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Graeme Bold, Scheme Strategist

Sharon Bellingham, Master Trust Lead

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Dr Mike Mosley Broadcaster and Author, Johnny Timpson, Technical and Industry Affairs Manager and Helen Dick, Senior Manager Underwriting and Claims Strategy

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    Scottish Widows



    September 17, 2020


    Alison Nicolson:                  Good afternoon, everyone. Thank you for joining us today. For those of you who don't know me, I'm Alison Nicolson, and I'm the Head of Client Relationships here at Scottish Widows.

                                                    Today I'm joined by colleagues, Maria Nazarova-Doyle, who you can see here on the slide, Head of Pension Investments, and Tony Clark, who is our Regional Development Manager. We were really lucky to steal Maria from Mercer and I know that we have a few of her ex-Mercer colleagues on this call. So, we thank you. But many of you may also follow Maria on social media. And if you don't already do that, then please do, because you will see a lot of what is going on from her social media.

                                                    For those of you that tuned into previous webinars on the evolution of our pension funds or investment markets, you will have heard some teasers about our Responsible Investment approach. And so, we're delighted that Maria, here today, will provide you with some more information on this ever-evolving topic.

                                                    Please do use the "Ask a Question" function to submit your questions at any point during the presentation. And Tony, who you can also see here, will keep a lookout for key themes that he can put to Maria towards the end of our session.

                                                    This webinar is being recorded, and it will be available for you to share with your colleagues after the event on the same link that you used to access it today.

                                                    This forms part of our Experts Series, which is a set of topical webinars, podcasts, podcasts, which see our experts talking of some of the key issues in our industry to help you navigate the changing market. We've been building the content in this series since June; our most recent one, a brilliant session on the economic state of the nation with Paul Johnston, from the IFS. Please have a look at the web page for this in our advisor extranet. If you didn't join it, I think you would enjoy it.

                                                    We have another great session coming up next month, with our LBG Security Team providing an overview of cybersecurity, a really hot topic given we've all moved digitally. This will help you and your companies be protected. So, please keep a lookout for the information coming into your inbox or on social media over the next few weeks.

                                                    Feedback from our previous webinars has suggested that investments is a really popular topic. And so, I don't want you to have to listen to me. Let's get started. And I'll pass over to Maria. Maria, over to you.

    Maria Nazarova-Doyle:     Thank you very much, Alison. Hi. My name is Maria Nazarova-Doyle, and I'm Head of Pension Investments at Scottish Widows. I look after our investment proposition, and I'm also responsible for integrating ESG into everything we do.

                                                    I'm delighted to see so many of you joining our Responsible Investment webinar today. The interest in this topic has been growing exponentially, and many pension schemes, asset managers, and providers are on the journey of integrating ESG into their business models and products. And today I will tell you how we approach RI integration at Scottish Widows. Well, I might be biased, of course, but I do feel that our approach is very comprehensive and that we have made significant progress in this area.

                                                    But before we go through the presentation, let me run a quick poll with you, as I'm quite interested to know whether I am preaching to the choir today or whether I need to work harder to convert the non-believers. So, Marco, if you could send the poll out, please, it will be really good to see what the audience thinks.

                                                    Marco, could you show the results, please?

                                                    So, if you're looking at what I'm looking, it's quite a strong support for "ESG factors affecting financial returns," and we do have a fairly small group that said they do not believe so and a slightly larger group who are not sure. So, I'm going to try to work harder today to get us to 100% believing. But if you still have any outstanding questions after this, I'll be more than happy to cover and have additional conversations.

                                                    Right. So, let's kick off then with our presentation. At the beginning of this year, we published our Responsible Investment and Stewardship framework to articulate our position and ambition in this area. So, since then we have been working hard to implement these principles in practice. And to set us up, here is how we define "responsible investment." We define it as, "incorporating financial and material ESG factors into the investment process to better manage risk and help identify investment opportunities." Our six principles are: invest responsibly, operate an exclusions policy, reduce portfolio carbon footprint, ensure our fund range is aligned to customer values, integrate these principles across all asset classes, and look for ways to enable direct investments for DC, particularly when we look at green energy and infrastructure.

                                                    And our stewardship commitments see us developing into an active owner of our assets, and our stewardship policy lays out a three-pronged approach to this. So, firstly, we'll work very closely with our asset managers to monitor their stewardship and voting activities, both looking back and looking forward, so that we can override their voting plans and direct their votes should the need arise. Secondly, we're engaging directly with our top 20 holdings, and then dialogue with those companies to influence developments that enhance the value of a customers' investments. And thirdly, we engage with other asset owners like us and the industry organisations, like Climate Action 100+, the IIGCC, the PRI, and others to drive positive change at the systemic level.

                                                    So, the principles are all well and good. But what does that actually mean we're doing in practice to integrate ESG? Here is our Responsible Investment toolbox. It consists of four main tools that we use to integrate ESG. Stewardship is number one. This one is the extremely important as, when done properly, it helps protect and enhance the value of our investments, as we work with companies we invest in to ensure they've been responsible in their business practices. I will cover up some examples of our stewardship in an action later in the presentation.

                                                    So, another tool we have is screening or exclusions. There are certain things that represent unrewarded risk in our portfolio, and this isn't something we can solve with engagement. In these cases, we simply do not want to hold these investments, as we have no way of mitigating these risks. So, we're now finalizing our approach to exclusions, and there will be further announcements on this later this year.

                                                    And I should note here that it is very important to decide where to draw the line between stewardship and exclusion. As a large asset owner looking after around £170 billion of investments, we can make a real difference if we keep a seat at the table and engage with our industry companies, rather than just passing the buck further down the chain to individual small investors. So, it's important not to approach exclusions as a blanket tool, and it's quite a blunt tool, as well. But it's also important to manage downside risk for people who trust us with their savings.

                                                    So, our preliminary analysis shows that there is a level of exclusions that helps achieve that, and I really look forward to telling you more about it later this year.

                                                    So, tool #3 is integration. So, this is where ESG considerations are fully embedded into the investment decision process at security level and normally applies to active management. You might know that our active mandates are managed by Schroders, who have achieved full ESG integration throughout all their investments. So, therefore, our own actively managed funds are now covered for this particular aspect.

                                                    And last, but not least, is allocation. This is where specific themes can be pursued to help capitalise on ESG-related opportunities. And a good example would be our recent investment of £2 billion into the BlackRock Climate Transition World Equity Fund that I will also cover off later today in a bit more detail.

                                                    There are many ways to position our discussion today. There is a lot I'd like to share. So, I've been thinking about how best to kind of put a framework on the conversation today so I don't just talk about lots of different things. And for the purposes of giving this some structure, I think it would be helpful to use the framework that I outlined on this slide. So, whereas the previous slide covered the approaches to embedding ESG into our investments, specifically, and we addressed the whole spectrum of ESG in our funds, this is how we address ESG at strategic, board level as a pension provider and asset owner.

                                                    So, this looks at our stewardship activities and investments into customer offerings and functionality. We define our strategic priorities on a three-year basis, as it is much better to focus on a smaller number of important things and get them done, rather than to chase a wide variety of things and master none of them. So, the rest of this presentation is dedicated to giving you more details around our activities within these three focus areas. So, they are climate and carbon, customer empowerment, and board cognitive diversity.

                                                    So, let's start with climate and carbon. Climate risk is very much an investment risk, but also an investment opportunity. The goals of the Paris Agreement that have 195 signature estates is to limit global warming to below two degrees and to make finance flows consistent with a pathway towards lower greenhouse gas emissions and a supportive climate-resilient development. So, UNPRI's work on the inevitable policy response projects highlights significant disruption to the investment industry, driven by changes in underlying valuations of companies due to adverse financial impacts from climate policy.

                                                    Now that the U.K. has legislated to be in line with the Paris Agreement, the government will be forced to act on its goals, and the longer a robust policy response is delayed, the more disorderly the implementation will be and the higher the potential costs. We know already that the assets are getting repriced as we speak and oil majors are writing off billions of their balance sheets due to oil reserves they know they will never manage to extract.

                                                    As institutional investors, we're acting to support the low-carbon transition through our stewardship by focusing on some of the largest high emitters  that we own and through changes to our investment portfolios to help manage standard asset risk.

                                                    So, speaking about investment, we are strengthening our pension default by allocating £2 billion of these equities into the new fund we designed together with BlackRock, called the Climate Transition World Equity Fund. This fund allocates more to those companies who score highly on their low-carbon transition readiness, which includes things like carbon emissions, percentage of clean technology revenues, water and waste management, and tilts away from those who achieve the lowest scores.

                                                    We're very excited to introduce this fund, as it is very innovative and achieves some amazing environmental characteristics, alongside making the return stream more sustainable by taking out some of the ESG risks and overweighting companies where we expect ESG-related benefits to come through.

                                                    The fund has exclusions for controversial weapons and U.N. Global Compact violators. So, these are companies breaching international labour laws, human rights directives, those involved in child labour, modern slavery, and corruption. So, this helps us to address some of the "S" and the "G" concerns, but the fund is mostly targeting significant improvements on "E" – so, on environmental characteristics – like achieving around 50% of carbon emissions reduction compared to its index, which is MSCI Broad Equities. It also achieves 63% increase in green technology revenues and 10% decrease in water consumption.

                                                    So, we expect that this fund is going to deliver very good environmental characteristics, alongside a more robust return stream over time.

                                                    The philosophy of the fund is built on five main pillars, within two broad categories: what the company's business actually is, and how well they manage natural resources that they use. I have seen a number of environmental funds – and I'm sure you have, as well – but there are a few things that make this fund stand out. For example, most often low-carbon funds would just run a screen on highest polluters, whereas this fund doesn't just do that; it goes further, into allocating to companies whose business models are in green technology and renewable energy. So, the fund benefits from the successes of the low-carbon transition.

                                                    Also, this fund incorporates natural resource management into its scoring, like water and waste management, which is becoming increasingly important, alongside carbon emissions mitigation.

                                                    (inaudible) This approach scores companies within the MSCI World Index based on these five parameters, and then excludes those with the lowest scores. So, that results in about 2% of the index being excluded on these scores outright. And what it does then, it allocates almost 90% of the fund to those companies in the top two quartiles of scores.

                                                    As I mentioned earlier, we're allocating 10% of the equities in our pension portfolio and retirement portfolio funds to this new fund, and we're already thinking ahead in terms of next steps to tackle ESG and climate change risks in our portfolios.

                                                    We address climate and carbon risk not only through investments, but through our stewardship and engagement. A year ago, we began a process of engagement with the largest oil companies in our portfolios, which were BP and Shell. With BP, we were the second largest shareholder in the group that put forward the shareholder resolution to require BP to publish their plans on achieving net zero and Paris Agreement commitments. That resolution received overwhelming support.                 And we continue to engage with BP to ensure the progress on this.

    We have recently exchanged letters again when the news broke out over the summer of the write-down of around $17.5 billion of assets from their balance sheet, combined with lowering of their long-term energy price assumptions, while also increasing their assumptions on carbon pricing. So, not very good news, at all.

                                                    We received additional information and (inaudible) clarifications we were after  the CEO of BP, Bernard Looney, and have been watching with interest the latest commitments that BP set out in their new business plan, as they've committed to restructuring as a low-carbon company.

                                                    We're having similar ongoing engagement with Shell, where last year we have been successful in tying the executive compensation to their achievement of carbon reduction targets, and we're staying close to them as a significant investor as the sector is undergoing a major structural shift from which clear winners and potential losers are already starting to emerge.

                                                    That's perhaps enough about "E," and now we can move on to "S" and, specifically, to how we define "social" at a strategic level, which is customer empowerment. We look after pension savings of over six million people, and this is only too well known in the industry: they do not engage much.

                                                    However, we have noticed a rise in customer interest and demand when it comes to ESG. We conduct regular U.K.-wide research in this area, and our latest research shows that a lot of people would really like to understand more about ESG, while even if they don't recognise the actual term immediately. But they find it difficult to understand how savings and investors, whether the provider is sustainable and whether their pension fund is sustainable.

                                                    So, we have seen a big rise in social and environmental consciousness in the population, but that hasn't yet quite translated into more active pension engagement. And I think we're on the brink of that lightbulb moment where people will make this connection, and we want to help them do it.

                                                    We're going to empower customers to give them the right information and a robust selection of investment options to help them align their investments with their beliefs. While this is perhaps not a traditional way to address the "S" of ESG, please remember I'm talking here about our strategy as a business and as a pension provider. We do feel that we have an important role to play here in unlocking pension engagement that also helps people build a future worth retiring into.

                                                    We're already implementing ESG as standard into our default offering, but we know customers want to go further and address a range of specific issues that are important to them. So, we will offer them that choice.

                                                    We conducted another piece of research to understand what those thematic issues may be that people would want to invest their pension savings into and whether it would make a difference in the engagement. But before I show you the results, I'd like to ask you to take a quick poll, as it would be interesting to compare how the audience today responds versus the U.K. population.

                                                    So, let me just click onto the poll question. So, just to position this a little bit, this is what we asked our customers in the recent research piece that we did, to understand whether any of those themes would actually click and people would want to put their money into. So, I would be interested to know if any of those themes actually resonate with the audience today. Marco, if you could please send the poll out, that would be helpful.

                                                    Fascinating. I don't know if you can see this, but I'm watching there the different columns kind of go up and down. It's really interesting. We'll just wait a few seconds, and Marco, if you could send the results out, as well, so the audience can see what I'm seeing?

                                                    That's very interesting. I'll show you kind of the answers that we got from our poll, but I could tell you that everybody definitely agrees on clean energy. So, there's definitely consistency there. But other than that, there's a little bit of difference. And particularly, I think the biggest difference would be around U.N. Sustainable Development Goals.

                                                    So, without further ado, let's have a look at the results of our customer poll and then maybe analyse the comparison a little bit more. Hopefully, you can see the results now in your screens.

                                                    We asked similar questions from about 1,400 U.K. DC savers, and the results were somewhat surprising, on one hand; but on the other hand, perhaps quite obvious. Most people tended to pick clean energy, water and waste management as their key priorities. And this relates, of course, to what people already do in their daily lives. So, that makes sense that they would want their investments to be aligned in the same way.

                                                    And interestingly, the asset manager, Nordea, conducted a piece of analysis not so long ago, to find that moving your pension savings into an environmental fund could have up to 27 times more positive effect on the environment than any of the individual actions we're taking, like flying less, travelling by train instead of by car, eating less meat, and so on. Oh, and on this subject I was a little surprised that vegan/sustainable food themes scored really quite low in our poll with the U.K. population, but we will keep monitoring developments in this area.

                                                    And biodiversity and U.N. Sustainable Development Goals both scored – got the lowest scores. I think there's still some work to do to link that better to the idea of investments. So today, it's probably not surprising that quite a lot of you voted for Sustainable Development Goals, because probably this particular audience already has an interest in ESG and understands what that means and understands the link; whereas, there is work to do to help U.K. population to understand that that is actually investable.

                                                    And on diversity, which is quite an important area for us, the stats are not particularly high. But interestingly, for Scottish Widows customers the stats were higher than the average market. And I suppose this is the draw of the Widow. Maybe there is a bit, some selection going on that's more diversity-conscious customers come to Scottish Widows.

                                                    So, the important question here, though, is will this make a difference? Offering people more ESG thematic funds looks to be something that will make them more interested in their pension investments. Over half of respondents said that the top three scoring themes, they will make them "more" or at least "a little more" interested. The proof of the pudding will be in monitoring actual customer activity, but I do believe that ESG has the power to unlock pensions engagement, as it makes pension savings suddenly relevant in the here-and-now, as these investments can target causes that people care about and identify with, and it's just relevant today rather than sometime in the future when they retire.

                                                    We then specifically asked if people would consider putting their money in thematic funds if they were made available to them. If you think this is only the woke millennials that care about ESG issues, you will be pleasantly surprised. Although the Under-34s did score the highest – 67% of them said yes – we saw high levels of interest across all age groups tested.

                                                    There was some difference for males and females who would actively put money in thematic funds, but we think that is part of the trends that we've seen around men tending to make more self-select choices outside of the default, rather than a comment on men being more ESG conscious, in particular. So, over all, the difference wasn't too large anyway; so, 61% of male respondents said that they would move money, against 49% of women.

                                                    And as I alluded to earlier, we carried out this poll to understand the areas where we can support our customers better by offering them a fund range aligned to their values. And you will be hearing more from us on how we're delivering this to them towards the end of this year and early next year.

                                                    Our ESG research report is also available on our website, or please feel free to reach out to your usual Scottish Widows contact if you would like a copy if that's easier. I'll also be posting them on social media, as you probably wouldn't be surprised to hear. So, you can get them there, as well.

                                                    Now we come to talking about the "G" within ESG, which stands for "governance." What I wanted to cover in a little more detail today is the focus of our stewardship activities in the current three-year period. While there are many aspects within "G," we believe that board diversity and, in particular, cognitive diversity is one that can be the most impactful. Without a diverse way of thinking and being able to consider different perspectives around the decision-making table, companies we invest in risk (inaudible)  falling foul of groupthink, which is one of the things that gave us the Global Financial Crisis a decade ago.

                                                    So, if we turn our heads to the looming crisis that is climate change, we need better quality decision making at the most senior level if businesses and the economies are to be successful in the low-carbon transition. Diversity is not just a buzzword or a nice-to-have. There have been numerous studies documenting the financial impact of this. This ledger shows a handful of such research results. And what we know on an intuitive level also comes through in research data: more diverse companies perform better.

                                                    Diversity isn't just about gender. It's about all aspects that help individuals think differently and enable new ways of looking at the same issues. Cognitive diversity stems from differences in education, age, religion, race, nationality, and other factors that are all very valuable if you want to get a balanced view. We, the business, are strong supporters of diversity. We have been championing diversity throughout the business and in our leadership position for a very long time, and we have committed to meeting the target of 33% female representation and at least one Black, Asian, or minority ethnic board member by 2021.

                                                    Recently, you may have heard that the ratings agency, Moody's, found our new Race Action Plan to be credit-positive, and we expect diversity to become increasingly financially material in the coming years. We have a variety of approaches available to us to ensure that the largest companies we invest in are making good progress in this area. We will write to them, hold meetings with them. And where progress isn't achieved, we can use our voting powers to help move the dial.

                                                    So, stay tuned for more updates in this area as we put our new stewardship policy into practice.

                                                    So, that was a bit of a whistle-stop tour in our approach to ESG, but I hope it gave you a better understanding of what we have already put in place and also helped signpost some of the developments that are underway.

                                                    I'd like to leave you with highlights in the next step on our ESG journey that we hope to start putting into practice later this year, which is our exclusions policy. We're at the latest stages of finalizing this and look forward to be able to communicate this to the market as we come to implement it later this year.

                                                    As I mentioned earlier today, we're very conscious of the progress we can make as a large asset owner by engagement; particularly, if we work with others, too. So, we won't be looking to suddenly disinvest from everything that looks a little off, nor would we look to disinvest on moral or ethical grounds. We'll work hard to protect our customers' lifelong savings from unrewarded risks, and this new policy will help us become even better investors on their behalf.

                                                    Thank you very much for listening. I am very happy to take your questions now, as I'd much rather be answering the questions that you have than to just kind of preaching to you on my pre-prepared remarks.

                                                    So, Tony, over to you.

    Tony Clark:                          Thank you, Maria. And thanks for that insight on where we currently are and what some of our initial next steps are on this wide and reaching subject.

                                                    There's a few questions that have come through. I'm just trying to sort of define them into some themes. One particular one, I'm actually going to – I'm going to let you take a glug of water, Maria, and aim this one, actually, to Ali, who obviously introduced the call earlier on, around that difference between men and women and how they approach this whole ESG subject. What do we think drives the difference in the way that they think about this subject, Ali?

    Alison Nicolson:                  Tony, I think that's a really interesting question, and I think many of the people here listening on this call will have views on this, as well. From research that we do in this area, we can see that more women than men are actually worried about some of the things that Maria has just talked about. So, for example, climate change, many more women worry about that on a day-to-day basis than men; yet, the question that Maria shared with us told us that actually less women than men are likely to invest in ESG-friendly funds if it was made available.

                                                    And we have to ask yourself, why is that and what can we do about that as a provider and what can you do about that as advisors on the call. And if we look wider at some of the things that we get underneath when we do research with women, we know that more women than men don't actually understand their savings, they don't know what they've got for their long-term savings. And more women than men feel they're not adequately prepared for the future. So, these types of stats tell us that actually there's probably a knowledge gap and potentially a confidence issue.

                                                    So, we've tried to take that quite seriously, to help support – and I'm sure many of you in the call will take that quite seriously to support. Because if we have women who have a passion in this field, but not necessarily going to follow it through in their investment principles, then there's a lot of education that we'll have to do to support.

    Tony Clark:                          Excellent. Thank you, Ali. That's good to hear, and it's good to see that we kind of take the way differing groups and populations – and this isn't just about gender. I know the way that Scottish Widows and Lloyds Banking Group work on these things, we take much more wider thinking into our approaches about the way that different groups around the U.K. approach these particular subjects. So, thank you for that.

                                                    Maria, I hope you've had time to have a bit of – to whet your whistle, so to speak, and have a drink after talking us through there. A couple of questions that have come up then. So, one of the ones that's come up, one of the themes, is around the fact that clients historically have already held environmental and ethical views and beliefs that's made them approach their investments by using environmental and ethical funds. Are we going to focus first on those, where clients are already consciously making those kind of choices?

    Maria Nazarova-Doyle:     It's a good question. Thank you very much. We're trying to address quite a few things at the same time. So, as we're trying to understand what other things we're missing in the fund range that people might want to invest in, we're also looking at what we already have and how we can improve this. So, we're currently reviewing the mandates for our ethical environmental funds just to make sure that they still address customer needs and what we believe is the market best practice or leading approach to ethical environmental investments. So, we're doing both, in tandem, so that the fund range that we do offer actually doesn't have any gaps and things that we do have in the range are exactly spot-on.

                                                    So, thank you for that question. You should be able to see progress on customer range of funds very soon.

    Tony Clark:                          Thank you, Maria. Leading on from that almost around workplace pensions, where obviously there's a lot of employees who have Scottish Widows as their provider of workplace pensions, where do you see BlackRock Climate Transition Fund and the wider thinking that we have here, where do you see that sitting within the workplace environment?

    Maria Nazarova-Doyle:     So, we're already integrating this fund into our default, which is our largest workplace product and with the majority of customers in it, but we're also looking to add this fund as a self-select option to the fund range, as we discussed earlier that we're looking to add different funds.

