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ASSESSMENT OF PARTNERSHIP S ENHANCED RETIREMENT ACCOUNT PROPOSITION

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ASSESSMENT OF

PARTNERSHIP’S ENHANCED

RETIREMENT ACCOUNT

PROPOSITION

NOVEMBER 2015

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C O N T E N T S

1 INTRODUCTION ... 3

1.1 PROJECT BACKGROUND ... 3

1.2 AKG ASSIGNMENT ... 3

1.3 INFORMATION SOURCES ... 3

1.4 RELIANCES AND LIMITATIONS ... 4

1.5 CONFIDENTIALITY ... 4

2 PROPOSITION ASSESSMENT ... 5

2.1 COMPOSITION AND STRUCTURE OF THE PROPOSITION ... 5

2.2 ABILITY TO MEET CUSTOMER REQUIREMENTS ... 7

2.3 ABILITY TO MEET ADVISER REQUIREMENTS ... 9

2.4 BACKGROUND AND COMPETENCIES ... 10

2.5 RISK AND RISK MANAGEMENT ... 11

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1

INTRODUCTION

1.1 PROJECT BACKGROUND

This Report has been prepared for Partnership, the Client. The Client has launched a new retirement income proposition, the Enhanced Retirement Account (ERA), 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 ERA proposition.

1.2 AKG ASSIGNMENT

The ERA proposition is a Self Invested Personal Pension (SIPP) containing an investment part (a flexi access drawdown account) and a guaranteed part (an annuity) designed to balance a consumer’s requirement for secure, sustainable income with flexibility of withdrawals and exposure to investment growth opportunities. AKG’s assignment can be broadly summarised as carrying out an independent assessment of the ERA proposition taking into account the following five overarching themes:

Composition and structure of the proposition – How has the hybrid proposition been structured and brought to market? Which parties are involved in the proposition and what are its component parts?

Background and competencies – What background and skill set do the provider and/or partners bring to the proposition? What have been their historical competencies? Is there some comfort to advisers in working with the various providers and/or partners?

Risk and risk management – What type of risks are associated with and/or prevalent with bringing this type of proposition to the market? How will these risks be managed by the parties involved within the proposition on an ongoing basis? What might be the high level risks applicable to customers and/or advisers?

Ability to meet customer requirements – Independent commentary about the market positioning of the proposition, its target market and the type of customer and/or circumstance which might lead to the recommendation of this type of hybrid product. High level comparison with other traditional retirement income product solutions. How would engagement differ? What would be the perceived value of each approach?

Ability to meet adviser requirements – Independent commentary about how the proposition might dovetail with adviser business processes. What type of customer and situation might it be applicable to? And also the fit of pricing structure/approach.

1.3 INFORMATION SOURCES

AKG has been supplied with the following information to support the assessment process:

a) Enhanced Retirement Account Product Specification

b) Key Features of the Enhanced Retirement Account

c) Example Enhanced Retirement Account quotations

d) Enhanced Retirement Account Client Factsheet

e) Enhanced Retirement Account Adviser Guide

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AKG met with senior members of the Partnership development team as part of the assessment process. AKG has also seen the results of a qualitative consumer research exercise, carried out on Partnership’s behalf by Ignition House in August 2014, which sought to understand consumer retirement income needs and to test consumer appetite for Partnership’s post-2014 Budget proposition.

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. In particular, future developments such as product changes, or company restructuring, 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 sole 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 arrangement 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; and

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2

PROPOSITION ASSESSMENT

2.1 COMPOSITION AND STRUCTURE OF THE PROPOSITION

Partnership’s ERA is a new model retirement income solution which can provide customers with a balance of ongoing equity market exposure, income withdrawal flexibility and lifetime income security.

