clay will be exploring how the competition that is developing for safe assets will impact de-risking plans, and what you can do to avoid missing your targets. In such a competitive environment, where the opportunity set is so varied and changing, getting your governance right so you can evaluate and act quickly will be paramount. Clay sees one of his most important roles as an adviser as enabling trustees to make quick and effective decisions. With the right structure and planning, there is no reason pension schemes can t be at the forefront of developing investment opportunities and competing successfully with other participants in the market. Contact +44 (0) clay.lambiotte@lcp.uk.com claylambiotte Specialist areas: DB Investment Investment Strategy Manager Research As a qualified pilot, Clay understands the importance of good planning before embarking on any journey. The planning must include not only your desired route, but also contingency planning for unexpected events. He claims to have been off course (some may even describe it as completely lost ) only once. Let s hope his record with clients is no worse!

18 18 Jonathan Camfield Partner, LCP Jonathan has helped companies and trustees manage their pension risks for over 20 years. He embraces change and relishes a challenge, and so is a good fit for leading LCP s response to the pension flexibility and freedom reforms. Pensions flexibility and freedom is here to stay.

19 19 SESSION 1 PENSION FREEDOMS 6 MONTHS ON The pension world our world - changed forever from April Pensions flexibility and freedom is here to stay and the ramifications are beginning to be worked through, including that for many people a pension is no longer a pension it s an asset. Jonathan leads LCP s response to the freedoms, and keeps in touch with insurers, financial advisers, regulators and civil servants to keep abreast of the latest developments. Jonathan is also a member of the Member Incentive Monitoring Board, and has been working closely with DWP officials considering how the Code of Good Practice should be amended later in 2015 as a result of the changes. Jonathan takes a keen interest in ensuring that the law and wider regulatory environment work in combination to give employers and trustees the tools to manage their liabilities, whilst ensuring that members are treated fairly and are adequately protected not always an easy task! Contact +44 (0) jonathancamfield Specialist areas: Mergers & Acquisitions Flexibility & Freedom Strategic Consulting Jonathan is a keen hiker and this year completed four hikes with his three sons in America s national parks and added a further 100 miles of England s South Coast in his ambition to complete the walk from home in Winchester to Land s End.

20 20 Karen Goldschmidt Partner Karen is an expert on the ever-changing pensions taxation regime, using many years experience as a pensions actuary to put this into practical context. She chairs the ACA s Pensions Taxation Committee, working with HMT/HMRC to clarify/solve issues and respond to consultations. Workable solutions for the range of different employers and schemes.

21 21 SESSION 2 THERE S NOTHING AS CERTAIN IN LIFE AS TAX Until 10 years ago Karen was a generalist pensions actuary, Scheme Actuary to some schemes with a bit of a penchant for the workings of pensions tax limits. In 2003 Karen joined the pensions tax committee of the Association of Consulting Actuaries ( a committee with very little to do ). Little did she imagine that the pensions tax landscape could get so challenging that it would merit full time attention (and chairing that committee) and never more so than today. Every year it seems the Chancellor sets us a new challenge to meet. The 2015 Budget set several - and what we have to find is workable solutions for the range of different employers and schemes we advise. We are already seeing a direct impact on employers attitude to how pensions savings fit into the general remuneration package. Contact +44 (0) karengoldschmidt Specialist areas: Executive Pensions Pensions Tax Flexibility & Freedom Karen is a keen amateur artist. She looks forward to the time when pressure of work will give her more time with a printing press, and less with a calculator and a copy of Finance Act 2004 [Consolidated]. (Perhaps that s why so much of her advice involves pictures )

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23 23 Unconflicted investment advice. We don t run money, so you can be confident that our advice to you is independent Judges comments A very hotly contested category with several high-quality entries, our winner was picked for significantly increasing business, and demonstrably lowering risk for their clients. Proud winners of the FT PIPA Investment Consultancy Award 2015

24 24 Mary Spencer Associate Consultant, LCP Mary offers proactive advice to a range of clients on a variety of investment issues, including investment strategy reviews, selecting managers and asset transfers. Focusing on small improvements can deliver better outcomes.