                                                    So, you might recall from the customer poll that the top three themes that people cared about are climate, kind of clean energy, climate, water management and waste management, which incidentally happened to be the top three themes that that BlackRock fund actually addresses. So, originally our thinking was to just have this in the default. But then, seeing the results of customer polls we thought that it makes really good sense to offer it as a stand-alone option, as well. So, those people who care about those issues could invest directly up to 100% of their savings, should they want to.

    Tony Clark:                          Thanks, Maria. And one other question that's just come through, actually, which is almost linked to this side of things, as well, is whether or not there's any work that we've got planned to support the ESG message through the schemes so, actually, end customers and employees actually start to get this messaging through to themselves, as well. Any thoughts or plans on that side of things, at all?

    Maria Nazarova-Doyle:     Yes, absolutely. So, I'd say we're starting from strategic level to make sure we put the frameworks and the foundations in place for us doing all the right things fully and the way we intend in terms of integrated ESG. And as a next step, we're looking then to engage with customers once we have this fund range that we think answers their exact needs and also our customer empowerment broken into two. So, one is giving them the good fund options and choices that they want, but the second one is to give them the tools to make better decisions and being able to incorporate ESG into those decisions.

                                                    So, what we're doing is we're also working on developing new tools for customers that are ESG tools that should be able to get them a lot better visibility of how the investments are aligned with things that they care about, whether it is global warming or diversity or anything else that they care about.

                                                    So, those two together we think of having a really robust, wide thematic range for sustainability themes and also giving customers the tools, combined together, will really empower customers, and we're doing both together. So, obviously, it's a process. So, it does take time to put things in place. We're now at the kind of proof of concept stage for this. But if that proves to be successful, we will continue on with implementation. And again, you should be seeing the results of that next year.

    Tony Clark:                          That's fantastic. And I guess we would continuously welcome feedback on that kind of content, that kind of education piece, that knowledge piece, etc., and any support we can give on that front we would always consider to see what we can do, as we take our responsibility on this so strongly, don't we?

                                                    I guess you'll get a number of questions, Maria, around our definitions and how we defined the elements of our strategy and our exclusions policies and what we include, what we exclude. And that will be up for debate in terms of folks who maybe are trying to look for black-and-white answers to some of these questions. But I guess just as an example, one of the questions we've had in is around BlackRock's fund deemed to be low-carbon, yet it includes companies with up to 5% revenues from thermal coal and tar sands. A very specific question, but how do we shape our thinking on that? How do we consider that fund to be low-carbon, given those numbers?

    Maria Nazarova-Doyle:     So, the fund is not just fossil fuel-free funds, to begin with. It is a low-carbon fund because it actually achieves more than 50% carbon reduction compared to its index. It outright excludes companies that have over 5% revenue from thermal coal and tar sands, which actually is a very, very low threshold. And what that means is that the companies who potentially have some operations that give them a small amount of revenue, they normally will be phasing them out and they would have put plans in place and agreements in place to phase them out, like Drax recently did, for example. So, it's a process of companies moving out from those areas.

                                                    So, what BlackRock's fund does, it cuts off anybody who has more than 5%. And then those who have below 5%, it then does the scoring over them. And it may be that that scoring means that actually they're still not in the fund, because there are also then rules about 2% of the MSCI universe of being in that fund. So, it might not even be there, specifically. So, we can look at it on a company-by-company basis.

                                                    But the point is that whatever is left in the investable universe after that exclusion is being scored, and only companies that actually have very clear targets and goals and commitments of exiting those areas, they will be included in the fund. So, yes, for us, it's very much a low-carbon fund that gives a really good carbon benefit to the portfolio.

    Tony Clark:                          Thank you, Maria. And I wonder within that then if that answers one of the other questions that we've had, does that start to balance out something you've mentioned already. So, you mentioned that ESG has got both an investment risk and an investment opportunity. And we've been asked how we manage to minimise the risks associated with ESG investments. Some of the answer may have been in what you just said there, but I wonder if you had any wider thoughts on that, at all?

    Maria Nazarova-Doyle:     I think kind of a straightforward tool to manage ESG risk is exclusions, but as I've said before you don't want to exclude too much. You want to exclude some of the unrewarded risks that you can't manage with stewardship. But beyond that, also stewardship is a really good risk mitigation tool.

                                                    What helps – specifically, around carbon – is embedding that thinking into your asset allocation process, and that's what we're doing at the moment. So, we're kind of on this journey. So, we already take into account carbon footprinting of investments when we do asset allocation analysis for our portfolios.

                                                    But I want to go even further and properly embed it into scenario analysis and kind of in line with TCFD recommendations, as well. And we're working with some data providers and tool providers to help us develop something completely new that will help us embed that into our asset allocation.

                                                    And one thing I probably should mention on this, as well, is the work that we've recently done with the IIGCC, which is the Institutional Investors Group on Climate Change. So, what they have done – and we supported them and were a part of the working group for this project – is design a framework, a Paris-aligned investor framework, which is amazingly important for the industry because it outlines what does it actually mean to be Paris-aligned in your investments. Because everybody talks about it, talks about net zero, talks about aligning portfolios to Paris, but nobody actually has yet said what that really means.

                                                    And those people who maybe have made commitments, like it would be really interesting to see what they even mean by that, because there isn't a standard definition or understanding of what that means in practice. Whereas, this framework was put together by practitioners, for practitioners, representing some of the leading environmentally friendly and conscious investors in the world, essentially, to put together that framework that actually could be implemented for portfolios to then be able to say we are aligned with Paris Agreement.

                                                    So, we supported that work and which was hugely exciting. And that framework is now out for consultations with the market. And once the feedback is received by the end of September, we'll see if that needs to be refined. And then, obviously, the next plan is then to start implementing that framework in portfolios. And hopefully we'll get some consistency in the market and we'll be able to actually call out if people are saying, "We are Paris-aligned and we are net zero aligned," if they use that framework that we should be able to all have some kind of belief that they are actually doing this properly.

    Tony Clark:                          Thank you, Maria. And again I've got one last question which I'm going to ask. And I wonder if it is linked to the answer you just gave earlier, as well. It's a question that's just come through, which is it seems very much aligned to that kind of risk and the approach that we take. The question I've got here is around the extent to which our assessments here are backwards-looking, (i.e., it's kind of evidenced content that allows us to drive our decisions) versus a forwards-looking basis. So, the targets that countries around the world – the U.K. – have, et cetera, around these particular subjects, how do we balance that evidence piece looking backwards versus the target piece looking forward in terms of the decisions that we make?

    Maria Nazarova-Doyle:     I'm trying to understand what that actually means. Okay. So, I think I get it. I think I get what you're asking. And if not, please get in touch with me separately.

                                                    When we look back at ESG-related data and we look at kind of experienced financial performance, for a number of years we couldn't really see ESG factors coming through as performance-positive. But over the last few years that really has changed. And particularly, Morningstar has found that ESG funds, a majority of ESG funds, tended to outperform more traditional investments over one-, three-, five-, and 10-years periods from this year. So, that kind of paradigm is really shifting.

                                                    I think it's a lot to do with investor expectations and investor behaviour as large institutional investors are moving their money towards kind of ESG-friendly strategies and better, more responsibly managed companies. So, there's a bit of a self-fulfilling prophecy in it.

                                                    But also there's, like, lots of other factors, because customers are also voting with their dollars and pounds in terms of where they shop and which brands to buy from. The company profitability is actually changing, too. So, that ESG thinking is more and more embedded in our daily lives; hence, it has more impacts on company profitability, as well. Plus, investor behaviour is starting to move the dial, too.

                                                    So, you can look at things like oil. Which has just not fared well in any almost of the periods you look since the Global Financial Crisis. It's, like, the last-performing, bottom-performing sector if you look at energy sector versus, say, technology, for example.

                                                    So, ESG is here to stay. And if you look forward, it's only going to come through more and more. And whereas several years ago it was hard to see it in the data, it's now very much in the data, past-looking and forward-looking, as well.

    Tony Clark:                          Thank you, Maria. And I did say that might be the last question. But actually, I've got one more for Ali. So, there's been quite a few questions around the fund make-up and the risk and that kind of very valid content, which is totally understandable. But one question that's been raised is around that diversity message, where we were talking about men versus women and their attitudes earlier on, Ali, and how we focus on race and gender a lot. One question has been raised about how Scottish Widows also are looking at things like social disadvantages, skills diversity, et cetera, when it comes to this subject, as well.

    Alison Nicolson:                  That's a super question, because we do tend to default to some of these race and gender because the stats are actually just so powerful. But these are equally as big societal issues that we've got.

                                                    There's a few things probably to share. I think that this is a topic in its own right. And if it is something that's of interest, we'd be very happy to create a webinar around it. We have what we call vulnerable customer program, and it's something that we're pretty passionate about right across the bank and it’s making sure that where people are disadvantaged for many different reasons – it can be social disadvantage, it can be educational disadvantage, it could be disability – that when we are designing new propositions and thinking about our literature and updating it – because some of it is still in old technical speak – we have a program of updating all of this, and we test that with vulnerable groups. And sometimes they can actually engage with us in a way that means that we're picking up exactly what we need. So, in some cases, it's a representative for the organisations that lobby for them. But there's some really interesting findings in that program that we're building through, and we'd be very happy to share.

                                                    In terms of education, we have a program running at the moment and Scottish Widows sponsors called Helping Children Prosper. And this is a series of Zoom and webinars that engages kids. And we are doing it through some employers. So, if it's of interest to you on the call, then please do let us know.

                                                    And what we're trying to do here is get to grassroots level in upskilling children on the basic financials. So, irrespective of social background, irrespective of education, there are some really basic needs or educational things that we want them to understand. And we built this on top of the program that the bank runs, where they go into schools and provide education at primary school levels. So, start to get people much more financially aware.

                                                    And the final thing probably to bring out on that question is that we have charitable foundations in England, Wales, over in Ireland, and also in Scotland. And the key focus for them is disadvantaged groups. So, as well as supporting customers we invest directly into charities who are helping to support disadvantaged groups across some of these other social issues that the question is focusing on.

                                                    So, there's a number of different themes in there, and if it's something that you'd like to know more about, then I personally would be very happy to speak to you or, indeed, we could set up a webinar around it.

    Tony Clark:                          That's fantastic, Ali, and that's a comprehensive answer, as they all have been. Thank you so very much.

                                                    A huge thank you to both Ali and Maria for joining us today and answering those questions and showing where Scottish Widows are in their journey around ESG and what the future looks like, as well. So, thank you, both.

                                                    It's clear from the questions that have come through and the sheer number of them and the variation that this subject is one that many people are passionate about and for very, very differing reasons, whether that be from an investment perspective, an advice perspective, or a humane kind of desire to do the best for the planet perspective. It's just great to see such content. So, thank you all who've raised questions. We will come back to you after this call.

                                                    And again, you'll have heard from both Maria and Allie that we are open to further dialogue. If you want to contact us directly, then feel free to do so, whether that be through the usual forums of the likes of LinkedIn and Twitter or through local Scottish Widows contacts. As you see fit, then please do so.

                                                    So, thank you once more, Maria and Ali. And I wish you all the very best. Have a great day.

    Alison Nicolson:                  Thank you, everyone.

    Maria Nazarova-Doyle:     Thank you.



    Maria Nazarova-Doyle, Head of Pension Investments


    Your questions answered (PDF)

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    Scottish Widows

    September 3, 2020

    Alison Nicholson: Good morning, everyone. I'm Alison Nicolson, Head of Client Relationships here at Scottish Widows. We're delighted you've been able to join us for our Economic State of the Nation webinar. This is part of our expert series, and I can see from the attendees many of you have joined our webinars before. And we hope those of you who it's the first one will join us for our future topics as we navigate these ever-changing times together. Whether you're an EBC, IFA, or employer on the call, you'll all have been affected both personally and in your business by COVID.

    Today, we're delighted to be joined by Paul Johnson, CBE, Director at the Institute for Fiscal Studies. Paul has been at the Institute since 2011. He's a key influencer of U.K. policy as a member of the U.K. Climate Change Committee and of Banking Standards Board. He was previously Chief Economist at the Department of Education; Director of Public Spending at the Treasury, where he also served as Deputy Head of Government Economic Service. It’s really no wonder Paul was awarded a CBE in 2018.

    Paul will share with us his thoughts on the economy, the COVID world we live in now, and what it means for pensions.

    Throughout the session, please use the "Ask a Question" function. Alexis and Robert , who you see on your screen, will be hosting a Q&A with Paul at the end of our webinar.

    So, to kick us off, we would like to hear from you. And Robert, can I ask you to start us with a poll before we hear from Paul? Enjoy the session, everyone.

    Robert Cochran: Thanks very much, Ally. As Ally says, I'm Robert Cochran. And we're going to run a little survey here at the beginning. So, Paul is going to cover the economic state of the nation, but what we'd be really interested in is how you feel about your business, where you work. So, thinking about where you work, how confident do you feel about the business outlook and what this will mean for you or your employer?

    So, I'm sending this survey to all just now. We'd love it if you could just complete this. It will help give Paul a benchmark for how we're all feeling and will support him when we look at all the numbers. So, how confident do you feel about your business outlook at what this will mean for you or your employer?

    Here we go; "I think our business will shrink in size," we had about 18% saying that. "I think we'll remain about the same size," so 53% put that in as an answer. Great to see. And, "I think we're set to grow in size." So, on the whole, a pretty positive outlook there. So, that's a decent set of results for Paul to look at as we move into his session.

    Now, Ali did say I think we'll do questions at the end, but we'll also take questions throughout. So, if you put questions in the little question box, both myself and Alexis will be watching out for them. And if there's appropriate times, then we'll ask Paul those questions as we're going through the session. Failing that, there will be some time at the end for questions to be covered off then.

    So, without further ado, I'm going to hand you back to Paul to update us on COVID-19, the economy, and pensions.

    Paul Johnson: Okay. Thanks ever so much. And it's quite a broad canvas I'm going to be painting today. I'm going to say something about what the economy looked like before COVID. It's something I've spoken about much too little, actually, over the last few months, but it is worth remembering that time many months ago, it feels, before COVID actually hit. I'll say something about where we are in terms of the economy at the moment, what that's likely to mean for the public finances. Meaning, one thing it's going to mean I think is that tax rises are likely to happen. I'll say something about that. And then, what that might all mean for pensions.

    So, with no further ado, let me start with this chart, which until COVID I think was probably the most important chart in economics and, indeed, politics for the last decade. What it's showing is that both productivity and, as a result, average wages really flatlined almost completely from 2008, right the way through to 2019. So, absolutely astonishingly, the first time in literally hundreds of years – literally, hundreds of years – that average earnings haven't risen over a decade and the worst productivity performance over a decade in a similar period.

    And the dotted lines at the top are, in a sense, what should have happened, had the economy grown as expected, had the economy grown as it had grown over the last 50 years, or so. You can see that wages would have been something like 20% higher than they actually were. So, that's an indication of the difficulty we were in as we came into the COVID crisis.

    This next slide is showing you what happened to median incomes for different groups over that period. So, starting off with the population as a whole, you can see that incomes last year were somewhat higher than they were pretty much 20 years ago, but not very much higher. If you look at this green line – so, those of working age – you can see that the growth was even lower. You've got a growth of maybe 5% over a 20-year period; again, astonishingly low level of growth.

    And then you've got this black line, what happened to pensioner incomes, or at least income for those over the age of 60, and you can see two remarkable things there. One is that, actually – particularly, over the 2000s; less so over the last decade – pensioner incomes rose very fast; a combination of higher occupational pensions, higher state pensions, and higher levels of earnings, actually, among people over 60.

    Remarkably, they overtook the under-60-year-olds in about 2011 for the first time in history – miles, miles behind people of working age over history. We're not talking about

    wealth here; we're talking about incomes. Incomes of the over-60s, in general, and of pensioners, in particular, overtook the incomes of those under the age of 60.

    So, all of that...

    Robert Cochran: Paul, can I just pick up a question, just around the productivity and wages that have flatlined. So, we can see that earnings kind of flatlined, but prior to that we had this flatlining of productivity. Any reason why that was the case?

    Paul Johnson: There's a big question. So, I see one of the questions here is about whether this is just for the U.K. These are U.K. numbers. Most of the world has seen some significant tailing off in productivity and wages over the last decade, but on a less significant, to a less significant degree than we have.

    What appears to have – a number of things have happened here. The two are obviously very closely related. Productivity appears to have been hit by a combination of reduced investment by companies, particularly both post 2010 and post 2016; by the long hangover from the Financial Crisis. There may be some measurement issues here, in that productivity may have been overstated, actually, in the U.K., given the scale of our financial sector, but certainly the hit to the financial sector post 2010 has had an impact on that.

    And then there's this sort of compositional effect. This is looking at productivity per worker and wages per worker. We've actually got a lot more workers. So, the plus sign of this is that there are a lot more people in work – or at least six months ago there were a lot more people in work – than there had been. And that has helped I think keep wages down and bring people into lower-productivity jobs, as well.

    Now, there are a whole series of long-term issues, of course, that drive productivity. In particular, our education system, infrastructure, transport, housing, all of those sorts of things, massive for productivity, though none of them explain that huge slowdown in wages and productivity post 2010.

    It is also worth saying, finally, that things were actually – I don't know if you can see that in the – you can't see it very readily in the chart, but you can see wages in 2014-2015, if you look at that yellow line, were picking up. And we might have expected them to pick up quite a lot better than they did, but there was a clear slowdown again after the 2016 referendum. Inflation went up and wages didn't. So, real wages were kept down. Corporate investment collapsed post 2016 as uncertainty increased. So, a whole series of things going on there.

    Let me come to the last chart on this kind of pre-COVID section, which is just to remind you of – so, what I've talked about so far is incomes, earnings, productivity, growth of the economy, which was very poor. What you can see here is one illustration of austerity. You can see government spending shooting up as a fraction of national income, largely as national income shot down during the Financial Crisis, with a big gap between revenues and spending. And then you can see that long, long reduction in spending over time as austerity bit and borrowing coming down by 2019, broadly, to pre-Financial Crisis levels. And that's where we went into this new crisis: borrowing down actually a bit below pre-Financial Crisis levels but, of course, debt much higher.

    And finally, of course, don't forget about Brexit. That will have a continued and ongoing negative effect on the economy.

    So, that's the run-up to where we were in beginning of this year. The economy had been growing slowly for a long period; wages and so on, barely growing; public finances largely repaired after the last crisis.

    But we are now entering – we are now in – what I think we can safely describe as the biggest recession or the deepest recession in history, and that's not terribly surprising given that we shut down a large fraction of the economy, as did the rest of the world. So, this chart just shows you one of the International Monetary Fund forecasts of what might happen to major economies over 2020. It's looking at a 10% reduction in the size of the U.K. economy over this year. You can see that's pretty much in line with what they're expecting for most other economies. There's all sorts of forecasts for this. Whether it's 8%, 10%, 12%, or something different, we don't know, but we do know it's something pretty remarkable.

    Now, in one sense, it doesn't really matter enormously what happens over this year. That seems like a strange thing to say, but if the economy collapses this year as a result of the pandemic – you'd think that's a one-off effect – and then jumps back to where it otherwise would have been, then actually we could look back on this as a bad dream and then carry on with our lives, as before.

    But this chart showing the scenarios or forecasts from the Office for Budget Responsibility over the next several years, you can see that their central forecast – and I think this is what really matters – their central forecast is that the economy will remain much smaller than it would have been in the absence of the pandemic, even five years out. And that's what's going to drive lower incomes, our unemployment, and, as I'm going to come on to in a minute, problems for the public finances.

    Why does it have this long-run effect? Well, partly, there are obviously huge risks and uncertainties around this – how long is the virus going to stay, are we going to have second waves, and those kinds of things. But even without that, even if the virus in some sense goes within the next year, 18 months, you have a big scarring effect from this sort of event: unemployment will persist, people will have lost the experience, businesses will have gone bust. And all of that has an ongoing effect on the economy.

    So, their central scenario is the economy will be still 4% or 5% smaller than it otherwise would have been by 2025, and it could be significantly worse than that. All of which of course is associated...

    Robert Cochran: Hi, Paul. Just a question, where you're looking at that. So, a couple of people asked questions about austerity and how we dealt with that previously. So, austerity had helped keep borrowing under control after the Financial Crisis, but do you feel that it stunted economic activity at that point? And do you think we've learned lessons from that that might be able to help support the situation where we are right now?

    Paul Johnson: Well, I think it's pretty clear that the nature of austerity has had an ongoing negative effect on growth; and in particular, the big cuts in capital spending back in 2010-2011, the kind of spending that we know would have supported the economy at the time and would have supported the economy, going forward. I think there's less evidence that, for example, cuts in spending on local government or health or social care or what have you. Did that have a negative effect on economic growth? Probably not. But did the big cuts in capital spending have a negative effect? Yes, they probably did.

    And I think that is actually something that government is learning from, because if there's something that's being prioritised over the next few years it clearly is that kind of growth-

    friendly capital spending. And I'll come on to say a little bit more about what I think might be the response to the high deficit in a moment.

    Lower growth, obviously, means higher unemployment. This is a remarkable chart. Again, these are all forecasts, lots of uncertainty around them. But this is – you're looking here at the central forecast of unemployment tripling over the next few months actually – and I should have put a longer-term chart up here – to levels we haven't seen since the early to mid-1990s, having had this long period of very low and falling unemployment. Particularly, this is going to hit younger people, people entering the workforce at the moment, but actually also younger people in the workforce who are much more likely to be working in retail and hospitality and entertainment, exactly those areas which have been shut down, which are doing particularly badly at the moment.

    So, unemployment of course, as ever, is going to be unequally distributed. But this time – very often in the past, unemployment has been hitting particular regions, particular industries – heavy industries and manufacturing and so on. This time, it's going to be a particular part of the service industry probably hardest hit and particular parts of the population actually, those who are low paid and those who are young. And actually, also, those towards the end of their working lives are also somewhat more likely to work in those affected sectors.

    So, again I could say a lot more about where we are with the economy. Clearly, we are moving up swiftly at the moment. The question, of course, is how quickly or rather how far we're going to move up. Whatever the impact of that, we're clearly going to have a big hit to the public finances. The economy is this year hugely smaller than it was and over the next few years will continue to be smaller.

    So, this chart is just giving you a sense of the scale of that effect on the public finances. This is a slightly complicated chart. But just to summarise what it's saying, it's saying that back in March – remember March? remember the budget before lockdown? – the expectation was borrowing would be about £50 billion this year. The current central scenario is that it will be £350 billion this year. An astonishing change.