Partnership sets out its proposition at a high level in the ERA Client Factsheet as follows:

The ERA is made up of three key parts: a Guaranteed Element that provides your guaranteed retirement income; a Flexible Investment Element, where the balance of your pension fund can continue to grow free of tax; and a Cash Account that can be used for keeping your money safe and free from tax until you withdraw it. The Cash Account can also be used to roll up guaranteed income payments if you decide at some stage that you don’t immediately need them. Once you have decided how much guaranteed income you require, the remainder of your pension fund can be invested, tax-free, either in a range of low-cost investment funds or in the Cash Account. You can access this money whenever you want or use it to buy more guaranteed income.

The new ERA proposition has been brought to market under the Partnership brand. Within the proposition Partnership is broadening its appeal to advisers through the launch of an innovative hybrid retirement income solution whilst also delivering access to its recognised competencies for an annuity/secure income component on enhanced terms.

In order to be able to provide access to flexible drawdown and exposure to equity markets, Partnership needed to be able to able to offer a pension/drawdown product wrapper and investment fund links.

Partnership has achieved this objective by working in conjunction with strategic partners, Investment Funds Direct Ltd (IFDL) and Vanguard Asset Management (Vanguard), each party therefore bringing a different specialism to the proposition.

ERA is written as a SIPP which is provided by IFDL. Post-pension freedoms drawdown flexibility is provided and, as is commonplace with SIPP wrappers, a cash account is also made available within the structure of ERA. The Partnership annuity is held as an asset of the SIPP.

From a legal structure perspective, ERA is a trust based registered pension scheme. Money flows in are directed to the SIPP partner, IFDL, so that they fulfil the FCA’s Client Assets Sourcebook (CASS) responsibilities. The investment permissions are held by IFDL.

Access to equity market exposure is made available via defined links to eight investment funds from Vanguard – Vanguard LifeStrategy 20% Equity Fund; Vanguard LifeStrategy 40% Equity Fund; Vanguard LifeStrategy 60% Equity Fund, Vanguard LifeStrategy 80% Equity Fund, Vanguard LifeStrategy 100% Equity Fund, Vanguard FTSE All Share Index Fund, Vanguard Investment Grade Bond Index Fund, Vanguard UK Government Bond Index Fund.

ERA is only available through the intermediated distribution channel and adviser charging can be facilitated. Initial, ongoing and ad hoc payments, paid by IFDL directly to advisers, will be separately identified as relating to the Partnership ERA. The adviser needs to understand that, although ERA is a Partnership branded proposition, they are opening a SIPP on behalf of the customer with IFDL.

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When the adviser and the customer decide on the amount that will go towards the purchase of an enhanced annuity with Partnership, and the shape of this annuity, the requisite payment of the annuity purchase price will be made to Partnership.

Advisers will obtain a SIPP flexi access drawdown pre-sale illustration for customers, including the regulatory requirements relating to the investment element:

• Projections

• Reduction in yield

Pre-sale illustrations will also include details of the premium required for the desired secure income payment, the amount assigned to the flexible element, the fund(s) selected and the basis of the annuity selected. The customer will complete a single application form and sign a single declaration for ERA. The declaration includes an instruction for the Trustees of the SIPP to purchase an annuity on behalf of the customer. On application all money flows will be directed to IFDL, the annuity premium will be passed to Partnership and the remainder will be invested, as per instructions, in the SIPP.

All secure income payments will be paid by Partnership into the customer’s cash account. The customer can choose how much of each income payment is paid out of the product and how much is retained within the product, illustrating the income flexibility that is provided by ERA. Furthermore regular and ad hoc payments may be taken from the customer’s cash account. The customer can choose to receive their income payments on the 1st or 15th of the month.

As the annuity is held as an asset of the SIPP, drawdown rules apply and IFDL will be responsible for the tax processing, including Lifetime Allowance (LTA) and income tax on payments once they leave the SIPP wrapper.