25 25 SESSION 2 ENHANCING INVESTMENT PERFORMANCE When Mary first joined the investment department, equity fund research was an exciting prospect and LCP s clients relied heavily on these returns to close their funding gaps. However, returns from traditional assets seem to have got harder and harder to achieve, while pension scheme deficits are as big as they ve ever been. Mary believes that we need to use new ideas and techniques to squeeze even the smallest additional returns from pension scheme assets and her talk shares some of these ideas. Mary helps her clients to set investment strategies working towards the ultimate goal of closing the funding gap. These strategies need to work today and be resilient in the tough conditions we find ourselves in. Specialist ideas mean manager skill is ever more important and Mary works with clients to ensure the right investment manager is picked for the job. Contact +44 (0) mary.spencer@ lcp.uk.com maryspencer Specialist areas: LCP Visualise DB Investment Manager Research Like a typical actuary, Mary likes detail. But it s still important to see things from a high level view Mary took this idea to the extreme recently by sky diving from over two miles high, just to get a new perspective. Personally, we re just glad she lived to tell the tale (and her talk!).

26 26 Michelle Wright Partner, LCP Michelle is a member of LCP s specialist buy-out and de-risking team, focusing on helping trustees and companies to understand and implement risk reduction strategies, and is keen to look at ways in which we can continue to find innovation in the market. Is longevity risk something you should be worried about?

27 27 SESSION 2 WHAT DO I DO NEXT? DB pension schemes are maturing. Most are on similar plans to reach self-sufficiency or buy-out over the next 5 to 10 years. And two-thirds expect to incorporate longevity hedging (buy-ins, buy-outs or longevity swaps) as part of their end-game. But is longevity risk something you should be worried about? And should you wait to the end of your journey to address it? Michelle will look at the factors influencing both of these issues, and explore the innovations in the insurance de-risking market (and in technology) that could make it easier for you to accommodate these solutions. As a partner in LCP s insurance de-risking practice, as well as a Scheme Actuary, Michelle s advice centres on helping pension schemes to incorporate insurance de-risking solutions effectively as part of their wider funding and investment strategies. She has advised on a range of interesting and complex transactions over recent years, including for the likes of ICI, GSK and Uniq, and, earlier this year, the innovative MIRA PPF+ buy-out and a 680m collateralised pensioner buy-in for the Northern Bank Pension Scheme. Contact +44 (0) michellewright Specialist areas: Buy-ins and Buy-outs Strategic Consulting De-risking Training Pension scheme de-risking is a race to the finish, and Michelle will tell you that the key to success is having a clear plan and preparing effectively and in good time. With her first half marathon looming in a matter of weeks, she is now severely wishing that she practised what she preaches

28 28 Jeremy Dell Partner, LCP Jeremy is an experienced Scheme Actuary and advises a wide range of clients, providing advice on all aspects of pensions and employee benefits and is a regular speaker on a variety of pensions related topics. Making the right decisions in an ever more complex world.

29 29 SESSION 2 HOW TO BRING CLARITY OUT OF UNCERTAINTY Pensions in the UK are at a cross roads. The Government s current consultation on pension taxation ends this month and its conclusions would make any previous pensions legislative change appear trivial by comparison. And this is just one of several issues that employers and trustees may need to address over the decade to come. Jeremy will give a personal view of the landscape ahead, providing some ideas on what actions can be taken to assist employees in making the right decisions in an ever more complex world. Contact +44 (0) jeremy.dell@lcp.uk.com jeremydell Specialist areas: Mergers & Acquisitions Strategic Consulting Buy-ins and Buy-outs With more than 25 years experience in the pensions world, Jeremy is an actuary advising trustees and sponsors on all aspects of pension provision.

30 30 EXECUTIVE PENSIONS TAX IMPLICATIONS Budget 2015 Impact on Tax In the wake of Summer 2015 Budget we look at the impact for executive pensions. July 2015 Budget - The end of the road for executive pensions In his Summer Budget, the Chancellor confirmed that the lifetime allowance will reduce from 1.25m to 1m from April In addition, from April 2016 the annual allowance will reduce for those with adjusted income of 150k or more. Adjusted income is not just income used for income tax - it includes the value of pension contributions / accrual funded by the employer or individual into registered pension schemes. This includes salary sacrifice for DC schemes. Individuals could end up paying very high rates of tax if they and their employers do not start planning now. 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Adjusted income ( 000s) What does the tapered annual allowance look like? The higher your adjusted income, the lower your annual allowance. Annual Allowance Individuals could end up paying very high rates of tax if they and their employers do not start planning now.