    And unusually, actually, a large chunk of that is down to policy measures: so, the three red bits towards the right-hand side of this chart showing support for households; the furlough scheme and the self-employment schemes for business, for public services; and then that additional red bit that we got in the summer economic update back in July. Big increases in spending and cuts in tax over this period; that's about half of the increase. And the other half of the increase is we're just getting less in, in the way of taxes, because of the effect on the economy.

    Three hundred fifty billion pounds, the biggest borrowing in peacetime, as I'll show you in a minute.

    Now, borrowing this year, in one sense, doesn’t matter. Particularly if this is a one-off, we can live with the additional debt and carry on pretty much as usual. But the real issue here is that we're expecting borrowing to be higher into the future. So, this next chart showing you some IFS projections of where borrowing might be over the next few years. And as you can see, we're expecting instead of being about 2% of national income – about £50 billion – towards the end of this Parliament, more like 5% or 6% of national income – well over £100 billion.

    And that assumes that none of the additional spending that we have in place at the moment continues. More realistically, we're also going to be spending more. And so,

    without additional work from the Chancellor, we're going to be borrowing more into the medium term, as well as in the immediate term.

    That means the government's selling vast amounts of gilts; just over the last four months, £225 billion, which is about twice the previous maximum, having no problem at all selling these gilts. It's worth saying, interest rates remain at absolutely rock-bottom levels.

    Look back over a long period and you can see, actually, this remarkable – those dots at the end is our view about where borrowing as a fraction of the national income might be this year, literally at its highest level ever outside of the First and Second World Wars. Historically, completely unprecedented levels of borrowing.

    Debt is a slightly different matter. You can see that actually over our history we've had public sector debt of well over 100% of national income for quite long periods, as you can see here: 131 over the last 320 years. We've had two periods where that debt has come down a lot. The first was that long period after the Napoleonic Wars, all the way through pretty much the First World War. And actually, the whole of the 19th century, from a fiscal point of view, was really of help bringing down that overhang of debt from the Napoleonic Wars.

    But the experience after the Second World War was very different. It came down much faster, and that's essentially to do with very fast economic growth and a fair chunk of inflation and fairly tight budgets over that period. And the question for us, going forward, is have we got a Napoleonic War sort of – have we got a century of worrying about elevated debt? Or are we going to see debt falling very fast as the economy grows very fast over the next few years? I think the worry is that there's not much sign of that very fast growth.

    The remarkable thing, though...

    Robert Cochran: Paul, there's a couple of questions in about just scale here. So, the scale of money that's being thrown at the COVID crisis this year versus the scale of money that the government threw at the Financial Crisis.

    Paul Johnson: Well, in terms of actual additional support for the economy, it's much bigger this time around. The furlough scheme by itself is something like 3% of national income. The big business rates holidays and so on are also very substantial. There was quite a lot thrown at the economy in the Financial Crisis, with temporary VAT cuts and so on.

    But the big support through the Financial Crisis, as it were, is that the automatic stabilisers worked. So, most of the increase in the deficit during the Financial Crisis was driven by the fact that the government carried on spending broadly what it was going to spend. Tax revenues stopped coming in because the economy had shrunk. And so, the deficit rose.

    And that's why I stressed what I said earlier, that it is quite unusual that this time around half of the increase in the deficit is actually down to specific additional policies by the government. So, the government in a sense have been much more active this time around, in a sense not surprisingly given what it did also actively was shut a large chunk of the economy over the period between April and June. And supporting through the self-employment scheme, the furlough scheme, the business support schemes, and so on was the sort of parallel part of that.

    So, just carrying on with this point about the deficit and the debt – and I think it is quite an important issue about to what extent do we worry about this – you can see the debt interest payments, again going all the way back to the 1680s. Debt interest payments, despite this highly elevated level of debt, are actually at historically low levels, which really does suggest that, in some sense, borrowing large amounts at the moment is not problematic. The risk, of course, is that if interest rates start to rise in a way which is not associated with additional growth, then we really do start to hit trouble. But that point about being not associated with economic growth is important. If interest rates rise, accompanying increased economic growth, then that's much less of an issue.

    I'll skate very quickly over just some of these issues about where the money has gone. So, nearly £50 billion for public services. That's not including things like the furlough scheme; this is for health and other things. Nearly £50 billion for public services since March. You can see a very large fraction of that for the NHS and then a significant amount for other parts of the public sector, as well, really driving a complete coach and horses through the spending plan set out in the Spending Review a year ago and set out in the government's manifesto back last December.

    The most remarkable thing about this, though, is the huge amounts of money going on personal protective equipment in the NHS and test and trace. It's £15 billion there for personal protective equipment in the NHS this year alone. That is a staggering amount, as is the amount going to test and trace.

    A lot of new policies in the Summer Economic Statement. The Kickstart Scheme, which actually started this week, supporting young people into work. Apprenticeship schemes. And then you can see there the stamp duty holiday, the reduced VAT for hospitality and accommodation, and a series of other programs, as well. So, again you can see that in answer to the last question, a really active, a really active bit of government response to the scale of this crisis. And as I say, this is on top of the self-employment support schemes and the furlough scheme.

    So, what does all that mean for the public finances? Well, as I showed you, the public finances look like we're going to have really quite significant deficit, going forward, even without additional spending. And I expect there to be significant additional spending, going forward, as well. At some point – and I don't mean in this budget – at some point that will likely to mean tax rises. We've seen a lot of kite flying or leaking or something from the Treasury over the last several days suggesting that taxes may have to rise in this budget for next year. Personally, I'd be very surprised if that's what happens. We've still got a very weak economy, a very large amount of uncertainty, and I'm pretty sure that actually the focus in this budget coming up will be in supporting the economy through that period.

    But at some point, kind of self-evidently, if the economy is smaller and tax revenues are lower and if spending is higher, which I suspect it will be, at some point we're going to have to do something about that. I think it's unlikely, given a decade of austerity, that we'll end up with additional spending cuts, but I think we will see some tax increases. But I do think this point about timing is really, really important. I don't think it should happen – I don't think it will happen – next year. Arguably, it might not be ideal the year after that, either. You then of course get, as I will show you, into the political cycle.

    Now, can we raise taxes? Well, if you look at the U.K. by international standards, we're not a high-tax country. Across the OECD, we're sort of an average-tax country. Across Europe, we're a fairly low-tax country. So, can we raise taxes and remain an

    economically effective and efficient country? Yes, we can, because a lot of other countries do it.

    One of the slightly difficult aspects of that, though, is if you look at where they raise their taxes, I'm afraid they broadly raise higher taxes on middle earners. They don't raise more taxes from corporates. They don't raise more taxes from high earners. They don't tend to raise more taxes from wealth. How do they manage to raise much more in the way of revenue? In general, it's because they tax middle earners – and particularly, actually, through employer social insurance contributions – much significantly harder and higher than we do.

    Now, that's not to say that's the only way of raising taxes, but I think it is actually a terribly important part of understanding how other countries manage to raise significant amounts of tax and something that we need to take account of in debates that we have about how we might fix that fiscal hole. I could talk for hours about options for raising tax. There clearly are numerous options, whether you're looking at corporate tax or capital gains tax, and I'll come on to say something about pensions tax and so on in a minute.

    But if the scale of the challenge is what I think it is, which is pretty substantial, which is looking at tens of billions, rather than the odd few billion, of tax, in the end I don't think we'll have much choice other than to look at our three big taxes – income tax, national insurance, and VAT – which between them raise nearly two-thirds of all our revenue. And if we're looking at raising a lot more, I think we're going to have to look, at least to some extent, at those three taxes.

    And then this last chart about taxes, I just think I rather enjoy, which is just to show you when taxes rise. And the answer is taxes rise in budgets immediately after elections. We have not had big tax rises in budgets immediately preceding elections in the last 30 or 40 years. And I think that will be playing very strongly in the Chancellor's mind as he thinks about the timing for when to address this fiscal problem. Is he going to go into the next election having raised taxes very substantially in the year or two beforehand? Or does he think he can get away with waiting until just after the next election? And how that will play in to both the economics and the politics I think will be very interesting to see.

    So, for the last few minutes I'll just say a few words about where I think this leaves pensions or what this might mean for pensions. Obviously, all of this has all sorts of consequences for pensions. Obviously, if you're thinking about the very, very low interest rates, that's an issue. But equally, I think the government is going to be thinking about pension tax relief to fill that hole.

    So, let's start by talking briefly about pension tax relief. I think one of the things that it's worth saying is that if you look over the last decade the second biggest tax rise after the VAT increase back in 2011 has been the restrictions on pension tax relief for high earners. That's been very remunerative for the Chancellor. And other than the outcry from the doctors last year as a result of the combination of complexities created and the generosity of their pension scheme, other than that it's been done with remarkably little in the way of political pain. So, big restrictions have raised something on the order I think of £8 billion to £10 billion a year for the Chancellor.

    And I think one of the kind of key elements of this is this has really changed the pattern of tax relief for savings. So, this chart is just one way of illustrating that. The blue line is showing what the pension annual allowance was for most people – this is for moderate earners – over this period between 2006 and 2018 and what the ISA allowance, the red

    line, has been over that period. And clearly, for the period before 2011 you could put, if you had the money, vastly more into a pension than you could into an ISA. It's now only twice as much into a pension as to an ISA if you're a moderate earner. Obviously, if you're a highest earner, you can put more into an ISA than into a pension.

    And remember, back in 2014-2015, George Osborne was talking about the possibility of changing pension tax relief. So, instead of getting the tax relief up front, you'd get tax relief as you do with an ISA at the end. He moved away from that but when he did that, he announced a further increase in the ISA limits, reduced pension limits further. So, without actually doing what he said he was thinking of doing he got some significant steps down that line.

    Now, the advantage of course to governments is that pension tax relief costs money up front; ISA tax relief costs money for your successors many years down the road. I think that that pattern of change, in a sense, is exaggerated by this chart because obviously not many people were putting £200,000 a year into a pension. But it gives you a fairly clear sense of the direction of change and the way that the tax system works.

    Will there be further cuts to pension tax relief? Well, there's been talk about restricting the basic rate. If you were to do that, that would raise money worth having: £10 billion a year, possibly more, depending on behavioural response. You can see why a Chancellor might be interested in that. Clearly, it takes more money from higher earners than for lower earners. But it's really only hitting – or it's hitting hardest – those in the sort of £50,000 to £80,000 range, what you might think of as middle England, conservative England, "Daily Telegraph" readers, what have you. So, the politics behind it are quite difficult. It adds another layer of complexity to those very few really in the public sector who are still in defined benefit schemes and further limits the attractiveness of pension saving.

    Will it happen? I don't know. It's not – I'd be surprised if it happens, for political reasons. There are clearly other things you could do to pension tax relief and, in particular, to the tax-free lump sum, which might be more palatable and actually more appropriate given the way that pension tax relief works.

    So, is the Chancellor going to think about this? He's certainly going to think about it, because there's a lot of money there. Is he going to do it? Well, in the end that will be a political decision much more than it will be an economic one.

    So, where now for private pensions, more broadly? Well, as you know, we've moved effectively completely away from defined benefit schemes in the private sector. So, we have a defined contribution, a world of defined contribution pensions for the vast majority of private sector employees. In that context, auto enrolment, as you know, has been enormously successful.

    But it does seem to me that one thing that recent events has done is to illustrate actually very clearly some of the concerns with the current model. The stock market has fallen, and that has hit the wealth of all pension savers. Particularly, we might worry about those who are relatively close to retirement. And we're actually putting some new work out next week suggesting that that's had significant effects on the retirement decisions or retirement expectations of older workers.

    Interest rates are lower than ever. So, with pension freedoms, annuity rates are at an all-time low. People are not, understandably, taking annuities in vast numbers. Taking an annual income doesn't look attractive. With defined contribution schemes, there's no risk

    sharing. In my view, we essentially genuinely do not have private pensions in the U.K. any more. Defined contribution pensions are just another tax-privileged savings pot. Now, whether you define that as a pension or not is up to you, but what you don't have are those things that you usually think of in pensions: they're not providing annual income in retirement; they're not providing any kind of risk sharing. They're providing you with exactly the same thing that an ISA or a bank account is providing you, just with a different form of tax relief.

    And if I have one worry about our pension system now, it is that lack of risk sharing either within or between generations that is created by not just the accumulation phase, but also now the decumulation phase. And as I say, I think this crisis has illustrated rather well the risks associated with that.

    And finally, let me just say something about the triple lock, which is the other element of pension policy which has come up for consideration at the moment. And I think the current situation illustrates rather well the pitfalls of the triple lock. I don't know what's going to happen to recorded average earnings over the next year or two, but I think there is a chance that they might rise really quite sharply next year, partly because of the unwinding of furloughs – so, we all move from 80% to 100% earnings – and partly, actually, because a lot of job losses really are going to be among low earners. If low earners lose their jobs, then the average earnings of those who remain in work will rise.

    At the same time, inflation is likely to remain low. That's certainly the view of the Bank of England and of the OBR. I think there are some upside risks on inflation, I have to say, with the result that we could end up with pensions rising, state pensions rising much faster than prices; and indeed, in any real sense, over a two-year period rising much faster than earnings, as well.

    So, it seems to be very clear that triple lock should at least be suspended for the next couple of years. But the crucial point here, though, is that the government can simply decide to suspend the triple lock. Rising in line with average earnings is actually in primary legislation. And probably, it is next year's rise in line with average earnings that might be the problem. So, the problem for the government, as it were, is that they're not – what is not required is a change in policy which can simply be announced at the drop of a hat, which is that triple lock is suspended; that can be done easily. The problem for the government is if they want to stop the state pension rising in line with earnings, they're going to have to put through primary legislation to do that. And that, of course, is likely to be problematic.

    So, let me just conclude by saying – just reminding you, as it were – of the key features of what I said. We came into this crisis after a pretty tough economic decade, though an economic decade in which we got the public finances into some kind of order.

    This crisis has created the biggest recession, the deepest recession in our entire history, probably going back to the Black Death of 1348, as a guess. That, in a sense, wouldn't matter that much if we thought the economy was going to jump back to where it otherwise would have been. But economies don't really work like that. Even if you hit them with a one-off shock which then goes away, it can take them a long time to recover, and the expectation is that the economy will remain smaller than it otherwise would have been.

    And of course, we've got the additional problem of Brexit layered on top of that.

    That's going to create problems for the public finances. Now, those are not urgent problems, partly because interest rates are so extremely low, but they are problems that will need to be dealt with eventually. Not this year, not next year, maybe not even the year after, but at some point in the medium run that's likely to mean tax rises of one kind or another, probably tax rises affecting income tax, national insurance, and VAT to some extent.

    In that context, it's not surprising that people are talking about what might happen to pension taxation, the triple lock, and so on. There are clearly options for changing pension taxation. One thing I might add to that is that there are also options for increasing the tax on pensions in payment, though I don't expect those to be explored. Pension in payment have been very much protected as pension contributions have become more heavily taxed. The triple lock is in the long run an expensive policy, and the issues associated with it have really come to the fore in the rather odd circumstances we're in at the moment.

    So, that's all I'm going to say for now. I'm now very happy to take questions on any of that.

    Robert Cochran: Well, Paul, we'll just let you catch your breath there. And before we fire over the questions, what we thought we'd do is just get a view from all those taking part as to what they think about the triple lock. So, just as a reminder, I'm going to send you a survey to see what you think should happen with the triple lock. The triple lock is for state pensions, and it guarantees that it will rise in line with living expenses – so, CPI, the increase in average wages, or 2.5%, whichever of those three is the highest. So, that's what the triple lock is.

    So, I'm going to fire you a question just now. In your view, the pension triple lock should be either maintained? Or should it be suspended for five years? Or should it be abolished?.

    So, it's a fairly even split. We've got 30% of you saying it should be maintained; we've got 45% saying it should be suspended for five years; and about a quarter of you say it should be abolished. So, that's a fairly even split. And I guess that's part of the challenge they have when they're looking at how you create policy around that which takes everyone with you.

    Okay. I don't know what you think of that, Paul. Do you think that reflects the country?

    Paul Johnson: Probably. I suspect the country is somewhat split on age lines, and of course the government is highly sensitive to the views of older voters.

    Robert Cochran: Yes. Okay. Brilliant. So, let's now go to questions.

    Alexis Ward: Okay. So, Paul, the first question I'm going to ask is, how does the U.K.'s projected COVID economic impact and levels of indebtedness compare to other developed countries?

    Paul Johnson: It's not so dissimilar. There are other – there are all sorts of international measures. It looks like we've done somewhat worse in terms of numbers of deaths, but actually not by vast amounts relative to some other countries. And a lot of that seems to be associated with two things: we've managed our care homes very badly, but also we've had the

    impacts, at least up till now, have been more broadly distributed across the U.K., whereas in some other countries have been more locally affected.

    In terms of the economy, you'll see one of my earlier charts showed the expectation is that the British economy will shrink by about an average amount by the standards of other major OECD countries. We might turn out to be a little bit worse, we might turn out to be a little bit better, but it doesn't look dramatically different.

    And the scale of government response here again has been not too different from that in some other countries. In some other countries, actually, some of the response was much more automatic because they have welfare systems which automatically replace very large fractions of your income if you become unemployed. Here, we have made universal credit, for example, a little bit more generous. But certainly for those who have lost their jobs, for some of them, the experience here will have been worse than the experience in some other countries.

    I think the truth is we won't really – again, I know that there will be – this government has not covered itself in glory in the competence with which it has dealt with things over the last six to nine months, but I do think it will be some time before we know how well, over all, the U.K. has done relative to other countries.

    Alexis Ward: Okay. Thank you for that.

    Robert Cochran: Paul, one of the areas I guess we didn't really cover today was self-employed. So, we've seen a rise in the number of people who are self-employed, a fairly significant rise, over the last few years. Do you think that this kind of structural change will increase the self-employed make-up within the workforce?

    Paul Johnson: Well, I think there are pressures in two directions there. The first thing to say is that, clearly, a lot of people who were self-employed very quickly found that their capacity to work dried up. They got – some of them or a large fraction of them got really very significant help through the Self-Employment Income Support Scheme, which for the majority of the self-employed really was very generous; but for a minority, left them completely uncovered. So, there was a lot of rough justice in that scheme.

    It might leave people feeling more risk averse. If you're feeling more risk averse, I think you're less likely to go down the self-employment route. So, it might have that impact, reducing self-employment. On the other hand, we know that a lot of self-employment actually is a response to losing your job. So, a lot of people who become self-employed become self-employed having lost their employment, and it's almost an involuntary kind of self-employment, although the majority then report actually being happier in their self-employment even if it was, as it were, enforced than they were when they were employed.

    I think the last thing it's worth saying on this is that, remember, the Chancellor did say when he introduced the Self-Employment Income Support Scheme that he would take the opportunity, as it were, to level up some of the taxes on the self-employed towards the levels of taxes on employees. Part of the reason at least for the increase in levels of self-employment is the much lower levels of taxes that self-employed people pay, particularly once you take into account employer national insurance contributions. This is of course why some tech companies – Uber, for example – much prefer to have their people working for them as self-employed, rather than employees, and one of the reasons that the Office for Budget Responsibility has raised significant budgetary concerns actually about the increase in the numbers of people who are self-employed and incorporated

    because of the lower levels of tax that's associated with them. So, it will also depend to some extent on the policy response, I think.

    Alexis Ward: Thanks for that, Paul. And one close to, I guess, everybody's heart, what would be the impact of raising state pension age by one year for everyone immediately?

    Paul Johnson: Well, we know that the increase in female state pension age over the last decade has significantly increased the number of women aged between 60 and 66 who have stayed on in work. You can see that very clearly in the data, that as you increase pension age, the numbers of people in work increase. And that's not – that might sound obvious, but it is not obvious that people would respond like that.

    The second thing that we see, more generally, is that there's been an increase in the number of people actually over state pension age who have stayed in work over the last decade or so. One of the reasons that there's been this increase in incomes for people over 60 and over 65 is that earnings have risen for that group. But of course they're very unequally distributed. A lot of people either don't or can't work.

    I think if you were to raise state pension age immediately, with no notice at all, it may be that people have difficulty responding to that and changing their retirement plans very quickly. But it's certainly – and is this the best moment to be doing it, when jobs may be particularly hard to come by and some people may already be feeling discouraged? I don't know, but there seems to be in my mind in the medium run, as the government is planning, there is no question but that we need to keep the state pension age rising.

    Alexis Ward: Okay. Thank you.

    Robert Cochran: Paul, you mentioned that you could see additional taxes being raised from pension in payment. Do you think that would be special tax rates for retirees? Or do you think those over state pension age would be asked to pay national insurance contributions?

    Paul Johnson: Well, I think there's a number of options there. One thing one could certainly consider is having – if you're in employment and over state pension age, of course there's currently no national insurance to pay, and maybe that's an anomaly that could be changed.

    The other thing that I have in mind is that if you've got an occupational pension in payment, because most of occupational pension contributions come from employers, they will never have been any national insurance contributions paid on those pensions in payment. So, there is at least a case for an additional tax on occupational pensions in payment. Now, it would be very difficult to do that at anything like the full national insurance rate overnight, but you could do it at a few percent on significant payments. That's not going to raise vast amounts of money for the Treasury, but it might not be a bad way of raising some. It is worth repeating again that in terms of taxes, those over pension age have not seen any increase in their pension taxation, whilst those under pension age have seen very big reductions in the value of pension tax relief.

    And finally, as I said in the presentation, I think the case for reducing the value, the generosity of the tax-free lump sum is also fairly significant.

    And one much smaller point, the way in which DC pots are treated at death strikes me as being absolutely absurdly generous and should certainly be changed to raise sums. Again that's not going to raise you significant money in the short run, but at least it makes pensions look more like something that they should be used for, rather than as a way of avoiding inheritance tax.

    Robert Cochran: Paul, thank you very much. We've had well over 40 questions. So, unfortunately, we couldn't get to all of those questions, and we're almost out of time. So, I'm going to hand back to Ali to close off. But thanks very much, everybody, for submitting your questions. And thanks, Paul, for your answers.

    Alison Nicholson: Thank you, Robert. Thank you, Paul. And a thank you to all of you on the line for taking part.

    It was actually really good to see at the beginning the positive outlook you have for your own businesses and the future that you see coming through COVID and the pandemic.

    Paul, it's great that you shared with us so many statistics. And there was a couple that really stood out for me, and that's the extent that the government has been financially active in support. We all know because we see it and we read in the news about the furlough scheme and the different things that were put in place. But £50 billion on public services, huge amounts on PPE and test and trace, and another £30 billion in the plan for jobs are absolutely staggering figures. So, unsurprising that government borrowing is an all-time high and in the face of such a deep recession.