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2.2 ABILITY TO MEET CUSTOMER REQUIREMENTS

The industry has long debated the merits of annuities over income drawdown as the optimum retirement solution, or vice versa, essentially comparing chalk and cheese. Meeting customer requirements in retirement and helping them, where possible, to address and mitigate a range of risks in retirement is not an easy process and no one solution necessarily holds all of the trump cards. But post pension freedoms there is a feeling that propositions like ERA which enable customers to provide a form of secure income underpin with access to flexible withdrawals and exposure to equity markets where required will clearly have a place. Individual components such as annuity, drawdown and investment funds are all available in their own right in the market and so advisers can seek to put together a form of combined solution off their own bat. Whether advisers have the propensity to seek out and deliver this DIY retirement income toolkit is the key question. However Partnership’s ERA is a new product response designed to meet underlying consumer needs (as identified from the primary research exercise) of having the option of a known secure income (underwritten annuity) at outset, but also having the chance to utilise some of the new found pension freedoms flexibility. An example of the new flexibility offered by ERA is presented in the income payment terms. All payments from the Partnership annuity will be paid into the SIPP cash account. However, there is no requirement for the full amount of the annuity payment to be paid to the customer. If the customer has surplus income for a period they can elect for the income or a portion of it to accumulate in the cash account for withdrawal at a later date or to help provide future dependant benefits.

It is very much a mainstream market proposition. Consumers can open ERA with a total fund value of £10,000 after Pension Commencement Lump Sum (PCLS) and initial adviser charge, split as follows:

• £5,000 in to the guaranteed element

• £5,000 in to the flexible element

The ERA accepts crystallised and uncrystallised funds. If a tax-free lump sum and/or taxable withdrawals have been taken, the ERA permits the transfer of one pension fund to the ERA. All transfers must be in cash and from a UK registered pension scheme. The ERA cannot accept Open Market Options (OMOs).

Cost of solution will inevitably be seen as a point of comparison. This can be seen at a product/proposition level where advisers may wish to directly compare the cost of ERA with other ‘hybrid-products’ or against the total cost of individually sourced secure income, pension/SIPP and asset management components. Advisers may also wish to consider the resource cost of constructing this type of solution themselves, on day one and on an ongoing basis.

From a pricing perspective Partnership has sought to bring ERA to market as a relatively low-cost proposition. There is no extra charge on the annuity other than costs implicit in the annuity rate quoted to the customer. There is a wrap platform charge of 0.35% per annum relating to the Flexible Investment Element (excluding monies held in the cash account), subject to a minimum of £60 per annum across both products held on the platform.

Moving funds from the flexible to the guaranteed element will be free of charge for customers. There is also a fund management charge of between 0.08% and 0.24% dependent on the investment fund(s) selected by the adviser.

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No solution of this type is likely to be entirely simple under the bonnet. ERA is no different, bringing together a number of key constituent parts, techniques and processes. However the concept is presented relatively simply and given a context of advice, in which an adviser can spend time talking through its construction and potential application with a customer, it would appear to be capable of being understood. It should also resonate with natural at-retirement questions and considerations.

The table below looks at some of the ways in which ERA can meet underlying customer needs in retirement.

HOW DOES THE HYBRID SOLUTION MEET UNDERLYING CUSTOMER NEEDS IN RETIREMENT?

Can the customer access flexible drawdown options introduced in April 2015?

• Yes – Through the Flexible Investment Element of ERA

Can the customer mitigate against the potential risk of living for too long and running out of money

• Yes – A secure income for life can be provided through

the Guaranteed Element of ERA Can the customer mitigate the potential impact of

inflation on their future income?

• Yes – By selecting an income indexation option on the

Guaranteed Element of ERA on application

• Yes – The ability for the customer to buy future secure

income as they get older also presents a potential method of inflation mitigation

• Yes – By accessing the potential for investment growth

with funds held in the Guaranteed Element of ERA Can the customer’s spouse/dependents receive death

benefits?

• Yes – By selecting a guaranteed payment term or value

protection option under the Guaranteed Element of ERA on application

• Yes – The value of the fund from the Flexible Investment

Element will be paid out on death Does the customer have flexibility in the level of, and

the manner in which, income can be taken from ERA?