31 31 Tax impact for individuals with DB schemes who have adjusted income above 150k My earnings: 110k My adjusted income 150k My earnings: 140k My adjusted income 180k Alf DC Annual allowance: 40k Betty DC Annual allowance: 25k 40k Nil 40k 6. 25k Pension contributions in year (employer) Tax charge on pension contributions Pension contributions in year (employer) Tax charge on pension contributions Alf needs to be aware that any pay rise, bonus or other taxable income will reduce his annual allowance. Betty is likely to want pension contributions limited to 25k if she can have cash in lieu of the rest. My earnings: 170k My adjusted income 210k My earnings: 210k My adjusted income 210k Charlie DC Annual allowance: 10k Dot DC provided through EFRBS Annual allowance: 10k 40k 13.5k 40k Nil Pension contributions in year (employer) Tax charge on pension contributions Pension contributions in year (employer) Tax charge on pension contributions Charlie is likely to want pension contributions limited to 10k if his employer offers cash in lieu of the rest. The annual allowance (and lifetime allowance) does not apply to Dot s pension, but she will pay tax when she receives it. Tax impact for individuals with DC schemes who have adjusted income above 150k My earnings: 140k My adjusted income 180k My earnings: 210k My adjusted income 210k Emma DB Annual allowance: 25k 40k 6. 25k Pension input amount (HMRC value of DB pension earned in year) Tax charge on pension input amount Emma s employer should consider amending the scheme. N/A Pension input amount (HMRC value of DB pension earned in year) Frank DB provided through EFRBS Annual allowance: 10k Nil Tax charge on pension input amount The annual allowance (and lifetime allowance) does not apply to Frank s pension, but he will pay tax when he receives it. To find out more about the impact of the Budget on your executive pensions and how we can help you simplify the tax issues, please get in touch with one of the team. Mark Jackson, Partner Karen Goldschmidt, Partner

32 32 IS LOW THE NEW NORMAL? The macro-economic outlook The global economy is continuing along its slow path to recovery. The UK and US have been paving the way whilst others, particularly Europe and the emerging markets, have struggled to find their feet. The situation in Europe (Greece aside) is starting to look up for the first time in years. 70% 60% 50% 40% 30% 20% 10% Bank lending and consumer sentiment have increased, and the European Central Bank s sizeable quantitative easing programme, albeit slightly late to the game, is giving markets a much needed boost. That said, global growth still remains far behind a normal recovery. The term secular Accomodative monetary policy Central bank balance sheets (% GDP), UK base rate 7% 0% UK Euro area UK base rate (rhs) Is stagnation our new reality? US Japan 6% 5% 4% 3% 2% 1% 0% stagnation is now being widely discussed by economists. If they re right, then this would mean that increasingly accommodative monetary policy (ie continued low interest rates and more printing of money) would be required to stimulate growth. With an abundance of accommodative monetary policy in developed markets (see chart below) and still relatively muted growth, is stagnation our new reality? And is low the new normal for yields? Developed market interest rates have reached unprecedented low levels and have remained there for quite some time. Although interest rate rises are now on the horizon, those that believe in secular stagnation fear that recovery is only temporary, and that interest rates need to remain low to boost demand and longerterm levels of investment. Whilst we feel that this view is perhaps too extreme, it also appears overly optimistic to expect growth to bounce back to its pre-financial crisis level. Another reason for this is productivity, a key driver behind economic growth. This was severely hit during the financial crisis and we have not seen productivity improvements in many developed economies since. In

33 33 the UK, productivity is yet to recover to its pre-recession peak (as shown in the chart opposite), let alone stretch beyond it. An increase in productivity is essential to justify growth of real wages, which in turn generates demand. The International Monetary Fund has called for governments to take action to stimulate productivity growth perhaps by undertaking structural reforms, promoting investment in capital and enhancing innovation which will, in turn, counteract the drag from ageing populations. Until we see levels of productivity start to increase, we may need to shift our expectations of what normal yields are down a notch, and look beyond traditional asset classes to access areas of higher returns Productivity after UK recessions Output per hour worked, pre-recession peak = 100 Q5 Q10 Q15 Q20 Q25 Latest recession Average of previous recessions (1973, 1980, 1990) An increase in productivity is essential to justify growth of real wages. Natalie Brain Investment Analyst In addition to advising both DB and DC clients, Natalie is a key member of LCP s macroeconomics research team, helping to shape our investment advice. Natalie discusses the economic outlook with senior economists and investment managers on a quarterly basis, and helps write our quarterly investment market commentaries.

34 Zoom in on your 34 DC scheme Age group Average protected fund at retirement 104k Average member contribution 4.1% To find out more, please visit lcphorizon.com Insight into action

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