    Depressing, but true, that our economy not in great shape, and you shared some really good statistics with us. The biggest recession in history as you said, and really we are always thinking what next and what might happen. And you've really addressed that for us today, Paul, and shared your thoughts. No one has a crystal ball, but you've really shared thoughts, specifically around pensions, for us, too; tax income; the impact of stock market volatility; the triple lock. All great insight, and thank you very much for doing that on behalf of everyone on the call.

    Our next date for the expert series is later this month, and it's all on responsible investing. We would love if you could join us.

    As we close this call, a feedback survey will appear on your screen shortly. It's really short, and we would appreciate you taking part to comment on both this call and what you would like to see in the future.

    So, thank you for joining us, and enjoy the rest of your day.



    Paul Johnson CBE, Director at the Institute for Fiscal Studies (IFS)

    Audience Poll results (PDF)

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    Scottish Widows


    August 11, 2020

    09:00 AM EDT

    Siobhan Barrow:                  Good afternoon, everyone, and thank you for joining us today. For those of you that don't know me, my name is Siobhan Barrow. I'm the Intermediary Distribution Head of for Scottish Widows. And today I'm joined by my colleagues Robin Kyle, Senior Manager in our Investment Office; along with Iain McGowan, our Investment Director. They will both be presenting some really timely updates on the current investment markets and how Scottish Widows have approached this.  

                                                    Following that, we'll have time for questions, which will be facilitated by Alexis Ward, our Regional Development Manager. So to submit your questions, please use the "Ask a Question" function at any point during the presentation, and we'll get to them at the end. The webinar is also being recorded, and therefore it will be available for you to replay or to share with your colleagues after the event.

                                                    Now today's session forms part of our expert series which is a set of topical webinars, vodcasts, and podcasts where our experts take on some of the key issues in our industry to help you navigate the everchanging market. Do take a look at our expert series webpage on the advisor extranet to see other topics that you may have missed and that we've already gone through. And in addition to this, we've got a couple of other great sessions coming up. First in August, we've got an overview of our approach to mental health underwriting and protection. And at the start of September, we are delighted to be joined by Paul Johnson, Director from the Institute of Fiscal Studies, who will provide his thoughts on how a post-COVID economy will actually affect pensions going forward. So please do keep a lookout for information on all of these in your inbox and on social media in the coming weeks.

                                                    Now, there is so much great content today in today's session, we should absolutely get started. So Robin, over to you.

    Robin Kyle:                          Thank you very much, Siobhan. And good afternoon, everybody. As Siobhan said, this is certainly a very timely time to be talking about financial markets. The S&P 500, which is the major US stock index, if you believe the futures market, is going to hit a new record high this afternoon for the first time since February. Now normally that wouldn't be a particularly remarkable fact. Equity markets tend to rise over time. But given in March we saw the worst 3-week selloff in its entire history, going all the way back to the 1920s, and we're in the midst of a global pandemic, then that's really quite a remarkable fact.

                                                    So it's been a pretty strange year all around, underlined by the fact that I'm sitting here in my shorts presenting this webinar, but a lot of very interesting things to discuss. So, what are we going to talk about today? We're going to look back over the past 6 months and look at the virus. We're going to look at how that's impacted the economic data, how the markets have reacted to that, and how it's impacted corporate earnings. And then we're going to try our best to look forward to understand what might happen from here on out, what we can expect in terms of growth as the year progresses and we get into 2021. Obviously, with the picture still uncertain, that's very difficult. But we shall do our best.

                                                    So this is where we are today. This data is now slightly out of date, to the end of June. But the picture remains true. In most countries, we have seen the worst of the virus, but it still lingers in a number of cases. The European countries have things broadly under control. But in countries such as the US, Brazil, and India; there are still spikes in the number of cases, and still a number of new infections. To give you some context, in the United States, the 5-day moving average of new cases was about 70,000 at its peak. It's currently about 58,000. That's quite well split out by states. New York is down to about 700 new cases a day, whereas California still has about 8,000.

                                                    The economic data as a result of the virus has made for a pretty difficult reading. On the two charts here, we've got unemployment. This is forecasted global unemployment. The UK reading, in fact, came out this morning. The number of people on UK payroll is down about 730,000 since March of this year, and the quarterly drop of 220,000 marks the biggest fall since the financial crisis. We don't expect the figures to show the full extent of the damage until October time really. Obviously a lot of employees are on furlough, et cetera, at the moment. But the Bank of England has forecast that the number could more than double, getting above 10% in a worst-case scenario. The US numbers also came out last Friday, and US unemployment is up to about 10.8%. Now that's against a peak of 14% in April. But it's less than half the level that we had before the virus, so it will be relatively significant.

                                                    This rather dramatic chart on the right-hand side of your screen at the moment, shows the contraction of the UK's GDP, in April falling 20.4%. Now obviously April was right at the peak of lockdowns, when economic conditions were at their worst. But actually when the second quarter's GDP is printed tomorrow, economists are expecting the fall for the quarter as a whole is going to be about 21%, which is pretty remarkable, and certainly the worst that we've had since the second world war.

                                                    If you look at that number versus the other G-7 countries, it's also pretty disappointing. For context, the US number was 9.5% decline in the second quarter, and Germany was down about 13%, again both figures the worst since the second world war. But obviously the UK had a slightly more difficult boat.

                                                    Earnings have also struggled. We're still in the middle of the second quarter earnings season, so kind of companies across the globe continuing to report on what's been happening to them in the second quarter. But this is the numbers for the first quarter, and obviously shows that in anything bar technology, there has been a pretty steep decline. Sectors such as financials, industrials, consumer-facing businesses and energy have struggled particularly. You will have seen all the headlines around oil prices falling. You will have felt the benefits when you go to fill up the car. And obviously with central banks cutting interest rates pretty significantly, then that's really impacted financials as well.

                                                    As of the end of last week, about 90% of the companies in the US had reported for the second quarter. The earnings decline for that quarter was about 34%. But what is interesting is that 85% of those companies had actually reported a positive surprise versus what the market was expecting. And the interesting fact here is really that everybody was expecting a very, very difficult second quarter. But they're expecting quite a bounce back in the third quarter and the fourth quarter, and into next year. So although the markets have been very strong through the second quarter, it's really going to be the third and fourth quarter figures that are going to be the important ones, because if companies start to underperform, or the bounce back in earnings is slower than many are expecting, then that's when things are going to get difficult.

                                                    Clearly since the financial crisis, the story has been one of pretty significant quantitative easing. And what we've seen in the last 12 years is a pretty remarkable debt transfer from the balance sheets of banks. Obviously during the financial crisis, it was the banking sector that was worst impacted. With low interest rates and quantitative easing for the last 10 years, that debt then transferred itself onto the balance sheet of companies, lots of leverage around companies, et cetera. Now this time around, as we get into coronavirus, it's central banks that are shouldering the burden.

                                                    And if you look at the chart on the right-hand side, it shows the balance sheets of the major central banks. The Federal Reserve is the US central bank. And as you can see, the balance sheet has really gone to pretty unprecedented levels. That means we're in for an environment of low interest rates to about 2022, and much more significant quantitative easing, which is what has helped to prop the markets up during the second quarter. This time around, it's been combined with significant government intervention and significant spending. The combined monetary and fiscal stimulus in the US has been the most significant since the second world war. And it comes to about $6.5 trillion. Now that's a pretty difficult number for anybody to imagine. But that counts for about 30% of the entire US GDP. What is interesting is at the moment is that the Republicans and Democrats in the US are squabbling over additional stimulus, the Democrats looking for up to an additional $3 trillion.

                                                    In the UK, the number is slightly lower, about 660 billion of stimulus, still huge relative to our GDP, about 23%. And in Germany where it's been the most significant, 45% of GDP has been injected through a combination of monetary and fiscal stimulus. What's also interesting is that the Chinese who have been kind of pretty active with fiscal and monetary stimulus over the last 10 years only injected 4.6% of their GDP to combat the effect of the virus. So whether that has a longer-term effect on competitiveness between the US and China in the years ahead will be an interesting development.

                                                    Now if we thought at the start of the year, obviously if at the start of the year somebody had come up to you with a piece of paper and said, here is the economic data for the remainder of 2020, in the second quarter we will expect UK GDP is going to fall by 21%, US GDP is going to fall by 9.5%, unemployment is going to spike, and it's going to be the worst recession since the Great Depression in the 1920s. If somebody had said that to you and asked you to predict the course of markets over the coming 6 months, I think the chances are you would have predicted Armageddon across the board. Of course, if nobody had told you about the economic data and they had given you the stimulus figures instead, then you probably would have been a lot more bullish. This is the longest -- or this was rather, until coronavirus, the longest bull market on record, in a large part thanks to all the stimulus that has been injected by central banks over the past 10 years. And so if you'd seen the extreme levels that we're at now, then you probably would have been a lot more optimistic on the trajectory.

                                                    And if we look at the numbers here, and you can see that the stimulus, it's won out the market thinking through the poor economic data, and banking on this being a blip for the meantime. And if you look at second quarters, some pretty impressive returns with US equities leading the way, emerging markets leading the way, and really all of them -- property and hedge funds, which tend to take a lot of short bets, that's betting on asset falling in value during this crisis. Just about everything has been positive. What's even more remarkable is that if we looked at it on a 12-month view, i.e. taking account of the full impact of the pandemic during the first quarter, most assets now in positive territory, although you'll note on the very bottom there, UK equities lagging quite significantly, down 13% over the past year.

                                                    The equity market in particular versus other asset classes has been the quickest to rebound. It's a slightly complicated looking chart, but what it looks at is bear markets, so falls in the market of 20% or more in global stocks since 1970. The grey bars effectively chart the 90th percentile of quick recoveries, and you can see from this blue line that this recovery has really through the first 3 months, been by far and away the fastest on record.

                                                    Now obviously coronavirus and its impact and effect is relatively novel. Economists expecting a really short, sharp downturn followed by a relatively swift recovery, assuming that the virus can be defeated. But nonetheless, given how poor the economic data is, it's a pretty surprising and speedy bounce back.

                                                    It really has been a remarkable first half of the year, and on this slide we've just set out some of my favourite statistics from the past 6 months. The Dow-Jones Industrial Average, now one of the large US stock indices, endured two of the worst 10 days since 1929, hitting the third-worst day in its entire history on March 16th. If you annualise the second quarter US GDP number, you get minus 32.9%, which is the largest fall we've ever had since the second world war, and really pretty significant if you think about it. We haven't seen anything like this for a very long time, not through the financial crisis, not through any other major stock market declines in history.

                                                    $189 billion, and today it's even possibly more with Amazon stock rising over the last couple of days, but that's now the net worth of Amazon founder, Jeff Bezos, who owns 11% of the shares in the company. A very strong second quarter for the business, and if Jeff Bezos himself was listed on the FTSE 100, he would be the second-largest company in the index.

                                                    300 million new customers have engaged with US trading app, Robinhood is a kind of app that you can use to bet on stocks, volatile market, and no opportunity to bet on sports with everything cancelled during the pandemic, has seen a huge rise in trading. And actually there's some that theorize the reason that many of the tech stocks have been doing so well and US markets have been rising so quickly is because of the glut of retail investors who are now buying with great enthusiasm.

                                                    Negative $40 was the price of WTI crude oil for a short while in April, because there was so much supply of oil, and futures contracts dictate that you have to take delivery of it and store it. People were actually paying to have it taken off their hands. So for the first time in history, we had a negative oil price. And there's $14.8 trillion of negative yielding debt, so you pay the government to lend you money. It's a slightly bizarre construct. We don't yet have negative interest rates in the UK or the US, but it's not been ruled out.

                                                    So that was the first half, and now we get on to the more difficult question of where do we go from here, and what happens next. In these charts, we've just looked at a couple of US states. We've got Florida. We've got Texas and New York. And it's just examining the impacts on these states and on virus cases, as the economy reopens. The left is a website or app called OpenTable, which charts restaurant bookings; Google mobility data kind of looks at how much people are out and about, using the roads and moving around the place; and then R is the R number of virus, how many new cases are we seeing.

                                                    So you can see that as restaurants have opened up, as people get back to something that looks like their normal life, we are seeing kind of an uptick in virus cases. It's obviously been relatively stable. But as the local lockdown in Aberdeen, for those of you based in Scotland have emphasized, there are likely to be small clusters going forward. Australia reported its worst day of deaths during the entire pandemic on Sunday. And after 102 days virus-free, New Zealand has announced that it's got some new cases as well. So really it emphasizes that the virus is not going away, and until we get a vaccine then there's likely to be a number of local outbreaks.

                                                    How long until we get a vaccine? It's a very good question, and something that's going to have a significant bearing on economic growth and the trajectory of markets over the coming months. There are 6 vaccines currently in stage 3 trials, which is the final stage of development. The first to go into that was a vaccine from Oxford University, and there's also one from an American biotech firm, and one from the Chinese company as well. So best case estimate suggests there could be a vaccine by the end of this year, but realistically it's more likely we could be looking to the kind of middle of next year or possibly further, if the trials take a wee while to come through.

                                                    So this data here comes from Schroders who are our partner investment manager, and it looks at the kind of trajectory of global GDP growth. Now, as we've already discussed, this year is going to be particularly difficult. They are forecasting a 5.4% decline. And I think it's interesting if you go along the chart a little bit, just looking at versus 2008 and 2009, when we had the financial crisis, which was obviously a massively significant event. But GDP growth during those years was 2.6% in 2008, and negative 0.5% in 2009. So the 5.4% decline that we're seeing this year is really pretty unprecedented, certainly until we go back to the great wars or the Great Depression. And that's forecast to bounce back reasonably quickly next year, with 5.3% growth, but really this data emphasizes that it's likely to be beyond 2021 until we get back to the levels that where we were at.  

                                                    This data here looks at individual regions and charts kind of GDP and expectations for inflation over the coming years. What we can see from this is that the UK is likely to be one of the worst-affected regions. Growth is expected to fall about 8.5% this year on Schroders expectations. The Bank of England were actually slightly more pessimistic. They were expecting a fall about 9.5%, and then bouncing back about 6% next year. Now obviously this is conditional on a number of factors, no second wave, et cetera. But what is interesting to note is that the Bank of England were actually certainly more constructive than the big banks like Lloyd's, HSBC, and RBS. So the outlook for growth is certainly going to be pretty pessimistic for the remainder of this year. And really it's going to be a question of how quickly into 2021 it can come back.

                                                    Inflation is likely to be pretty soft, unlikely to present a significant problem. This is one school of thought when looking at asset classes in which to invest in, this may well lead to runaway inflation or in fact deflation. But it looks like inflation remains slightly above zero in major economies, but be pretty soft. The Bank of England and the US Federal Reserve target a 2% inflation rate. That's what they see as particularly healthy. So obviously if you look at the numbers on that chart, three bars from the right for 2021, we're not going to be quite getting back to that yet.

                                                    This scenario maps various paths of recovery to the global economy. We have the US on the left-hand side. We have the Eurozone on the right. And you may in the media have heard lots of talk about U-shaped recoveries, V-shaped recoveries, and W-shaped recoveries, or even L-shaped recoveries. So this kind of maps out some of the scenarios. The kind of base-case expectation at the moment is for a U-ish-shaped recovery, so that's to say growth has obviously fallen sharply through the second quarter. That probably stays pretty flat for a little while, before picking up into 2021-2022. We think that a V-shaped recovery, which is where you see a sharp decline followed by a sharp bounce back, is too optimistic now based on how long the virus has been lingering. But we hope that there's not going to be a W-shaped option, which is what you would see if you got a significant second wave in the third or fourth quarter, and local lockdowns became a full-blown lockdown again.

                                                    There's a blue dotted line in each of these charts, which shows the expectations for growth before coronavirus as a factor. And you can see that other than really in the best-case scenarios, then we don't get back to pre-coronavirus growth before the end of 2021. The Eurozone has set up what they're calling a recovery fund. So they are going to borrow $750 billion from the capital markets to distribute to their member states in the form of various loans and kind of asset sales. That's expected to stave off the Eurozone debt crisis scenario. And the MMT-fuelled fiscal splurge, as it's described there, MMT stands for modern monetary theory, it's basically when you get a significant amount of government money printing. Obviously some of the recovery packages that are being looked at in the US just now are kind of quasi-fiscal splurging. But we don't expect anything to be as significant as that to come through.

                                                    So having said all that, we're going to hand it over to you, given the outlook for economic data, where I'd be interested to know where you think global stock markets are going to end the year relative to the current levels. So I'll ask Pauline if she could help run this poll. But we basically have five options. Is the market going to be down 20% or more from here, down by 10% to 19%, 0 to 9%, up by 0 to 9%, or up by 10% or more before the end of the year?

                                                    Now this is actually a very interesting split of data that we've got in your responses here. The majority thinks that the market is going to be down by 0 to 9%, so that's 38%. We have about 35% optimist, 32% of you thinking it's going to be up 0 to 9%, 4% thinking it's going to be up by 10% or more, and only 2.5% thinking that the market is going to fall significantly before the end of the year.

                                                    Your thinking is broadly in line with the markets. We have on the two charts here expectations for earnings in the US and expectations for earnings globally in terms of recovery into next year. And the chart on the left-hand side is slightly confusing visually. But you'll see there's a red circle over the navy blue line on the far right, and the kind of lighter blue line. What that shows is that although expectations for 2021 earnings have fallen pretty sharply, the market expects that by the end of next year earnings will be back to where they were before coronavirus at the end of 2019. So that obviously presumes a full opening of the economy. And it assumes that companies are going to be back trading, as they were in normal times, which in our view is relatively optimistic. But it's definitely not out of the question.

                                                    If we look at expectations for 2021 on the right-hand side, you can see that almost every sector is expected to record pretty significant earnings growth. Obviously energy will still lag. If your earnings fall by 80%, you need to be 160% to get back to flat, so significant challenges for energy and some of the consumer staples businesses. I'd say a lot of things are expected to return to normal by 2021, and that's one of the reasons why the market is so optimistic. In our view, things could be slightly more challenging than that. It's going to be a slow grind when you hear companies reporting, when you hear central bankers speaking. They're keen to stress that risks are firmly to the downside. And there's a lot of uncertainty that remains, particularly for a market that's looking at record highs.

                                                    Another interesting trend during all this has been the divergence between new economy stocks and old economy stocks. So when we say new economy stocks, we mean a lot of the technology businesses, a lot of businesses that don't need to have much interaction with their customers. Everything is done electronically. Old economy is the old brick-and-mortar retailers and businesses like banks, businesses like oil and gas companies, when you now think a lot of energy is going renewable, traditional auto manufacturers versus some of the electric car makers, and really kind of the businesses driving things forward into the future.

                                                    So on these charts here, we have the share price performance. We have a company called Shopify, which allows merchants to sell things online, sets up the infrastructure for them, versus Walmart which is obviously a major traditional American retailer. Shopify has returned 150% year-to-date versus Walmart's 11%. And on the right-hand side we have Tesla, the electric carmaker, which is up about 250% year-to-date, versus General Motors which has fallen by about 30% year-to-date. But in the charts, we've looked at a couple of the traditional valuation metrics for these businesses. Now obviously when you are buying stocks, you want something that has a potential to rise significantly in value. You don't want to be buying something that's particularly expensive.

                                                    But if you look at the price-to-sales ratio of Shopify, it's at about 60x versus that of Walmart of 0.7x. If you look at the enterprise value divided by EBITDA, which is a measure of earnings, Shopify actually trades on minus 85x, because it doesn't yet have any positive earnings, versus Walmart at 1.27x. And the forward price-to-earnings ratio is 100x versus Walmart's 2x. To put things into context, the market average for the S&P 500 is about 22x.

                                                    With Tesla and General Motors, the position is even more exaggerated, kind of you can see from the price-to-sales and EV-to-EBITDA ratio, a significant gap again. Tesla is trading on a forward price-earnings ratio of 217x. Now this has been fuelled by the fact that people believe coronavirus is going to lead to significant structural shift. It's going to lead to proliferation of kind of old businesses versus new. But we would always be very, very cautious when you see such significant earnings discrepancies as this versus history. You have to pay out for what you're able to achieve over the longer term. And if these businesses aren't able to deliver on very, very lofty expectations for their earnings over the next couple years, then that's particularly when you’re going to tend to see quite a significant market pullback. So that's one of the major reasons to be cautious.

                                                    Some of these valuations look relatively akin to the tech bubble in the early 2000s. And if you think back to some of the companies then, your Yahoos, your Like-Office (ph), et cetera. They're obviously no longer around today. Now many of these businesses are in a much better position nowadays, but you always want to be cautious about paying too much for earnings.

                                                    Looking to the bond market, similar story. Yields have fallen significantly year-to-date. And with interest rates likely to remain very low for the foreseeable future, there's little value in kind of taking interest rate risk and duration. Bond spreads and credit moved out to kind of 50-year wides in March, when things fell. They have pulled back a significant amount of that now, maybe kind of 70% of the widened spreads have now been pulled back. In the US, that's as high as 80% to 90%. There's still some value in the credit market, if you know where to look. But again, another area where there's been a pretty significant and incredibly fast recovery.

                                                    And before I move on, I'm just going to leave you with a couple of headlines. The quote at the top from Mark Twain, "It ain't what you don't know that gets you into trouble, it's what you know for sure that just ain't so." And one of the great facts about this quote is although it's been attributed to Mark Twain, there's no actual record that he said it, so a great irony there.

                                                    Well, we have a couple of headlines here, "Stocks Collapse, But Rally at Close, Cheers Brokers; Bankers Optimistic to Continue Aid," That came from May 1929 shortly before the worst fall in market history during the Great Depression. The one on the right is "Credit Crunch Fails to Produce the Feared Economic Catastrophe." That came from the Times on the 5th of May, 2008, three months before Lehman Brothers went bust.

                                                    So although markets are at record highs and although we are relatively optimistic on the shape of the recovery, it always pays to be cautious and just look at what you're buying, and what you're having to pay out for assets. With that said, I'm now going to hand over to Iain who's going to talk you through our positioning during this, and how we're positioning ourselves going forward.

    Iain McGowan:                    Thanks very much, Robin, and good afternoon, everyone. Yeah, Robin talked about the current market climate, what might happen in future. What I will do in this section is talk about how that feeds through into Scottish Widows' portfolio management.

                                                    I'm going to start with a question, if I may, so Pauline, if you could take us to the poll. All things being equal, how are you most likely to change a client's portfolio in current conditions? All things being equal, how are you most likely to change a client's portfolio in current conditions? Would you most likely increase risk, there would be no change to risk, or reduce the risk in the portfolio?