Yes – Although the level of income payments from the Guaranteed Element of ERA will be set on application the customer can decide whether or not to withdraw the income

payment once it has been paid by Partnership into the Cash Account

Yes – The customer is free to choose how and when money is withdrawn from the Flexible Investment Element

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2.3 ABILITY TO MEET ADVISER REQUIREMENTS

Some advisers may have pushed the pause button on annuity business following the pension freedoms changes. If customers still look like they require the delivery of secure income for their lifetime then annuities and other forms of secure income provision will need to be explored.

Where previously Partnership would have been limited to the annuity part of the discussion, the launch of ERA has meant that it can be considered in the light of a more flexible retirement income solution.

While the proposition is based on quite a straightforward foundation ERA does need to be delivered in conjunction with professional financial advice/planning.

As had previously become good practice for annuity proposals it remains important for advisers to gain an understanding of a customer’s medical history/outlook and any lifestyle related conditions. Moving forward this should remain the case and while it may be a difficult area to tackle in customer dialogue it should to some extent now form part of the customer fact finding exercise. Where an enhanced annuity rate can be achieved for the customer on the open market it is worth seeking out.

One of the main differences now would appear to be that advisers will not necessarily be making a call on a retirement income solution which is 100% annuity or 100% drawdown. Their processes will need to take account of this in terms of ascertaining the customer’s requirement for security vs flexibility.

Whether they elect to use them or not, there is a requirement for advisers to assess the potential suitability of new products/propositions for their customers.

There is a move towards more advisers making use of tools which support dialogue with the customer on key budgeting and cashflow modelling exercises. Where these exercises seek to divide income requirements between necessity and lifestyle spending there is a feeling that customers may take comfort from the necessities in retirement being underpinned through the provision of a secure lifetime income.

This brings us back to the fact that not many solutions in the market beyond annuities can take on this task. But in planning beyond the necessities, where customers are fortunate enough to have additional funds and sources of income the ability to plan how these are used most efficiently in retirement will also fit well with the budgeting and cashflow exercises. This is where it is felt that products which seek to combine secure income with flexible drawdown functionality can provide an option for advisers and customers.

Partnership has launched a Target Income Calculator for use by advisers. The calculator is designed to support the adviser in their discussion with the customer about the amount of money required to meet their income needs in retirement. Once the customer’s retirement costs have been totted up the calculator will help them to understand how much of their retirement fund might be required to secure the requisite income. By association they will also be able to get a feel for the level of any excess funds which can be used in a more flexible manner through drawdown.

There are a variety of decision points, not only on the annuity side of things where the selection of the ‘right’ income shape is crucial for the customer, but there are broader financial considerations which need to be taken into account when planning the optimum balance of secure and flexible income for the customer including propensity for investment risk.

Advisers will therefore need to carry out a robust risk profiling exercise with the customer when planning how investment will be made within the Flexible Investment Element of ERA. Advisers will also need to assess a customer’s propensity for loss. Within this new type of hybrid solution the ability to select a level of secure

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Another change in approach is that lifetime income might be secured in batches over time at different ages and indeed the shape of the income on each occasion may differ slightly. Ongoing dialogue with the customer about their changing circumstances and secure/flexible income requirements will be required for a product like ERA.

Finally with more advisers aiming to support holistic financial and tax planning strategies ERA will also have something to offer. With the two components available within the proposition not only can a death benefit approach can be shaped and agreed with each annuity that is secured, but a plan can also potentially be made for dependents which takes into account any additional funds in the investment or cash accounts. Partnership has also launched an Income Tax Calculator for use by advisers. The calculator is designed to support the adviser in their discussion with the customer about how they might withdraw their retirement benefits – lump sums and income – in the most tax efficient manner. The calculator can illustrate the income tax consequences for their client of taking money from their pension pot.

ERA can then be used to help implement a particular income tax strategy. For example, if the customer does not need to take the income, it can be reinvested or held as cash in the ERA without incurring income tax until it is withdrawn.