                                                    Okay, I'll just make some comments while the poll is continuing to be up and running. I mean clearly there is no right or wrong answer to this. And I suspect many of you could actually be a little bit irritated about me asking that question. In general terms, the answer is likely to depend on client circumstances, is likely to depend on the client's risk appetite. The argument for increasing risk might relate to perceived cheapness or assets were cheaper than they were, maybe that's an opportunity. The argument for reducing risk might reflect the consequences of volatility, particularly for short-term investors. But broadly where Scottish Widows has discretion in running multi-asset funds, we model portfolios for the long term. Of course we don't run portfolios for specific underlying clients. Short-term impacts have limited bearing, and like the majority result here, we are unlikely to change risk as a consequence of short-term market disruption.

                                                    So that leads us then -- maybe we can close off the poll, and I'll move to my slides, if that's all right. That moves us then to my presentation on portfolio management. Scottish Widows runs quite a number of multi-asset funds for clients. And what I'm going to cover, I'm going to focus on what I've called on this slide, our family of multi-asset funds. And there are three legs to this, three variants.

    On the left-hand side, are our pension portfolios. They are the component portfolios of our workplace defaults, as introduced in 2006, and have been made available since then, actually with some additions to the range of standalone portfolios for advisors to use with individual customers at different levels of risk. In principle, these are low-cost simple. They're essentially trackers diversified by region, both for bonds and equities, and have proved in their simplicity actually, to be very effective over the medium to long term.

    The next leg is premier. These are based on similar principles and the same risk classification, but have greater diversification by asset class, they bring in absolute return property and other things, and make some use of active strategies. So they have the potential for outperformance that a passively-based solution does not.

    And then retirement portfolios, our most recent addition, they recognize the short-term volatility may be problematic, particularly acute for customers who take income during the period of falling markets. And what the retirement portfolios do is that they de-risk equity in volatile markets, by what we slightly grandly call dynamic volatility management. That's an entirely formulaic approach to respond to market volatility. So three different ways to provide multi-asset risk-based coverage across a range of portfolios.

    The key principle in forming multi-asset portfolios, of course, is diversification. I'm sure many of you have seen this chart before. But it shows the performance of key asset classes by calendar year over the past decade. Light colours are good. Over a calendar year, they show the best-performing asset class, darker is the most poorly performing asset class.

    This chart tells us a number of things. It suggests that the spread of asset coverage is important to avoid a bumpy ride. So you don't want to be in that kind of boom or bust environment, which a single asset class is likely to give you. That said, it does demonstrate that equities have done well, the lighter colours dominating the top couple of lines over the whole period. To a slightly lesser extent, property also, but they have lighter colours compared to in inverted commas, "safer" asset classes of cash and gilts at the bottom of the graph.

    But as ever, the balance of risk and return is important. And we consider that through a process that we refer to as optimisation. Let me tell you what that looks like. So if I start with a simple picture on the left-hand side, what we're doing here is we are bringing three different asset classes together in that slide. And we're forming a picture of total return in the first total column, total gross risk. What I mean by that is the sum of risk per asset class, but without allowing for diversification.

    It’s the impact of diversification, in other words assets being less than fully correlated and in some cases actually quite uncorrelated, that means that their combined risk is less than the sum of the parts. So we move then from gross risk to net risk. The benefit there from diversification in reducing the risk of the whole portfolio, we call here the risk rebate. So that's a term we like to use. And a lot of the skill in optimisation, what I really mean by optimisation is trying to find the best performance you can for a given level of risk and sometimes other constraints. That process is known as optimisation.

    On the right-hand side, we're trying to take that optimisation a bit further, by adding more and more asset classes. We have to do it smartly. Using asset classes that are largely uncorrelated, we can build up a greater amount of gross risk, apply a larger amount of diversification, and the portfolio risk is back where we need it to be. I will just strike one word of caution that it's not always just about adding in further asset classes. Most multi-asset funds will have some kind of cost constraint, whether that's been about investment fees or whether it's about asset turnover. So we're trying to optimise taking into account risk that sometimes some other factors, including costs, which as we know can be inadvertently detrimental to the portfolio if you're not careful.

    There are a number of parties involved in the optimisation process. I thought I'd just give you a picture of how that looks for Scottish Widows in my following slide. What does Scottish Widows do? What do we rely on other parties, including our asset management partners, to perform? First and foremost, Scottish Widows is responsible for representing the customer, so determining the level of risk that's right for a portfolio, the constituents of the portfolio that align to that level of risk, and then what we do is set a mandate for the asset manager. This is a mandate that sets parameters within which the fund operates. That might include the array of asset classes, the styles within each asset class, the level of turnover, or ultimately the specific funds that might be used with the mix.

    Schroders carries out portfolio management for us, and sometimes they have fairly limited discretion in doing that. But there's generally two main components to portfolio management. One is about rebalancing, so making sure that fund asset classes remain within tolerance. And the other one, this doesn't happen for every multi-asset fund, is carrying out tactical asset allocation. That's generally about forming views that are less than 1 year in time horizon. The fund manager is looking at short-term influences on an asset class and adjusting upwards or downwards accordingly, based on some limits conveyed by Scottish Widows.

    The building block funds on the right-hand are selected by Scottish Widows. These are a combination of Scottish Widows funds where we set the mandate. These could be managed by our investment partners like Schroders or BlackRock, and in some cases additionally some third-party funds. That's where we invest in funds offered by a particular fund manager. Often we do that for passives, State Street or BlackRock, typically because they get scale by investing in someone else's pooled funds. In other cases, we do that for specialist asset classes. I've mentioned on the slide there absolute return.

    To give an example of how that's come together, let me move onto my next slide, I can do that by talking about the strategic asset allocation review of our pension portfolio. So these are the portfolios back on the left-hand side of my slide a few ago that make up our pension defaults. What I was really keen to do in 2020 was leverage the new commercial relationships that we have with BlackRock in particular, to add new asset classes at no cost to investors. And the two asset classes that came into the mix from that were emerging market debt and global REITs. Both of these have really strong diversification benefits relative to equities and bonds.

    Additionally, we considered high yield bonds. We will add them where there's opportunity. At the moment, we didn't allocate on the basis that the benefit of doing that just wasn't worth the turnover. But we may do so in future. We were also keen to add listed infrastructure, but at this point couldn't find a suitable vehicle to do that. I should also just mention to the side that we allocated an element of the global equity to the BlackRock Climate Transition World Equity Fund. And that was launched just on Thursday. We saw some press coverage from that. You might have come across it. And we made our initial allocation to that fund on Friday, just post launch.

    So that's how we thought about the asset allocation review. And the consequence of that is that we've managed to add a number of additional components at no additional cost. I'm going back to optimisation slide that has the more we add, the more benefit we might expect from diversification.

    Now what that doesn't answer though is how much risk is right for a client to take. And I consider that in the next slide. This chart shows the MSCI UK index over 50 years. All of my index slides, by the way, reflect the reinvestment of dividends. And what the equity market has been characterised by over 50 years is a strong upwards trajectory. That is pretty much what we would expect from equities. That's pretty much what we've got. And we've seen a few bumps along the way, generally lasting for a handful of years. The general conclusion that we can draw from that is that equity is the place to be for a long-term investor. But of course such a bumpy ride can be problematic for the horizon of a short-term investment by a customer.

    The point about equity being the place to be is rather reinforced by this slide. The source of this is BNY Mellon. But what that shows is just quite the change from market peak to market low in various different events. I'll focus on the bottom one here, which is the financial crisis. Financial crisis, the UK equity market fell by slightly more than half of its value. But then if I look along that row, in the first 6 months of its recovery, it increased by a little more than half. So that means it recovered about half of what had been lost over the previous period. And then over 24 months, nearly doubled from that low point, so essentially by the end of 2011, the FTSE had returned broadly to its level pre-financial crisis.

    If I look at any of the other rows on the table, the tech bubble just before that, the conclusion is broadly similar. If you're prepared to be patient, if you're prepared to ride out a market fall, then you'll be advantaged by doing that in the medium to long term.

    If I look at how particular portfolios have performed and give that some context through the period of market disruption resulting from COVID, my chart here focuses on our pension portfolios. That's the range that I talked about on the left-hand side of the previous slide. We have a number of pension portfolios, and you'll see on the right-hand side of this slide, they go from 100% equity down to 40% equity. We actually have some portfolios in between, but I've focused on some of the key ones here.

    So I'll focus on Pension Portfolio 1 with 100% equity, Pension Portfolio 4 with 40% equity. The FTSE, first of all, top row of the graph, returned 19% again with reinvestment of dividends in 2019. It then fell by about 17% in the first half of 2020. So roughly it gave back its previous gains in the first half of the year. I compare that then to our Pension Portfolio 1, 100% equity, similarly to the FTSE return, 20% this time in 2019, but fell by rather less, only 7% in H1. And this is the benefit of regional equity investment unhedged and going back to Robin's comment at the beginning of this presentation. That includes investment in the US market, which has largely recovered its gain from the period of disruption. But still, it's giving up quite a lot of its return.

    If I move to PP4, well it had a more modest growth of 14% in 2019, and lost less than 1% in H1. So this is a portfolio that is much less exposed to equity investment. So past performance of course is no guide to the future. But this graph reinforces the merits of equity investment through the 2019-2020 experience, but also the need for a more diversified approach for a shorter time horizon.

    So the preceding slides I've outlined how we think about portfolio risk, both in BAU and in disrupted markets. In this slide, just as I try and wrap up, I'll briefly give some comment on the practical challenges in managing multi-asset funds during disrupted markets. First of all, rebalancing; Scottish Widows Fund rebalance in a number of different ways. They're a combination of time-dependent and response to asset allocation tolerances. Rebalancing proved difficult recently. When equities reduce, what you're trying to do then in rebalancing is buy back into equities to make up that allocation. But at the time, you're trying to re-divest corporate bonds, but corporate bonds were trading only in very, very thin volumes.

    What that meant was that we were collaborating closely with portfolio managers, not just trying to do bigger trades, but figuring out on a day what was practical to do, how much could you buy in equity and how much could you sell in corporate bonds without incurring ridiculous transaction costs or spreads. And the consequence of that is that we ended up dealing with more frequent trades, so smaller ticket sizes actually on almost a daily basis, rather than trying to rebalance portfolio very suddenly. And the other lesson we took from market disruption was to avoid spurious trading. So what you don't want to do is if equity markets drop back in a day, that you try and recover that too quickly, when in volatile markets the chances are they could just bounce back the next day, and you've traded for no reason. So the idea of a bit more patience in volatile investment markets, we think has been particularly important.

    And the final point I'll make here is that we have been slightly disadvantaged in managing multi-asset funds through the period because of property fund suspensions, which we understand have been particularly difficult to work around. Essentially multi-asset funds have got a frozen component of property at the moment, which we'll deal with when the underlying fund is un-suspend.

    So just to summarize, what are we looking to deliver from multi-asset fund construction? The constant here is well-diversified risk-based portfolios that deliver a level of risk appropriate to the customer. We do that by optimising portfolios. We maintain a level of risk. But what we're trying to do is challenge the existing asset class boundaries, trying to invest in different ways that allow us to get that risk rebate through diversification. That approach should be resilient to market conditions when investing for the long term. We might need to adapt a little bit to short-term circumstances. But in the main -- we're long-term investors, and all of that needs to be based on the right expertise for different aspects of the process.

    So I'm come at the end, good timing. I've lost my voice. I will hand on to Alexis for questions while I recover. Thank you.

    Alexis Ward:                         Thank you, Iain and Robin, for your insight today, excellent to hear your insight on the current marketplace. We have a number of questions today, and I know we won't get through them all. We will however ensure that they are all answered and will be sent to you with a copy of today's recording and slides. So without further ado, I'll move onto our first question. And it's an interesting one for you, Robin.

                                                    Would a Biden election win be the same as it would have been with a Corbyn win last year, i.e. not good for the markets?

    Robin Kyle:                          Yeah. That's a really interesting question, and I say it's quite amazing that four months out from the US Presidential election in November time, how little attention it's actually receiving, given everything else that's going on. A couple of things to comment on this, traditionally a win for the kind of non-incumbent is bad news for markets. Obviously in this circumstance, Biden is doing very well in the polls, is quite well ahead of Trump in all the recent polls. He has a lead in many of the swing states. And although it looked like in 2016 that Hillary was most likely to win at this stage, Trump is no longer the surprise commodity that he was back then. So when you look at kind of betting markets, when you look at the latest polls, it looks like Biden has a very good chance of winning the election in November.

                                                    Traditionally markets don't like a new candidate on the basis of their uncertainty. Whatever you happen to think of Trump, a lot of his policies have been quite pro-market friendly, whereas Biden is more of an unknown. There has been talk that the Democrats make look to reverse a lot of the Republican tax cuts. These tax cuts have obviously been very good for kind of company earnings, allowed them to undertake a lot of share buybacks, which in turn has been very good for share prices and the market. Whereas Biden is more of an uncertainty. It also depends on how much of Congress he's able to influence. If he ends up taking the Presidency, but is unable to kind of take control the Senate and the House, then the legislative impact that he can have in reality is pretty limited. So the market will also want to asses that before we can see sharp moves one way or the other.

                                                    Corbyn is a bit of a differentiator, again, in the sense that in some respects he had from the market's point of view slightly more extreme policies, so this kind of talk of nationalisation, et cetera. Whereas Biden, although kind of slightly left, is more central left than Corbyn was. So it shouldn't have quite as extreme an impact as that eventuality would have had. But yeah, we will see what happens in November. But there's certainly likely to be some volatility in the election.

    Alexis Ward:                         Yes, we'll watch the space. Okay, Iain one for you, apart from commercial property, what other assets do you use which aren't correlated?

    Iain McGowan:                    Yes, I'm not going to suggest that our assets are entirely uncorrelated. So if I look at premier, for example, we have equities, bonds, commodities, REITs, direct property, and absolute return funds, generally a small element of cash in there as well. So I mean clearly these are not uncorrelated assets. But to the extent that they are not fully correlated, there are some diversification benefits in there as well.

                                                    We also, within all of our portfolios, have different regional allocations. So historically product providers have a rather a UK bias within their portfolios. We have over time invested more and more globally, and within that actually take regional asset allocation decisions as well, which helps.

    Alexis Ward:                         Okay. Thank you so much for that one. And another one for you, just to finish off. This has been really useful, but I assume you're talking about non-ethical funds. What about the ever-increasing area of ethical investors?

    Iain McGowan:                    So yes, I am talking about non-ethical funds, and it's probably important to start with some definition here. So we use the term a lot ESG, and what we are trying to do across our product range is introduce ESG disciplines. And part of that would be to figure out what we like in a mandate as opposed to what stocks we might exclude. Part of that, and I mentioned in conjunction with the pension portfolio, has been to invest in the BlackRock Low Carbon Fund. Of course, they're not ethical funds, so I'm not confusing the question there. These are still mainstream funds.

                                                    We start off in a position where we have a number of ethical funds within fund ranges. And I'm conscious when I'm talking to this audience, we do have a number of products which have slightly different funds in each. We haven't gone far enough. I mean we believe strongly that having the right range of ethical funds so that clients can express their beliefs through their investment is really important. Not the time to announce this now, but we are working hard to make available some additional ethical-type funds, perhaps later in the year or turn of the year. And that will include not only single asset class funds like equities and bonds, but also multi-asset, if these plans come to fruition. So I'm very acutely aware that this is a growing area. We start off with some components in that area, but we will expand.

    Alexis Ward:                         Okay, thank you. Robin, anything to add?

    Robin Kyle:                          No, other than the fact that this is an extremely interesting area, and it's a significant growth area. Obviously a lot of these funds doing very well, as areas like energy have struggled. It's something that we're doing a lot of work on, and it will be interesting to see developments in the future.

    Alexis Ward:                         Okay, thanks. And I know that we've got an ESG webinar on the 17th of September that you will be able to sign up for, which will give more information on where we are with that. That is us out of time, can I thank you, the audience, for joining us today? It really is appreciated, and I hope you get a lot out of the expert series. You will shortly be asked to complete a survey that will appear on your screen, and I would be really grateful if you can take the time to complete it. This information will be used to create future editions of the expert series. And you can find out more about our future events through our social media. Thank you very much. 




    Iain McGowan, Investments Director and Robin Kyle, Senior Manager, Investment Office

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    Scottish Widows

    July 21, 2020
    11:00 AM BST

    James Phillips: Well, good morning, everybody, and thank you for joining us today. For those of you who don't know me, my name is James Phillips and I'm a Regional Development Manager at Scottish Widows. Today I'm joined by my colleagues, Pete Glancy, Head of Policy, Pensions & Investments, along with Jeavon Lolay, our colleague from Lloyds Bank Commercial Banking, who is Head of Economics & Market Insight. They will both be providing some really timely updates on the economy and industry initiatives in the next 40 minutes, and then David Rhodes, our Strategic Relationship Manager, will be facilitating your questions at the end. Please do use the "Ask a Question" function to submit your questions at any point during the presentation.

    The webinar is being recorded, and it will be available for you to share with your colleagues after the event.

    This webinar forms part of our Expert Series which is a set of topical webinars, vodcasts and podcasts with our experts taking on some of the key issues in our industry to help you navigate the changing market. Last week, we launched the web page for this on our advisor extranet. So, please do take a look to see some of our previous content on demand.

    We have a number of great sessions coming up throughout August, with a summary of investment markets in the current climate, as well as an overview of our approach to mental health underwriting in protection. At the start of September, we're also delighted to be joined by Paul Johnson, Director from the IFS, who will provide his thoughts on how the post-COVID economy will affect pensions, going forward. So, please do keep a lookout for information of all these events in your inbox and on social media in the coming weeks.

    Today's session is such a pertinent topic, I don't want to waste any more time. So, let's get started. Jeavon, over to you.

    Jeavon Lolay: Thank you, and good morning, everyone. My presentation today is going to largely focus on the macroeconomic impact of the pandemic thus far. For now, the outlook still depends crucially on the evolution of the pandemic, which appears likely to remain with us for some time, albeit there has been some good news on possible vaccines this week. I will start the presentation with some high-level global themes, before moving on to discuss the U.K. in a little bit more detail.

    So, without further ado, I'm going to move on to Slide 1. On this page I have the latest global forecasts from the IMF to illustrate the extent of the shock, highlighting its synchronization across the world but also the scale by comparing it with the Global Financial Crisis. What the first chart shows is the percentage change in GDP which is forecast in 2020, which is the blue bar, and compares it with 2009 financial crisis, which is the red bar. It's worth highlighting – and you can see – that the world economy is forecast to contract by over 5% in 2020, and this compares to a decline of just 0.1% in 2009; a much more severe contraction at a global and, also as you can see across the bars, at an individual country level.

    Advanced economies are going to contract by more than the global average, as you can see in the blue line there, but it's worth highlighting that emerging markets of the group are also expected to contract in 2020. Much of that is explained, as you can see, by the performance of China – you can see that red bar standing out – which is expected to grow again this year, but only modestly and significantly slower than what it did in 2009.

    The second chart I have on this slide compares the forecast for 2021 – so, for next year – with 2020, which is obviously the year after the financial crisis. Despite a much sharper decline in 2020, global GDP growth, as you can see at the top of this, is forecast to be similar in 2021 to 2020, but the rebound is not going to be as strong. Notably, though, the advanced economies are expected to rebound by more than in 2020; you can see that the blue bar is ahead of the red bar. The emerging markets are going to be projected to grow by slightly less than in 2020.

    So, before leaving this slide I think it is worth mentioning, though, that the IMF forecast for the U.K. is that it's going to contract by around 10% in 2020, this year, and then rebounding by around about 7% in 2021.

    The next slide I have here talks about the uncertainty still surrounding any forecast right now. So, as you probably will be aware, the U.S. economy has notably performed much better than expectation coming out of lockdown. But that's not the only thing that people are watching in the U.S. economy just now. So, alongside the better economic data attention is also increasingly being drawn onto what's happening in terms of rising infections, particularly in the large southern states, as you can see in my first chart. Now, this is a very strong sort of pace of growth because we're looking at percentage growth on the left-hand axis.

    The second chart might explain why the spread of the virus has not been the dominant theme and why the focus is on the economy still now. Though the mortality rate in the U.S. has still remained low, as you can see from my bars on the second chart this is starting to pick up now. So, if we really think about the global outlook, a key feature to watch is going to be the U.S. economy and, particularly, what happens in terms of mortality now that we hear that infections are rising and hospitalizations are also rising.

    So, despite the situation, though, in the U.S., there is a growing belief that the national lockdowns will not be required again in pretty much any country, as testing capabilities and healthcare resources have improved significantly from what we saw earlier on this year.

    Now, the two charts I have here are just to give you an idea about mobility, which a lot of people are watching that now. So, we know from a lockdown perspective – the businesses not being open and individuals not being able to travel – mobility was a key factor. Now what we can see here is that mobility in the first chart bottomed in around April but has been picking up across many countries since then, and it's reflected in these charts, which show improving quite markedly; particularly, you can see in Germany and France and also, as you can highlight there, the U.S. sort of tailing off a bit now, which reflects a bit of this uncertainty about the virus infection.

    Now, a key thing to mention is that a lot of this data is quite experimental. So, we're calling them "real-time" and "fast" indicators. And economists are using more of this because the traditional data comes with too much of a lag. But I think the indications are very clear. You can see it from the first chart, with the U.K. lagging but beginning to pick up, but definitely on the second chart, where you see the U.K. now opening up the hospitality sector how quickly the volume of diners at restaurants picked up. And expectation is if the virus is under control, at least to a level of control, then as economies open up we should see a pickup in economic activity.

    Now, the improving economic outlook has boosted investments and investor sentiment, because a few months ago we weren't sure about how quickly economies would recover and how soon lockdowns would be relieved. And despite the rise global virus cases – as I mentioned what this chart acutely shows is that the better-than-expected data is outweighing concerns about deteriorating virus metrics at a global level.

    So, on this chart what I've done is I've indexed the level of different stock market indices at the start of the year at 100, to give an idea about where the year started, and then compared where they are now and also the troughs that you saw in March. What you can see here is that the tech-laden, sort of NASDAQ index, which obviously is a key barometer of COVID at the moment, has done extremely well, significantly outperforming the broader S&P 500 in the U.S. But even the S&P 500 in the U.S., which is the green line, you can see is almost back to its levels at the start of the year, and that's even given the extent of the shock and all I mentioned in the first slide about how much global growth is going to fall.

    However, what you can also see if you look at the grey line, which is the Chinese indices, you can see that there is a fragility there in terms of confidence, and the markets are very much watching each data point as it comes out to assess the sustainability of recovery and to better understand how sustainable it's going to be beyond this immediate rebound.

    The FTSE 100 is shown as the blue line, and you can see there that it's notably underperformed the U.S. and even Europe at this moment.

    So, moving to my next slide, here what I wanted to highlight is although the equity markets and other risk markets are rebounding in terms of optimism about the economic outlook, it's not the only thing that they're considering. Now, obviously, the vaccines and possible medical sort of breakthroughs are an important factor, but the rebound we're seeing and the hopes of recovery are also closely entwined to the extent of policy support being provided by governments and central banks.

    Fiscal stimulus – and this is what this chart focuses on – has played a much bigger part in this crisis, both in the form of additional direct spending like on wages and unemployment subsidies, which is reflected in the red bars, and on the left-hand scale – this is as a share of GDP; so, it's significant support being provided – but also when we look at the blue bars, which is in the form of credit enhancement, where the government has sort of put forward loans or guarantees to support credit being provided to the businesses to ensure that they can sustain through this shock.

    And as this chart shows, you can see the mix of this across countries, but very sizeable amount of support provided by governments to support businesses. And it's a very topical area, particularly this week, with the U.S. set to discuss a Phase Four stimulus package which could be worth potentially over $1 trillion this week and, as you may have heard in the last few hours, a recovery fund worth around €750 billion in the E.U. So, we expect to see continued fiscal support to sustain the recovery, going forward.

    Now, the two key challenges of this as we go ahead are going to be what's going to happen once this support is removed, and secondly, looking at longer term, what will be the legacy of this sharp increase in public debt due to COVID. On that next point, I think it's worth highlighting that although I haven't mentioned much about monetary policy at this point it still remains a significant part of the crisis response, and it's going to continue to do so and a key reason why interest rates are so extremely low.

    So, after initially cutting policy rates to their record lows across major economies, the major central banks have now aggressively been expanding their balance sheets – so, basically, their stake in the broader economy – with large quantitative easing programs and also funding for lending schemes where they're providing cheaper funding for banks to lend into the real economy. So, what this chart shows is the balance sheet sort of size relative to GDP growth, and what you can see here is that there's almost been a vertical move higher. The amount of support being provided directly by central banks by supporting asset markets, by supporting the economy, by putting in reserve money has been unprecedented.

    Now, with this, as we go forward, I think there is a challenge, obviously, in terms of how long they can continue to do this, but what it does show you is that it's coming at a time when it's most needed. So, rather than being gradual, it's been sort of very rapid and very sizeable to calm markets.

    Now, it's not strictly comparable, but it's worth highlighting the blue line, which is Japan, right at the top you can see. Now, a common question we get is, what's going to happen in terms of how much can the central bank continue to do this. And what I wanted to highlight here is that when you look at Japan you shouldn't be looking at the right-hand axis, but the left-hand axis. So, in Japan, as a share of GDP, the central bank balance sheet is already approaching 120% of GDP. And if you look at the U.S. and other economies, we're significantly less than that. So, it's not to say that we're going to get to those levels, but it shows you, you can get to probably quite significant levels without causing concerns about inflation, for example.

    The next few charts, what I'm going to look at is just some specific sort of focus on the U.K. to give you an idea about what we're looking at here. So, my first chart here is looking at two of the most common questions that economists are asked, which is what is going to be the potential shape of the recovery and how long before we return to pre-COVID levels of GDP.

    On this chart, what I've done is to plot the shape of previous U.K. recessions, as you can see there from the '73 and '76 recession and also the Global Financial Crisis, which is the grey line, which is from 2008 to 2013. And what I'm trying to identify here is at the bottom is you can see how long in terms of quarters did it take to return to the pre-recession level of GDP, which I've indexed at 100. What is immediately startling, as you can probably see, is the extent of the decline in GDP we have in this recession; so, that line, that black line, is really sharply lower. And this is primarily as a reflection of lockdowns, which effectively shut down a large share of the economy, which hasn't happened before. So, the extent of that decline very much reflects the timing of lockdown.

    But the shape of the recovery, this is going to be a lot harder to tell. Because how long it's going to take to get to normal is difficult because we need to understand what is going to be the path of the pandemic, the impact of these shocks, the persistence of both mandatory and voluntary social distancing, and any potential scarring which may happen. So, I think something to watch out for when we talk about recovery is that this is pretty much unprecedented and there's a lot of uncertainty. Mechanically, as the economy opens up, we should see a decent rebound.

    The next chart I have here looks at the sectors of the economy and what's happened to them in terms of output since the change in terms of COVID-19. So, what I've tried to do here is look at February GDP, which was I'm hoping not that affected by COVID-19 concerns, and then comparing that with the latest figures we've had, which is for May GDP data. Now, what this chart shows is that the direct effects of COVID-19 have had an impact on most sectors – you can see all of these sectors are down – but also that it has been concentrated in some industries more than others.

    It's pretty clear from the chart that the service sector industries where there is more social interaction, such as hospitality, for example, and also where the risk of spreading the virus is considered to be higher have suffered the most, both in terms of mandatory restrictions, which are obviously from the government itself and some sectors are still not open yet, but also voluntary behaviour, because individuals realize the risk and are holding back. So, a lot of the outlook in terms of these sectors will depend on what happens on the voluntary side, because I think mandatory restrictions may be removed and continue to be removed as we go forward, but individuals will be obviously keeping a lookout in terms of where the risk is highest and how they manage that risk.

    Now looking ahead, so much, therefore, is going to depend on the path of the virus and how swiftly this uncertainty is replaced by confidence. So, on this slide what I'm trying to show is two recent business surveys, which highlight the challenge but also has an optimistic sort of trend to it, as well. So, the first chart shows the closely watched PMI surveys you may have heard of, which asks how are you performing relative to the previous month, for example. And I've got these for manufacturing, services and construction.

    And what these show, as you can see here, is a very strong V-shaped type rebound in output and sentiment in recent months when you compare within lockdown. So, it sort of supports what I've said earlier, that once the lockdowns have been removed, on a relative basis output is going to pick up; clearly, in some sectors more than others. So, that's clearly positive in terms of the effects of re-opening economy. And we're going to get some more data on this on Friday.

    However, what you see in the second chart is from our own Lloyds Business Barometer, and this compares how firms feel about their trading prospects versus last year. Clearly, the picture here remains very challenging. If you look at the black line there, you can see that trading prospects compared to last year actually in our June survey fell to an all-time record low.

    So, it very much depends what you're comparing against. If you comparing on a monthly basis or two or three months ago, etc., comparing to lockdown, some indicators are going to look a lot better. If you're comparing, however, with how the situation was a year ago or even six months ago, then there is quite a significant room for difference here, depending on the sectors that you're operating in.

    The other key factor, as well as business confidence, is going to be what's going to happen to consumer confidence. Because obviously, you know the U.K. economy, a significant share of it is consumer. So, if we look at the black line here, which is overall consumer confidence, you can see on a positive trend at least that we have seen some stabilization at relatively low levels in recent months. So, we had a sharp decline, but it has stabilized.

    But what I've then done is I've split how consumers feel about expectations for the economy, which is the red line, and also the green line, which is how they feel about their own personal finances. And here you can see that the extent of shock, particularly in relation to the economy, is very severe. So, they are concerned about the outlook for the economy, and I think until they see more optimism about the economic outlook this might remain challenging. But it is positive, on the green line, that consumers at this moment do you feel relatively confident about their personal financial situation.

    Now, as we look ahead – I'm going to touch on the last two slides – a lot of focus will be on two key areas for me. The first one will be the labour market, which is going to be a key barometer, if not the key barometer, about the economic performance and the policies that governments have put in place. So, unemployment you can be sure would have been significantly higher if it were not for the Coronavirus Job Retention Scheme, which alone, as you can see from my chart, has had more than nine million employees take that up; 9.4 million, of late. So, that's a significant part of total employees.

    Now, that support is expected to be withdrawn over the coming months, and I think this represents a crucial stage of the recovery in the U.K. as we ultimately find out how many of these furloughed workers are going to be returning to work. Now, this is crucial as we think about what it means for confidence and what it means for demand, going forward, and also how businesses are feeling about the level of demand, because I think the labour market will reflect that as well. So, something to watch as we move forward.

    The second chart again is from the Lloyds Business Barometer, and what this shows at least for now is that a large net balance of firms expect lower staff levels rather than higher levels in the coming year. So, again when we compare it with a year ago firms are quite negative in terms of what they expect in terms of staff and output. The expectation and the hope has to be that the recovery is strong, the recovery is sustained and, therefore, firms feel more confident.

    But we do also need to be mindful that the economy that we locked down into is not the economy that we are now opening into and there will be challenges because of social distancing and confidence that stay with us for some time.

    I'll now move to my final slide. And I've got this far without really mentioning the "B" word, but unfortunately it's going to be very difficult to not mention Brexit as the year ends and when you consider the U.K. outlook. So, this time last year we were close to welcoming a new prime minister, as Brexit absolutely dominated the political agenda. But while we've now left the E.U. earlier this year, the other big question at the time still remains: what will be our future relationship with the European Union?

    So, it's still unclear and as the available time remaining under the transition period is passing by day by day and as the end of the year sort of comes over the horizon, it's going to be challenging. Now, we have negotiations currently underway. There hasn't really been much sort of progress to report, although there is talk about an intensification of these negotiations. But it does look like we may be waiting to later into this year to understand what our next sort of stage looks like.

    And I think when we think about the U.K. economy, increasingly more clients are now talking about the impact of Brexit, albeit I still think it's going to be significantly less important than COVID for some time. But I think we should bear that in mind, particularly since it is a U.K. risk that we are going to be facing into in the coming months.

    So, at that point, I want to say thank you for listening, and please feel free to ask any questions in the chat box provided. Thank you.

    Pete Glancy: Good morning. I think it's on to myself now, Pete Glancy, Head of Policy, Pensions & Investments at Scottish Widows and Lloyds Banking Group. And what I'm going to try to do over the next few minutes is just provide a bit of an update on what the public – be it consumers, be it savers – are thinking, an update on what business is thinking, and then cover some of the major policy initiatives that are currently in the pipeline, if you like.

    And I just wanted to start off with a summary of a survey that we undertook last year in conjunction with the CBI, and this was done at a time when employers knew about the challenges of Brexit but it was obviously done at a point before COVID was a reality. What the business community were confirming, which is good news, is that 98% of businesses were seeing pensions as a very prominent and important employee benefit, that they're still very valued.

    And businesses also recognized that 8% as a contribution level isn't enough to see people through to a decent retirement. There was also an acceptance in that survey that at some point in the future employers were likely to be asked to do more and, indeed, many more parental employers already are much more generous than the statutory minimums for auto enrolment. But what the business community were seeing within the context of Brexit at that point is that now isn't the right time to be increasing employer contributions on a statutory basis. And I guess that would be amplified now in terms of the COVID situation.

    But what the business community were saying is that they really wanted the assistance from the financial services community to help engage their employees to help them understand how much they should be saving, if they can, and to encourage people to increase their employee contributions. And I've shared with the CBI the wealth of facilities available to them, everything from presentations and workplaces support that's online through to salary sacrifice regimes. And I think the financial services community is well placed to support there.

    I'm also doing a bit of work with the Money and Pension Service, MaPS, at the moment. I'm on the Future Focus Challenge Group, where our job is to set the priorities and the goals for MaPS for the next few years in terms of hitting the national targets, and I'll come back to those in a few slides' time. And what MaPS have done recently is they've been doing research of their own and they've been pooling a wealth of information together that's already available from places like the Office of National Statistics to try and figure out what's going on in terms of people, rather than businesses.

    And it's quite polarized, actually. The overall figure is there's about 30% of people who are either seeing their level of debt increase or they're seeing their levels of savings diminish. But the other 70% of the population, who are either still employed or who are furloughed, they are unable to spend their money in the same way that they used to do pre COVID, and they're seeing their savings levels increase. So, back in May, the average bank balance for that 70% had doubled, and I would expect that that's probably now trebled, or more, as we're going into July. So, it's very polarized.

    And I think there's a big question coming out of COVID: do those people, if they've got these bigger bank balances, do they decide to save that money or invest it, build up some financial resilience for the next shock that comes along, or do they decide to spend that money? And obviously, part of the U.K.'s economic recovery will depend on how much of that money gets spent. There's a balance there I think between people saving and spending that we need to look out for.

    And also, some stats at the bottom there from the business perspective, that one-third of the businesses will be in distress after furlough and some of them in considerable distress.

    So, that 70/30 skew that we're seeing at the moment, which looks quite favourable – 70% of people are actually better off – that skew is going to move as furlough unwinds and redundancies may well increase.

    If I move on to the political and legislative update, I've got just a few boxes here. Some of you may have seen this slide before. But in terms of what's happening, these things change. There's a whole bunch of initiatives that have been on the go for the last few years and are still on the go from the Financial Conduct Authority. And what they're trying to do is they're trying to improve the effectiveness and efficiency of the way that the financial services market works for consumers, making it more competitive, etc. The asset management market review finished a few years ago. Retirement income outcomes review is in the process of being implemented. We're still awaiting, for example, the outcomes from the non-workplace savings review.

    I'm not going to go into those specific reviews, but to pull out some generic points in terms of what I'm seeing consistently from the FCA is that they're looking to drive simplicity in terms of charging structures, in terms of communications to customers. They're looking to drive transparency so that customers can see exactly what they're paying, to whom, and what they're getting in return. They're looking to drive comparability so that you can see what you're paying in a similar format from one firm or product to another so that you can then make a value comparison. And then they're looking to promote ease of switching, and that's so that when you make that value comparison, if you want to move product or provider it's very easy to do so. So, simplicity, transparency, comparability and ease of switching. And some of you may have heard me talk about that before.

    The other thing that I'm now seeing the FCA doing is working with the Pensions Regulator and the Department for Work and Pensions, and what those bodies are collectively trying to do is get much more consistency and synchronicity between contract-based business, such as personal pensions and SIPPs and GPPs, to the occupational schemes, including the master trusts. But they're also trying to get that consistency between accumulation and decumulation. And so, for example, when I've been speaking to the FCA recently about the non-workplace pensions review, one of the reasons we don't have the results yet is they were waiting for the IGC effectiveness review in the workplace environment, because they wanted the outcomes for non-workplace pensions to be consistent with workplace, and they're also waiting for the work that the DWP have been doing on annual statements in terms of how charges will be disclosed in workplace.

    And if you look at the accumulation and decumulation piece, behind the scenes the Department for Work and Pensions is doing work on looking at how can we apply the framework from the retirement outcomes review in the individual pensions drawdown space, how can we apply that in the occupational scheme space for in-scheme drawdown. So, I think we'll see a whole bunch of efforts to try and get that consistency.

    And one of the reasons for that is that there isn't probably a genuine individual pensions market these days. The RDR (Retail Distribution Review) to kill that off as did lower annual allowances. The vast majority of the flows into individual pensions these days are coming from workplace pensions, people consolidating their pots either leading up to retirement or at retirement, pooling them all together to manage it in one place with their financial advisor. And what people are keen to see is that money that's in workplace pensions with, for example, a charge cap can't then move into an individual product which has unlimited charges. So, we'll see a whole bunch of efforts in that space continuing.

    Within the workplace itself, there's a wealth of stuff going on. There's a charges review at the moment which I think isn't just relevant for workplace; it's relevant to individual pensions. They're looking to see should the checkout come down from 75 bps to 50; should policy fees, where people charge £2 a month, should they continue because they can erode small pots very quickly – so, a few things being considered there; should transaction charges come in at the cap, etc.

    And it's not only relevant to workplace, because I think if they brought the cap down to 50 bps for workplace pensions they would also want to ensure that any consolidation activity moving money out of workplace was similarly protected in the future. So, I think it's important to keep noting that synchronicity point.

    I'm going to come back to some of these in the questions if anyone's interested, just in the interest of time. There's a lot. In terms of the wider long-term savings piece, I think taxation is going to be very interesting. We heard earlier that the government is building up a lot of additional debt; I think it might be in the region of £300 billion. I'm not an economist. So, don't quote me on that. But it's a very large number.

    I think it's unlikely that Boris Johnson in terms of being a bit populist will want to put up explicit consumer taxes and also that he'll want to maintain spending power for the consumer. And I think it's also going to be challenging to put a bunch of additional overheads on British business at this point with Brexit and COVID to contend with.

    But there's £50 billion a year of pensions tax relief in the country, and that might be a soft option for the government at this point of time, where I think they've probably got an appetite to look at radical measures. And that £50 billion isn't necessarily tax relief; in the main, it's tax deferment. It's today's Chancellor in today's economy seeing we are not going to get that £50 billion with a future Chancellor and a future economy in 20, 30 years' time. We'll start to get that taxation when people pay the tax on the income when they retire.

    Personally, I don't think they will move to the TEE or the ISA-style system because there's far too many complications there. But I do think that they may look at bringing down the rate of tax relief, perhaps to 20%. They may reduce the annual allowance. And I think employer and employee National Insurance relief may be something that they'll look at. And those measures between them could be getting into the territory of £25 billion to £30 billion pounds worth of gain for the Treasury. And within the context of the additional debt that the country has, that might have an appeal that it wouldn't have had a couple of years ago.

    And then, a lot of stuff still trying to address the advice gap. We've got the new Money and Pensions Service, which I'm going to come on to specifically in the next slide, and then also the Pensions Dashboard. So, I'll come on to those two important developments in a bit more detail.

    And then there are some large initiatives that span everything. So, vulnerable customers. Up to half of us could be vulnerable at some point in our life. ESG is obviously another big one, where there's a desire from the government to help get the financial services industry to play its part in moving the dial away from fossil fuels and less sustainable practices into something that correlates with the ESG agenda.

    So, just getting on to the Money and Pension Service, this of course brings together key PAS, Pensions-Wise and the old Money Advice Service. And they're still consolidating. So, those three brands continue to operate as they were. The levies in respect of those three bodies continue to operate; it gets all pooled together. And they're pulling together a plan of action that will bring the brands together at some point, but they're still using the current plans.

    They have been set five national targets for the year 2030, which is the graphic that you can see on the left-hand side there, which includes improving the level of financial awareness in schools, helping people manage debt better, all the way through to future focus, which is the one that I'm involved in, which covers accumulation, long-term savings, pensions, decumulation, long-term care. It's the whole end-to-end spectrum, with the goal of having five million people that are much better able to manage their finances in that regard by 2030.

    Now, MaPS has got two raisons d'êtres, if you like, the two red boxes top right. One raison d'être is to directly help people who write to them or have gone to their web services or who phone them in terms of guidance. They can't cross the advice boundary – not at present, certainly – in terms of giving a personal recommendation, but they will try and give people the best guidance and help people make decisions.

    And the second role, which I think is very important for all of us, is that they are also tasked with galvanizing the financial services industry, the business community, the regulators and government departments and the education sector to work more consistently and effectively and collaboratively to help address some of those five challenges on the left-hand side. So, I think what we'll see from MaPS over the next 10 years is a bunch of stuff that they build and deliver themselves and then a bunch of initiatives where they become the chair and they pool together those communities and lead a bunch of initiatives where we will all be asked to play our part.

    They're going to focus on wellbeing, and wellbeing isn't a magic money tree. You can't take someone that has very little income and then make them rich. But what MaPS are trying to do is saying that we need to help people manage what they've got much more effectively and make them much more comfortable that they're making the best decisions or they have made the right decisions. And they're going to produce something that they're calling a wellbeing index. And it's a concept at the moment. So, the little chart in the bottom right there is a concept, and they're going to work on the exact formula, the numbers that will go into this, over the course of this year, and they'll roll it out next year.

    But the concept is that you've got two axes. And your wellbeing is your current financial position, but also considering your confidence in making good financial decisions and then your empowerment to execute those decisions at this point in time. And then on the y-axis, predicting into the future, which I expect will be around about retirement age, what your financial position is likely to be and your predicted ability to make good financial decisions and then execute them the way you want to at that future point in time.

    So, there will be a national wellbeing index so we can look at how effectively MaPS are doing in terms of improving the wellbeing of the nation. But there will also be an individual wellbeing index, when individuals can look at their own wellbeing score, and then if they engage with MaPS, with financial advisors, with product providers, any other sources, they can see how their financial wellbeing is improving over time.

    Now I think, importantly, when you see those two indexes it doesn't then take a genius to figure out that we will soon have regulators, the media, others coming to people who provide services in the industry, saying, "Well, what is the wellbeing index for your product?" or "What is the wellbeing index for your client bank?" And that may well become a basis of competition in the future in the same way that things like price or investment returns are a basis of competition today.

    And then jumping on to the Pensions Dashboard, this is a relatively busy slide, but I'll try and make it simple. Where we are at the moment is that the Money and Pension Service have been given the task of developing the Pension Dashboard ecosystem, and there's a delivery group that's been set up that is being led by Chris Curry, from the Pensions Policy Institute, and he's leading that group. And what they're going to do is they're going to set out the data standards and the infrastructure and the way that individuals will be authenticated, etc. They're going to put together that entire ecosystem.

    But they're also going to build a pension finder service. And the way to think about a finder server is a database, and on that database you, as an individual, will have a whole bunch of entries which are the different pension entitlements that you have, which will include the state pension, any old final salaries, DC pensions, personal pensions, SIPPs, anything that you've accumulated. It won't hold the details of those pensions, just that you've got one and where it's with.

    And the pension finder service, when someone wants to see all of those pensions in one place it will send out a real-time request in terms of APIs to all of the different pensions you hold, and the people administering and providing those pensions will be required to respond immediately in real time with all of the data. That data itself will then go through to Dashboards. So, Dashboards will be windows which allow people to see all of the pensions that they have.

    So, in terms of where we are with this is there's a pensions bill making its way through Parliament at the moment. It's got cross-party support at the headline level. There are some individual challenges being made in the Lords. So, for example, the Lords have been saying that MaPS must be compelled by law to build a public service dashboard. They're also suggesting that private sector providers, such as financial advisors or pension companies like ourselves, although we should be able to build dashboards, we should have a one-year delay built in, which allows the MaPS Dashboard to be fully established before the big brands come in and compete in that space. And the Lords amendments are also suggesting that there shouldn't be any functionality of a dashboard – it should be an aggregation tool – and in particular, there shouldn't be a button that you hit to consolidate in case people consolidate pots with various benefits of cash, but they're unwittingly doing that.

    The pensions bill will also require in law all of the people who provide and administer pensions – again, state pension right through to all the different types of private sector pensions – it will require all of those people to build real-time APIs. And several older parts of the industry may struggle with that, but it will become a legislative requirement to speak to the finder service in real time.