2.4 BACKGROUND AND COMPETENCIES

Partnership is an established enhanced annuity specialist whose proposition toolkit also includes long term care and equity release solutions. This toolkit is now broadened further by the launch of ERA.

https://www.partnership.co.uk/home/about-us/

Although ERA brings a broader proposition to the market Partnerships focus remains on underwritten annuities. It has developed an understanding of medical and lifestyle related conditions over time and aims to continue to use this underwriting intelligence to price annuities for specific cohorts of customers.

IFDL, owned by Royal London, is a known provider of platform solutions. Financial advisers are more likely to be aware of IFDL through the Ascentric brand in the intermediated market.

https://www.ascentric.co.uk/advisers

IFDL has worked with third party SIPP providers on its platform and has also developed a proprietary SIPP solution. It therefore has experience of pension/drawdown wrappers and their associated servicing requirements.

Vanguard is an asset management group headquartered in the US. It has built its reputation on the provision of low cost, passive investment solutions. Vanguard has now being operating in the UK market for a number of years.

https://www.vanguard.co.uk/adviser/adv/about-vanguard/about-us

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2.5 RISK AND RISK MANAGEMENT

Partnership has responded to the risk presented to its annuity business by pension freedoms through the introduction of a proposition that should essentially broaden its appeal in the retirement income market. It has opted to use respected external partners to provide the components which are not part of the established Partnership toolkit, i.e. pension/drawdown and investment funds. In all likelihood this has enabled Partnership to bring the new proposition to market more quickly than if it had tried to develop proprietary drawdown or asset management solutions.

While it is broadening the appeal of its proposition Partnership is sticking firmly to its roots and core competencies as an enhanced annuity specialist and is relying on the pension/drawdown and asset management skill sets of IFDL and Vanguard respectively.

In terms of the proposition and service experience for advisers and customers, ERA needs to ensure that it equals the sum of its parts. The three partners need to work closely together to ensure that a connected proposition is delivered. From a ‘front of house’ perspective educational material, roadshows and workshops will support understanding of how the new proposition works for financial advisers but behind the scenes the partners need to connect efficiently, i.e. data feeds, systems talking to each other, overarching service proposition etc. The feel of a hybrid solution, rather than one that has been bolted together, needs to be experienced.

Advisers have been awaiting the launch of new retirement income propositions since the introduction of pension freedoms in April 2015. What is becoming clear is that retirement income planning represents a balancing act between a range of potentially competing priorities for customers. The results of various market research exercises suggest that customers have a desire for the delivery of a form of secure income in retirement but with potential flexibility in terms of access to their funds and the ability to alter their retirement income strategy as requirements change.

One of the key risks in retirement remains, quite simply, that the customer will run out of money. Advisers therefore have a duty of care to ensure that this risk is addressed and where possible mitigated. In the new excitement around flexible drawdown advisers need to consider whether some, or all, of a customer’s fund should be underpinned by a secure income. There are still not many forms of provision of a guaranteed lifetime income and annuities remain one of these.

But consumers have however also let it be known that they feel a loss of control and flexibility with traditional annuities and, where income guarantee periods and/or value protection have not been employed, a loss of the ability to pass on pension benefits to husbands, wives, partners and the wider family.

Where an investment component is employed within a customer’s retirement income package the adviser needs to ensure that the customer’s attitude to risk and capacity for loss is appraised. Often done through third party risk profiling tools, advisers will need to match the output from their tool of choice to the appropriate Vanguard fund. Furthermore, and as highlighted by the FCA, advisers need to look at and probe other key indicators in the risk profiling process beyond the score attributed to the customer from a computerised process.

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3 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)

AKG Offshore Profile & Financial Strength Reports (Covering Offshore life assurance companies)

AKG Platform Profile & Financial Strength Reports (Covering platform operations)

AKG UK Life Office With Profits Report

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Produced by:

AKG Financial Analytics Limited

Anderton House, 92 South Street, Dorking, Surrey, RH4 2EW Tel No: 01306 876439 | E-mail: info@akg.co.uk

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