    I think the only other thing I would mentioned here is that we have – you may have heard of open banking, which is a facility whereby if you have an account with, say, Lloyds Bank but you also have bank accounts with Santander, Barclays, you're now able to see your bank accounts with Santander and Barclays on your Lloyds app. That technology has all been put in place. Pension Dashboard is effectively open finance for pensions. So, in the future it doesn't matter where your entry point is; you will be able to see all of your pensions through a window, which may be through your financial advisor, it may be through MaPS, it may be through your bank, or through a pension provider.

    And there's the body called TISA, one of the industry bodies, which is leading a development on open finance, more generally, open savings and investments. And when we have all of these pieces of the financial jigsaw, in the future it's going to be possible to log on to a bank account or to your advisor's website or maybe an employer website and you'll be able to see everything from your own insurance to your mortgage to your pensions to your bank accounts, all in one place. And that's going to I think significantly disturb the value chain in the longer term.

    When I've been speaking to employers recently at a bunch of seminars I've been running with the CBI, I've been encouraging them to think about their employee benefits package and their total reward statements and, in particular, in the longer term how would you present that to your workforce. Because at the moment, what you're showing them is a slice of their personal finances. It's a slice that's through their employer, their current employer. But in the future, there will be a bunch of services which make it possible for people to see all of their finances, past and present, in one place, and how do employee benefits and total reward statements need to evolve within that context?

    So, that's a brief run-through from me. I think we're going to be able to take some questions, and I'll do my best to answer any.

    David Rhodes: That's great. Thank you, Pete and Jeavon. Two excellent shared sessions. I think have we ever had so much to consider? Probably not.

    So, whilst you've been sharing your insights, I've been taking a number of questions. And depending on the length of your answers, we'll see how many we can get through before we close at 12 o'clock. For everyone who has submitted a question, please be assured that if we're unable to get to yours during this part of the proceedings, it will be compiled and uploaded on the on-demand session. And I'll say more about that in a little while.

    But to get going, can I ask a question to Jeavon, first of all? There's been a number of questions on this. So, hopefully, you'll recognize yours here. The extent of the fall, Jeavon, and will we see a G-shaped recovery – a V-shaped recovery? I certainly don't know what a G-shaped one would look like – a V-shaped recovery. What's your view on that, Jeavon?

    Jeavon Lolay: Okay. Thank you. Thanks for the question. So, I think the first order, in a sense, is what does a V-shaped recovery look like? So, it's a recovery where we fall very sharply and then we bounce back quite strongly. So, as I mentioned earlier, the fall is pretty much guaranteed. The latest official data that we've seen for GDP suggests that second quarter GDP growth is likely to be around 25% smaller – so, less than – what it was in Q4 2019. So, the bottom part of that "V" is fully established.

    On the rebound side of things, again, as I've mentioned, the easing of lockdown measures and the mobility indicators and fast indicators are all suggesting that we should see a bounceback in GDP growth in the coming months, and we're starting to see that now. So, you would think that in Q3 we should see a strong sort of bounceback.

    The challenge, though, will be how is that second part of that "V" sustained? So, will that recovery be sustained beyond the point where it obviously reaches the previous level, where the "V" started from. And there, there's a lot of uncertainty because a lot will depend on what happens with the virus. We're still not certain, but obviously we are feeling a bit more confident than we were before. It all depends on government measures, as I've highlighted, in terms of the furlough scheme and what happens to businesses in terms of the accommodation with new social distancing and the sort of impact that has on businesses and confidence in demand. Thirdly, then it depends on what happens with consumers and how they feel about changes in terms of both labour market rules or voluntary social distancing. So, many things at play still I think, which suggests that we can expect at least some sort of strong rebound, but whether it's a full rebound to the top is hard to tell. Hence, there is still going to be many sort of stories and shapes out there.

    I'd say right now that the Bank of England Chief Economist, Mr. Haldane, feels that the fast indicators are suggestive of a V-shaped recovery. And I'd say he's got considerable more resources than I have.

    Thank you.

    David Rhodes: Okay. Thank you, Jeavon. I'll leave you on the spot if you don't mind, because again a number of questions on something which I guess is close to all our hearts, and that's tax increases. Pete mentioned a little bit about tax relief in his session. But how do you think the government is going to cover the cost of all this borrowing, and how soon will we see tax increases do you think?

    Jeavon Lolay: That's a very good question. I think two key things in mind. One is it depends how long the government support is required. So, if you think about when we had the budget in March, what the government thought it required to do for coronavirus or COVID-19 was fractions of what we've actually seen it do. The latest figures are suggesting the borrowings (inaudible) talking about £370 billion this year. So, we just don't know how much support is going to be required, going forward, because the government will have to protect the future taxpayers and that means supporting businesses and individuals as much as they can through this crisis. So, a lot depends on the recovery and the pace of recovery.

    The second part, obviously, depends on the markets and the ability for the government to continue to borrow cheaply, and that's one of the key factors when you think about it. Even though I've just talked about increasing debt and increase of issuance in the government debt, the ability for the government to borrow in markets is remarkably cheap. Part of that has to do, obviously, with the uncertainty about the outlook and support from the Bank of England. But also, I think investors appreciate that this is where we are and that the level and sort of rules that we had before about what level of GDP public debt had to be and all these old rules are just not fit for the new order we operate in.

    So, I think from now the government's focus will be to do all it can to support the economy. But there will come a point, as you mentioned, in terms of a point of reckoning and what it wants to do next, and I think that's going to be a huge challenge, to try and decide what it does in terms of public spending and also what tax and policy levers it can pull to put the finances back in a sustainable path, because what we can accept right now is that the current path is unsustainable. And the challenge is going to be, how much of a recovery do we get? How is the tax base affected, going forward? Also, how sustainable are the government spending commitments, going forward? Because we already know that we're probably going to have to spend a lot more on health than we have been previously. And then at that point I think the government is going to have to understand and appreciate how does it take this forward. Does it still want to do some of the same initiatives it has suggested before? Or is it going to basically hunker down? What we do hear from the government is that austerity is not a route it wants to take this time around. So, that would then suggest that tax rises are probably more likely, but the timing of that is hard to say just now, and the size and scale.

    Thank you.

    David Rhodes: Thank you, Jeavon.

    Pete, if you're feeling recovered, can I ask you a question on behalf of a couple of people, the government's view, particularly on the self-employed sector?

    Pete Glancy: Yes. So, self-employed is interesting in that auto enrolment doesn't really extend effectively to them. In auto enrolment, it work for employed people because there's someone else putting money in. Obviously, there's not someone else when you're self-employed. It's done on the basis of inertia. So, your employer puts you in. You're auto enrolled, and you don't realize that's happened. You can't really auto enrol yourself as a self-employed person and not notice you've done it. And then of course the tax regime is different.

    So, what the government were doing pre COVID is they were working with the accountancy profession and the banking profession and payments, with card payments technologies, and they were looking at technological ways of making it easier for the self-employed to save, recognizing that self-employed have very lumpy earnings. They have good years when they make a lot of money and they would like to put in big lump sums, but they'd also like flexibility in their way out because they can have calls on cash that come out of the blue. So, they don't like the pension wrapper necessarily because it ties money up for decades and they don't have access. So, they were looking at what might be the most appropriate products for something like auto enrolment. But obviously, you wouldn't use payroll for the self-employed. You might use another technology platform, like business banking accounts, for example.

    But I think what we heard the Chancellor say in the early days of COVID that if the self-employed want to benefit from government assistance in the same way as employees, they really need to play a little bit fairer in terms of the tax that they're paying. So, if the Chancellor chooses to align the tax treatment of the employed and self-employed, then it might then be that something that looks closer to auto enrolment could be rolled out. So, we'll have to wait and see what the Chancellor says on taxation I think before we know the direction of travel.

    David Rhodes: Okay. Thank you, Pete.

    I guess this question could be for either one of you. But again a couple of people have asked this. What's the view on the market impact when the furlough scheme comes to an end?

    Shall I pick somebody first? I'll go for Jeavon, first. Do you want to try?

    Jeavon Lolay: Sure. I don't think there's a real view in terms of the market impact, as in like the financial market impact. But I think what we are sort of concerned about will be the economic impact, and that will then flow into the market, impact. I think at this moment it's very hard to tell how many individuals on that scheme will be reabsorbed into the workforce, etc. So, I think this is going to be a challenge as we move forward. And also the sectors that are affected.

    Now, interestingly, obviously, there's going to be an autumn budget as well this year. So, we'll see if there's going to be further support. Because what we have seen recently is the Chancellor does seem to know what's happening, does have a strong idea about implications for certain sectors and areas. So, therefore, they may look to see to head off any sort of rise that we may see in certain sectors by providing further support.

    But it is absolutely crucial I think for economists, at least, to see what happens here, because the traditional labour market data that we've seen so far doesn't give us a good steer. What we've seen this time around is unprecedented in terms of furlough scheme, and only once that furlough scheme is over or we get to a situation where firms now have to take a bigger stake in terms of paying for their employees will we really get an idea about what unemployment looks like. And unemployment, therefore, will give us a better idea about confidence and other markets and the economy recovery, as well.

    So, I think it is something which is quite confusing at the moment, yet everybody knows it's very beneficial. So, the question is going to be a big question, what does happen once it's removed and to what sort of scale and extent is it removed? And I think these are all still open questions just yet.

    David Rhodes: Okay. Thank you, Jeavon. Pete, do you have anything to add to that?

    Pete Glancy: Yes. Let me tackle it from a pensions perspective; obviously, I'm not an economist. Some people will have seen the retirement report that we issued about a week ago that confirmed that 60% of people are now telling us that they're saving adequately for retirement. So, either in a DB scheme or between them and an employer there's at least 12% going into a DC scheme. And that was a record. It was starting to plateau a bit as auto enrolments come to an end.

    But the 60% of people that are saving adequately are typically people on moderate to higher-paid jobs and in very secure forms of employment. And when we looked at the other 40%, it was multi-job or it was low-paid, people on less secured employment. And I think that the risk is when the furlough scheme comes to an end and some of the economic impacts are felt, that we'll see more people moving out of those higher-paid, secure jobs and into less secure jobs. And what that's going to do is it's going to bring down that percentage from 60%. I would probably guess it might be a little bit lower than 60% next year, if there is a lot of restructuring of employment in the economy.

    David Rhodes: Okay. Thank you. Thank you, Pete.

    The next question I think, Pete, is for you as well, which is, what's your view on the cap for pension funds? Do you think it will be a max of 0.75%? And what's the impact of that when it comes to switching for non-workplace plans?

    Pete Glancy: So, I think it's tricky to bring down the cap from 0.75% at the moment because a lot of the big master trusts, in particular, have been through the authorization process and TPR and DWP will both have a very good line of sight into their commercials and many won't break even for decades into the future. So, I think it's tricky to bring that 0.75% down to 0.50%.

    I think there'll be a temptation to include transaction charges, and I suspect most industry bodies, whether it be PLSA or the EOBI or whatever, will suggest that's not a good idea. Because if we have another shock coming with us, a financial shock or a health crisis or geopolitical or whatever, you really want pension providers and financial advisors for individual clients to be able to act quickly on behalf of clients to put their money into locations that might insulate them from that emerging or forecast shock. And if you're limited on the transaction charges, you're limited from acting on behalf of your clients. So, I'm hoping that we'll persuade the government not to include transaction charges in the cap.

    I think there's a possibility that they may introduce a monetary cap alongside the percentage cap. So, they may say, for example, that the 75-bip charge remains but you're only allowed to charge up to, say, £500 a year – just a number off the top of my head – so that when pots become very large you don't continue to take thousands or tens of thousands out of them under a flat percentage scheme.

    But I do think we'll get to a point when it will be obvious that the vast majority of the individual pensions market is a consolidation of workplace pensions. And there's no point having a charge cap that protects the amount of charges you're paying for three years when you're with your employer, and then it moves into an individual pensions for the next 37 years before you retire, where that cap doesn't apply any more. That seems untenable.

    So, I'm thinking 75 bps potentially with a monetary cap and eventually it will become consistent across workplace and individual. But only for workplace money. If an individual client is saving their own money into a SIPP into exotic investments or whatever they want to do, I don't think there will be any caps on that.

    And I also think these caps will only apply to default funds or financial advisors building portfolios for their clients. I don't see any caps interfering with any of that.

    David Rhodes: Okay. Thank you, Pete.

    And one final question for you, Pete, if you don't mind. This question, I know you've been asked dozens of times – at least by me, half a dozen times – which is with respect to the Pension Dashboard and how well do we think defined benefit schemes will cope with the data requirements.

    Pete Glancy: I think it will vary. If a defined benefit scheme is working with one of the big third-party administrators, I think they'll realize that they have to be on their game. They'll just have too much pressure from their large clients. Many of the smaller defined benefit schemes have said in the past that their administration has kind of been in a shoe box; it's not digitized. And they were kind of using that as a reason, not an excuse, of what I think is a problem statement, and I think the government does, too.

    But there are technology solutions out there that would help smaller DB players digitize. They'll just have to I think embrace the change and get on with digitizing those admin models.

    David Rhodes: Okay. Thank you.

    We're going to squeeze in one last question because it was a question related to lots of news stories yesterday. So, very current. It's in respect to the vaccine. And just a quick question for, I guess, you, Jeavon. What do you think the announcements around the vaccine will have on both the economy and perhaps equity markets, as well?

    Jeavon Lolay: It's a very good question. I think very topical, as you mentioned. For the equity market, it's pretty obvious what's happening now, with a lot of optimism whenever we hear any story about a new groundbreaking vaccine. So, the equity markets are basically looking for that sort of optimism to sort of give them scope about what it means in terms of the recovery and what it means for earnings growth for firms, because I think this is going to be the key challenge. At the moment for many individuals and firms the main reason they're not operating as per normal is because of the uncertainty created by the virus. If there is confidence that that can be tackled or at least addressed in cases, in certain cases, then I think the equity market is going to see that very positively.

    For the economy, I think it's slightly different because I think that the economy is going through a real shock right now. So, a lot of questions I get often is why the equity market is so buoyant, while the real economic data is so weak. So, I think for the economy, the real economy, it's got a slightly different challenge right now in terms of dealing with what's happening. And even if you do get to a situation with a vaccine, it may be a considerable time before it is sort of available in a mass dosage and tested and people take it. So, there's a lot of uncertainties around it.

    So, we can see the equity market is finding that more positive. I'm not saying the economy won't find it positive, but I think it's more of an equity market story for now. Broadly, if it does happen, then obviously the economic outlook will also improve.

    So, I think for me at this moment all news about a vaccine, extremely positive. And if we can get to a solution, then that would be amazing, and I think the challenge for the economy would be reduced in terms of longer-term scarring, because the quicker we get a recovery, the better. But it's definitely an equity market play right now. They definitely are hearing about different schemes underway and the opportunity to take advantage of the good news that is available.

    David Rhodes: Smashing. Thank you very much for that.

    And sadly, that's all we have time for in terms of questions. If we didn't get to your question, please take a look at the on-demand link when it comes through. This will include also a repeat of the presentation, answers to any questions we didn't get to, and the slides. A number of you have asked for the slides.

    Apologies for any of you who can hear a bit of background noise. My neighbour has decided to cut his lawn whilst we're doing this.

    Now before you go, I have a favour to ask of you. At Scottish Widows we're enjoying pulling together and delivering these webinars. How they evolve and the topics we cover is up to you. And to that end, we'd love your feedback. A very short survey will appear on your screen shortly. We look forward to your opinions and suggestions.

    We're planning more of these webinars, as I've said. So, please do look out for invites in your inbox or on the Scottish Widows social media channels.

    Thank you again for joining us this morning, and we hope to meet you at one of our future webinars. Thanks very much, and bye for now.




    Pete Glancy, Head of Policy, Pensions and Investments at Scottish Widows. Jeavon Lolay, Head of Economics & Market Insight Lloyds Bank Commercial Banking


    Your questions answered (PDF)

    Watch now

    Good morning everybody.  I think it is fair to say that the last few months have been extremely challenging for many of us, in lots of different ways.

    There’s no doubt that the effects of the pandemic have made their mark on the financial resilience and financial plans of countless people. Some of them may be your clients.

    This has left more people vulnerable than ever before – so it is timely that we’re discussing this important topic today.

    Whether you’re reviewing and sense checking your approach, or still developing it, I’ll be sharing some key information and ideas to help you with this.

    We’ll focus on:

    •       What vulnerability is, how it can cause harm

    •       How firms can identify vulnerable clients,

    •       And once they have, what can they do to support them.

    Let’s start by looking at the regulator’s activity around vulnerability.  

    This is what the FCA said in a recent speech, when they talked about their aims to protect the vulnerable.

    It is becoming very clear that they want to see this topic shifting from an approach where the right boxes have been ticked to achieve compliance, to firms standing back to ask “what are our vulnerable customers’ needs, and how can we respond to deliver good outcomes”.

    In other words – having a process is one thing, making that process live and breathe within your culture and your business is another.

    This isn’t a new topic for the FCA. It’s worth having a quick look back at where their focus started, and how it has evolved over recent years.

    Five years ago, Occasional Paper No. 8 first highlighted this topic. It set out the definition of vulnerability and sought to raise awareness and promote best practice across the industry.

    We then had two further papers which included reference to vulnerability, whilst focusing on Access to Financial Services & the impact of longevity for financial services.

    2018’s Financial Lives survey set out the four main indicators of vulnerability and emphasised the scale of vulnerability in the UK, we’ll look at both of these things later.  

    And then in 2019, for the first time we see FCA consulting on issuing guidance for firms on the fair treatment of vulnerable customers. Again, we will come back to this consultation – GC19/3 - shortly.

    We’ve now seen the first complaint upheld by FOS because a firm did not treat a client as vulnerable. She complained about the advice given to her soon after her husband died. She believed that she should have been treated as vulnerable, and wasn’t. And had she been, the recommendations made ought to have been different. The Ombudsman agreed, and ruled that the firm had to compensate her for giving unsuitable advice.

    So, if vulnerability isn’t already a key area of focus for firms, then maybe it should be?

    Before we move on to explore this topic further, let’s take our first poll of this morning and ask you what percentage of your clients you think – or know – would be classed as vulnerable. OPEN SURVEY


    Thanks you for your input, it’s useful to know your views. SUMMARISE RESULTS

    Where that number is on the low side, there may be specific reasons, but it would be interesting for you to see if your thoughts change by the end of this session.  

    If your screen isn’t now displaying my slide headed FCA definition, then you may need to close down the poll pop up screen by hitting the X near the question.

    So what is vulnerability? Occasional paper 8 defines a vulnerable person as somebody who is susceptible to detriment because of their circumstances, particularly when a firm isn’t acting with the appropriate levels of care. 

    Helpfully, the FCA also issued a practitioners’ pack alongside Occasional Paper 8. This includes examples of good practice in identifying and interacting with vulnerable customers.

    I’ll be sharing some thoughts on good practice today, but you can also use these documents, along with Guidance Consultation 19/3 to help you put the appropriate processes and support in place.

    Let’s explore further how vulnerability might result in detriment?  

    First, there could be financial detriment – for example, somebody gets scammed. Or they get into debt, which spirals and then there’s an impact on their credit history. Or they suffer financial loss, because of making sub-optimal choices or poor decisions as a result of their vulnerability.  

    Detriment can also relate to psychological harm. Vulnerable people often feel unable to cope – then they may become stressed or anxious, and even feel embarrassed and humiliated because of their situation.

    We need to ensure that customers don’t lose trust in firms and withdraw from financial services altogether which could ultimately leave them with a higher exposure to risk.

    So what is the FCA suggesting that we could do? Let’s look at the three key areas they included in the proposed guidance issued last year.  

    First of all they expect firms to proactively take steps to understand the needs of vulnerable consumers – including know what the drivers, impact and effect of vulnerability are.  

    Then they want to see staff who are equipped with the knowledge, skills and confidence to work effectively with these customers.  

    In terms of practical action, they’ve focused in on these three areas. So they don’t expect firms to develop products specifically for vulnerable customers, however they do expect us to embed consideration of vulnerability in product design.

    Vulnerable customers are more likely to have particular service needs, for example they may need more time to understand information, reflect on it and make decisions. So we should consider this in relation to our customer service. 

    Communication can be a significant barrier for vulnerable consumers where they have additional or different needs. There’s a lot that we can do to ensure good and appropriate communications – and we’ll come back to this later.  


    Finally, they expect that all of this will be reviewed & adapted on an ongoing basis.  

    Vulnerability comes in a range of guises – and many people in vulnerable situations would not recognize themselves as such. 

    There are certain risk factors that are particularly important within financial services, which we can explore.  

    First of all, low literacy, numeracy and language skills. For example, if English isn’t somebody’s first language that can have a real impact on their financial capability.  

    Physical disability, illness or poor mental health can make it difficult to carry out day to day tasks – including looking after our finances properly.  

    A sudden change in circumstances such as job loss, bereavement or divorce can not only make it difficult for us to cope emotionally, but can trigger a financial loss.

    And having caring responsibilities can make us vulnerable – many people who take on caring duties find that their income often reduces. Carers often use up any savings they have and can end up with debt.  The FCA extend this risk factor out to include those operating a power of attorney.  It can be time consuming to manage a complex set of financial affairs for somebody else – which can lead to less time or focus spent on one’s own financial situation.

    There are two age related vulnerability factors.  

    Those who are young may lack the financial experience to make the best decisions for themselves - or not had time to build up a strong credit rating.

    Being old does not in itself make you vulnerable. You’ll all know 80+ year olds who are sharp as a pin. However, it is more likely that that as we age, we will be living with cognitive or physical impairment, or experience sensory impairments such as problems with hearing or sight. The onset of ill-health is more prevalent and those in this age group are generally not comfortable with new technology.

    We’re now in a world where technology is king – we wouldn’t be here today without it. So many of us have had to rely on going online to manage our finances during lockdown.  

    And finally, having low income and/or debt can present challenges.

    So when you look at all that – and bear in mind this is not an exhaustive list – it’s easy to see how the Financial Lives study concluded that 50% of UK adults display one or more characteristics that signal their potential vulnerability.

    We can summarise the various situations that might make us vulnerable into four key groups.  

    • Health conditions or illnesses.

    • Major life events such as bereavement or relationship breakdown.

    • Low ability to withstand financial or emotional shocks impacting financial resilience. 

    • And the things that affect financial capability.

    This can be helpful in remembering what to look out for. This chart – taken from GC19/3 – can act as a useful checklist to help spot vulnerability. If your client displays one or more of these characteristics, there’s a flag for you to put your vulnerable client process to work to establish whether vulnerability exists – and what that means.

    GC19/3 says that firms should have systems in place to record information on the needs of vulnerable customers and make that information available to relevant staff.

    This is so that vulnerable customers don’t have to repeat the information AND to ensure that everyone is geared up to deliver the service that the client would deem to be good and appropriate.

    In GC19/3, vulnerable is defined as actual or potential. So if somebody has a history of stress related illness, or has taken on caring duties, they may not be vulnerable now, but have the potential to be. The guidance says that what you do for your vulnerable clients, you do for potentially vulnerable.

    I also want to talk briefly about the FCA’s recent Policy Statement and Guidance on Pension Transfer Advice. You’ll know that a ban is being imposed on contingent charging for this advice. But there is an exception – the “carve outs”. These are specific types of vulnerable customers in circumstances that make pension transfer advice particularly worth considering – those in serious ill health and those in serious financial hardship. The rules help these customers access the advice they might not have been able to afford.

    In PS20/06, the FCA says that firms should have the relevant knowledge and experience to deal with the specific personal circumstances of vulnerable customers who meet the tests to be carved out. For example, understanding the behaviour of those with persistent debt and the debt management options available. PTS are also required to carry out specific CPD, and one example given as a relevant CPD topic is: advising vulnerable customers on DB transfers. So for those of you involved in DB advice, I’d recommend including this into your vulnerable client policy.  

    I said earlier that the Covid-19 pandemic has affected many of us. What does that mean in terms of financial vulnerability?

    First of all we’ve seen significant market volatility with clients experiencing sudden falls in their investments, and there’s uncertainty about future market and economic recovery.  

    We’ve seen an increase in income shock caused by investment volatility, furlough, redundancy or bereavement. This has led to millions applying for universal credit or mortgage payment holidays in recent months.

    Savings are worth less. Many retirement income plans on hold or being reviewed and adjusted.

    With an ‘income shock’ recognised by the FCA as an indicator of vulnerability, this means you will have a number of clients who did not start out 2020 as vulnerable – but now they are - even if temporarily.  

    There has undoubtedly been an impact on many people’s financial resilience.  

    Many have seen their physical or mental health impacted by the virus or by lockdown.  

    Death rates are significantly higher than is normal, leaving many more families newly bereaved.  

    Many are taking on caring duties, or trying to maintain caring duties under difficult circumstances.

    And finally, another driver of vulnerability can be lack of access to financial services or indeed other services and support. This has been an issue for many – mortgage and financial adviser offices have been closed, bank branches closed, or open for shorter hours. And of course many people have been unable or unwilling to leave their homes. I’ve already talked about a greater reliance on digital services – imagine being one of the 9 million people who struggled to get online by themselves before lockdown? The recent Lloyds Bank UK Consumer Digital Index reports that almost 4 million people were totally disengaged digitally – and almost 6 million were unable to turn on a device.

    So overall, the numbers who are vulnerable is likely to have increased recently, purely as a consequence of the pandemic.

    It might feel as if I’m painting a very gloomy picture here, but the great news is that you can offer a lot of help and practical support to your clients.  

    An immediate and obvious action is to keep in contact with them and let them know you are there for support.

    You can offer reassurance about your business continuity plans, educating them about what to do – and not do – in times of market volatility. Ensuring that they don’t let valuable protection policies lapse if it can be avoided. I’ve seen some great examples of firms signposting clients to places where they can get help and information. Like using Newsletters containing all the relevant links that their individual or business clients might need to access. Some firms have run webinars like this one to talk to their clients. And of course there’s the good old fashioned option of picking up the phone for a chat!

    You may also be experiencing or thinking about the changes to client reviews that as a direct result of the current situation.

    If you haven’t already, you could consider prioritising those clients who need an urgent review.

    Which of your clients were on the cusp of making significant changes to their life or financial plan. For example, you may have clients who were about to retire.  You may have been helping a first time buyer with house purchase. And now with changes to both pension fund values and lending criteria – these clients will need to speak to you sooner rather than later.

    For the review meeting, normal practice is to review the overall plan. So to identify any changes to your client’s situation or objectives and carry out an assessment of how well things are on track. But we’re not in normal times, so you’ll need to understand exactly how Covid has impacted your clients. There may be some planning implications.

    Some clients may have exercised their contingency plan, but if there wasn’t a contingency plan, or the emergency fund has run out - what alternatives can they consider? Are there other sources of funds? Can they use their Property?

    For clients close to retirement, they may need to work on an additional year or two beyond their target date. And those already in retirement may mean to adjust their discretionary spending.

    Whilst some of this may feel unpalatable to clients, knowing what needs to happen will reduce any stress or anxiety they were feeling about their financial situation.

    Along with this, there’s an opportunity to discuss budgeting – what adjustments can be made, what payments can be stopped or delayed to help with the current situation – if necessary. Checking that those who need to are taking advantage of mortgage payment holidays, for example.

    Recent research suggests that on average we’re spending £182 a week less since lockdown started. For those who are working, and now have more surplus income, could that be put to good use in support of longer term goals.

    Let’s look at some important future planning points – and how you can help protect your clients.

    You can establish what is causing concern right now? Is it protection against illness, early death or redundancy? This is the perfect time to discuss the protection solutions that provide financial support if any of these things happen.  

    Don’t forget business owners – business protection is crucial for continuity and succession planning.

    I hear that the pandemic is bringing topics like wills or power of attorney front of mind. This is a key opportunity to work with those who haven’t yet got these important tools in place.

    And for those already drawing income in retirement – are they now feeling concerned that the balance of secure and unsecure income is right for them? Has their appetite for risk, or capacity for loss changed? Would they be concerned if a drop in investment values meant that they would struggle to pay their bills?

    Sadly a plethora of new scams have emerged to take advantage of the pandemic. Who is at risk of being scammed – probably most of us, especially with recent reports of phishing emails to IFAs purporting to be from the FCA - and are you helping your clients understand how to spot a potential scam? There are some great fact sheets that you can use to help with that from Citizen’s Advice, PFS, MAPs and Scottish Widows.

    The message here is that you are uniquely positioned to help clients – many of whom are under an unusually high amount of stress at the moment. So by making adjustments to their plans, keeping them focused on the bigger picture and creating contingency plans, you provide much needed peace of mind in these highly uncertain times. Doing something, rather than nothing, with respect to the financial plan – will give your clients back an element of control.  

    For those who are vulnerable,  

    The trigger for this can be sudden, like an unexpected bereavement or gradual, like the onset of dementia.

    Vulnerability can also be exacerbated by the actions of firms in some cases. For example if a firm made an error that caused either financial loss or stress and anxiety or had policies and processes that were making it difficult for people to engage, then that in itself can be a trigger point. 

    Not everybody will always be vulnerable, and, indeed, some people will move in and out of vulnerability.  Others will always be vulnerable, and, for some there may be more than one thing that is making them vulnerable.

    The reality is that we all have the capacity to be vulnerable at some point in our lives.

    So before we come on to look at some practical steps that you can take to support vulnerable customers, we have our second poll question. 

    Can you tell us if your vulnerable customer approach is

    Still in progress

    Complete and fully in place

    In place but you’re currently reviewing it

    Thank you

    For those who are working on their policy, reviewing it, or merely want to do a sense check, let’s come back to the FCA guidance and remind ourselves that is expected of us.  

    Remember the regulator is suggesting these three key areas, and we’re now going to look at some ideas on how you can take positive action in all of them.

    I appreciate that this won’t be true for all of you, but some firms are finding that there are people in their business with a bit more time available than is usual. So it’s a great opportunity to engage in education about this topic – like this webinar, for example, and make sure that everybody is fully up to speed.

    There may also be the resource available to review your processes and revisit your communications.

    Communication was a key area of interest from vulnerable consumers, when they were asked in research what good looked like.

    They want clarity and choice in terms of communication – with everything that is sent to them being clear and straightforward. They also want alternatives like large text where is needed, and different options than face to face – and we’ve all had lots of experience of carrying out meetings in different ways in recent months. And also there may be certain times of day that are better for clients to meet - depending on when they take medication, or have carers calling in.

    Clients want to be offered clear and easy to understand financial products that do not contain surprises that may only become apparent when crisis strikes – e.g. hidden “get out” clauses for paying claims.

    They’d like it if we were proactive when we suspect that something isn’t quite right.

    And when we know that a client’s situation makes them vulnerable, they want a flexible and tailored approach.

    All of that of course means we have to take the time needed to listen, let conversation take its natural course, and be sufficiently trained to spot the signs of vulnerability.

    It really isn’t difficult, and in many ways it isn’t that far removed from the way we are obliged to treat customers fairly – so one way of thinking of this is as TCF Plus – adding a layer of extra service or support those for who need it.  

    So how do you go about spotting the signs. Bear in mind that it may not be you who is the first person within your firm to learn of a customer in vulnerable circumstances. It could be somebody else like a Receptionist or administrators, for example. Which is why training across the entire business is vital.

    Here are just some of the signs that anybody engaging with a client can be alert to:  

    You may become aware that a client seems to be struggling to understand information or follow a conversation:  

    They ask you to speak up or speak more slowly. They ask you to repeat information – or they repeat themselves, ask unrelated questions or wander off topic.

    They indicate a lack of understanding. Or a client who previously has been well prepared for meetings has started ignoring letters or reports. Any of these things raise a flag that something isn’t quite right.  

    There could be audible or physical clues – they seem flustered, or out of breath, or they tell you about new medication or a change in health.  

    They may want to do things differently to the way you’ve always worked with them – like requesting home visits when previously they came to your office. The two other points here that need proper investigation would be where somebody else is helping with their finances, or unusual financial requests that weren’t in the original plan. If a client discloses that somebody else is helping them – you need to find out if this is an informal arrangement for extra support, or whether the appropriate power of attorney in place – and if it isn’t, should that process be started?

    Where a client is asking or income or capital withdrawals outside of the plan you’d agreed with them, it is important to understand the reasons why – and I know that usual processes would do that.  A third party could be putting somebody under duress to withdraw money – the client may be about to be scammed, or be the victim of economic abuse. Or they may have got themselves into financial difficulty.  

    And finally, they disclose something that has triggered a financial shock, like business failure, being furloughed for example.

    Having established that there may be a potential vulnerability, the next step would be to explore further what this means and how you can help.  

    Vulnerability can be challenging to ascertain because customers may not believe themselves to be vulnerable; or be reluctant to disclose certain things, or believe that they will be treated badly because of it. When in fact, the opposite will be true – understanding what is going on will usually make it easier for the firm to provide the level of service the customer needs.

    So, the Practitioners Pack I mentioned right at the start contains practical tools to assist us when having conversations around vulnerability. We’ll look at two of those today – the TEXAS and IDEA drills.   

    The T in Texas stands for Thanks – it may have been difficult for your client to disclose something and you can also let them know that doing so will help you offer a more flexible way of working together.  

    Then you should Explain how the information will be used - including why it is being collected, how it will be used to help decision making, and who, if anybody, it will be shared with.  

    Which of course means that you need to obtain the customer’s explicit consent to use the information. I should point out here that the protocols were developed with data protection in mind, if you follow them as described in the practitioner pack, you will meet your obligations. Of course you will need to satisfy yourself about that, and there is good information about DPA and GDPR in both the 2015 pack and the 2019 Guidance Consultation.  

    Asking these three will enable you to understand the situation better – and help you work out what you can do to support your client:

    1. What does your situation make it difficult for you to do? (focus in one hour meeting)

    2. Does your situation affect your ability to deal or communicate with us? If so, how?

    3. Does anyone need to help you manage your finances such as a carer or relative? If so, how? Important to know if this is a formal Power of Attorney that needs to be used. Is it registered and ready to go? Or if there isn’t one, should it now be put in place.  

    The S in Texas stands for signposting. This can be toward internal or external help. So, you might need to refer a client to a colleague who is better placed to help them.

    Or, you might consider external signposting to an organisation such as a debt advice agency for help with multiple debts. We’ll come back to external signposting shortly.  

    IDEA is particularly useful where a customer has mental health issues

    As with TEXAS, ask what the mental health problem either stops the customer doing in relation to their financial situation, or makes harder for them to do. This will help provide insight into both the severity of the condition, and its consequences.

    It is also useful to understand how long the customer has been living with the reported mental health problem, as the duration of different conditions will vary. This can inform decisions about the amount of time someone needs to be given to retake control of their situation.

    Some people will experience more than one episode of poor mental health in their lives - you will need to take such fluctuating conditions into account in your decision making.

    And finally, question what care, support or treatment your client has been able to get for their condition. AND, is anybody else helping them manage their finances now?

    Let’s explore what kind of approach you could think about when conducting a review or factfind meeting with a Client.   

    I’ve separated this out into new and existing clients, although some things here are interchangeable.

    When meeting a new client, in the context of vulnerability, here are a few things to consider:

    Does your fact find gather sufficient information for you to be able to assess if there is a potential vulnerability? If not, can you add some questions, or use a checklist separately to support this?

    Are there some more obvious signs, for example somebody else is accompanying a client to a meeting? Any other unusual requests or behaviour? You may pick up on some of the signs we’ve talked about a few minutes ago.

    The final point relates to a situation where you’re working with an attorney or attorneys. It is really important to clearly establish the adviser / client relationship. I’ve heard some horror stories in the past of power of attorney being abused. And often, when an attorney is also a beneficiary, they may have different ideas to you about what is in the client’s based interests.

    When meeting or speaking with existing clients, I suggest that when you know people, it is usually easier to spot if they’re acting differently or their behaviour or circumstances have changed. Does a change in circumstances come up that might lead to vulnerability - e.g. taking on caring responsibilities, needing to draw more income for some reason.

    In addition you may be able to sense when their understanding and recall of information isn’t what it used to be.

    Some firms use questions or other techniques to check their client’s recollection if they think it’s appropriate.

    And again, being aware of the potential for conflict of interest or undue influence if working with more than one person.  

    When it comes to the presentation of information, I think this is an area where most of us would admit that we could make improvements if only we had the time. So here are some ideas.

    This can be simple steps to adjust the delivery and format of information – like using large text in documents or emails. Or the use of infographics to simply complex topics and explain issues and solutions clearly.

    It would also be good to challenge how information can be explained with a limited use of jargon. This can be incredibly difficult in financial services - there is some jargon we just can’t get away from, as we have to use the correct terminology for certain things because of legislation.

    But, it is always worth undertaking a review of documentation. The Plain English Society has a range of excellent guides – available to download from their website.  My favourite is the Alternative word finder, which has complex or outdated words and phrases on the left side of the page, and on the right hand side says “you might want to consider using this instead”.

    There’s been a lot of talk about how we can make Suitability reports easier to understand.  I read an article by a paraplanner recently where she mentioned having 3 levels of suitability report that she will choose from depending on the client’s attention span.  

    Most people find it useful to include a summary at the front of a suitability report or information pack. However, I wouldn’t call that the “executive summary” because that’s jargon! Instead, you could title that page “Read me first”. And use this one pager to highlight the important points, actions and deadlines are. If the things you need your client to do are hidden away in page 15 or at the back of the pack, they might spot it before a deadline. But if it is clear up front, you have a better chance of your client taking action.

    I want to talk about cashflow models, too. They’re a great way of simplifying complex information, however I know that some cashflow tools come with lots of additional features. At some point, as their cognitive ability changes with age, your client may not be able to take in all the whistles and bells, so look out for the point at which you need to pare it back to core information. And here I’m talking about the normal changes to our brain as we get older, not necessarily where somebody has a dementia diagnosis.

    And finally, you should challenge everybody who communicates with your clients to review how they do it – your colleagues, providers and professional connections!

    I want to come back to the topic of signposting because I think it is vital and I don’t think enough firms make the most of it.  

    There are a range of vulnerabilities that present challenges outside of your area of expertise. So why not start to collate a “Directory” of signposting partners.

    Let me share a couple of examples.

    So, for example: charities – like MacMillan who offer fantastic support for helping those with a cancer diagnosis, both emotionally and practically.

    The Alzheimer's Society or Alzheimer's Scotland – again, amazing support and helplines/factsheets to support anybody affected by dementia.

    And it doesn’t have to be national charities – you can recommend local support.

    There may also be services that the customer needs that they can’t offer. For example, an existing client contacts you because they want to consider releasing equity from their home. If you aren’t authorised or qualified to help with that, then, it would be great if you can put that client immediately in touch with somebody else who specialises in that type of advice.

    This could make a huge difference this could make to somebody who is possibly quite stressed and anxious – rather than keeping them waiting while you search around for another adviser who can help them.

    The final point to make about working with third parties, is where advisers are working with providers in relation to specific client requests. It is often helpful to let us know if your customer is in a vulnerable situation. Whilst we can’t record that against the customer, it can help us ensure that we manage the specific transaction with that in mind.  For example, you may be working with a client who is going through a divorce, and needs access to their pension funds to pay a bill. If you submit the request but don’t tell us that, we might miss the opportunity to treat your client appropriately – and in a worst case scenario, they could miss the deadline for payment, which may have other implications.

    You can help providers be in the position to deal with clients effectively

    Here are some of the things that we do within Scottish Widows and Lloyds Banking Group to support vulnerable customers and drive thinking in the industry:  

    We have partnerships with Macmillan Cancer Support, who I mentioned earlier, with Turn2Us – a national charity that helps customers in financial need get information and gain access to welfare benefits, charitable grants and other financial help. And if you’re familiar with Scottish Widows protection solutions, you’ll know about the link with RedArc – whose Personal Nurse Advisers give people the practical advice and emotional support to transform their whole experience of illness, disability, trauma or bereavement.  

    As a group we have specialist teams in place to properly support our customers at certain points in time when they need additional help. There are some examples on screen, including the Scottish Widows Protect dedicated Claims Team. Each person who claims is given a claim assessor who will stay with them throughout the claims process, and they use their expertise and specialist knowledge in all types of protection claims to support the client.  

    And finally we support and deliver a wide range of initiatives across financial services.

    Our “Taking on your Future” campaign, has the aim of helping people across the UK plan their financial future better. You can use our financial planning tools and short pension films with your clients to help them understand the issues, challenges and opportunities they may be facing, whatever stage of their retirement journey.

    We’ve also recently added some short films to YouTube to reassure people in these uncertain times – for example, that our life insurance policies will cover claims for death as a result of Covid-19.

    2019 marked our 15th annual Women and Retirement report. This highlights the unique challenges women face in saving for their futures. We then provide you with practical resources and issues to consider when having client conversations, including maternity leave, reduced working hours and childcare costs.

    My colleague Johnny Timpson chairs the Access To Insurance Working Group in his role as Cabinet Office Disability Champion for Insurance. One of the Group’s key successes is the signposting agreement which expands access to protection insurance for those with pre-existing medical conditions and/or disabilities.   

    When it comes to meeting your customer’s needs, we’ve worked hard to embed consideration of vulnerability into our product and service design.

    As the UK moved in to lockdown, we rapidly adjusted our ways of working and our processes – to ensure that you and your customers still had access to us and were able to transact with us.  

    We have a comprehensive protection offering with the added value of Red Arc support and a great reputation in supporting people and families with claims – backed up by statistics.

    When it comes to retirement planning and retirement income, we are extremely well placed to help you support your clients - whether they need flexibility, certainty, or a mixture of both:  

    Our retirement account has a clear charging structure, the benefit of family pricing and a range of funds with the ability to cope with volatile markets.  

    Where your clients want simplicity and guarantees for some or all of their retirement income – our annuity gives them exactly that, providing valuable peace of mind.

    There’ll be chance in the feedback survey to request specific information about any of the Scottish Widows support or solutions that I’ve mentioned. This will open up for you automatically as we end the webinar.

    Now I’m going to hand over to Tony Clark as we open up this webinar to questions.  

    In closing, I would urge you to check that your approach to vulnerable clients is in line with the latest thinking to deliver good outcomes.

    You can get more help with this from both the Guidance Consultation I’ve talked about – and from Occasional Paper 8.

    For more insight on a range of financial planning topics, visit the Expertise section of Scottish Widows Adviser website, where you’ll find our CPD masterclasses and technical articles.

    To hear from your dedicated relationship manager, let us know how we can help in the feedback survey that will appear on your screen shortly and we’ll be in touch. And do look out for details of our future webinars in your inbox and on our social media channels.

    We’ll be making a recording of this webinar available to you, so please feel free to share it with any colleagues who weren’t able to attend today.  

    Thank you so much for joining this webinar, my colleagues and I look forward to hearing your feedback and to speaking again to those of you who request support from us.





    Jan Holt, Specialist Development Manager

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    Paul Guthrie, Group Pension Product Expert and Graham Peacock, GSIPP and Master Trust Product Expert

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  • Pick up practical insights on how the Individual Retirement market is changing and how to plan for your client’s varied needs.


    Scottish Widows


    July 09, 2020

    06:00 AM EDT

    Siobhan Barrow:                 

    Good morning, everyone, and thank you for joining us today. For those of you that don't know me, I'm Siobhan Barrow, Head of Intermediary Distribution at Scottish Widows. Today, I'm joined by my colleague Gareth Davies, our Specialist Business Development Manager; and Alexis Ward, our Regional Development Manager. Gareth will be taking us through the presentation, and Alexis will host our question-and-answer session at the end.

    Now, to submit your questions, please use the "Ask a Question" function at any point throughout the presentation, and we'll pick those up and make sure we get to them at the end. The webinar is being recorded, and it will be available for you to share with your colleagues after the event, should you wish to.

    So in today's session, Gareth will share our thoughts on the recent FCA policy statement regarding defined benefit advice. This webinar forms part of our new expert series, which is a set of topical webinars, vodcasts, and podcasts, which sees our experts taking on some of the key issues in our industry to help you navigate the changing market. You can now find a number of webinars from the series available on-demand by our Scottish Widows social media channels. And some of our future topics, which I'm sure you'll be interested in, will include the focus on the economic outlook and industry initiatives that are happening at the moment, as well as a session on protection mental health underwriting. And I'm sure you'll find these and the other topics of use, so please keep a lookout for registration information in your inbox or on social media in the coming weeks. As today's session is such an interesting topic, I don't want to waste any time, so let's get started. Gareth, over to you.

    Gareth Davies:                    

    Thank you very much, Siobhan, and good morning, everybody. Thanks for joining us this morning, and we'll hopefully bring a little bit of pensions sunlight into what is actually an otherwise pretty dull looking day, quite frankly, out there. As Siobhan said, there's a bit to get to here. And for those who know me, this is a subject that's very close to my heart. It's a topic that I'm incredibly passionate about in terms of getting the best outcomes. It's an area of regulatory scrutiny that isn't going to go away anytime soon. But I think what pleases me most about the recent turn of events and the updates from the FCA recently is just the level of clarity we have now started to get from the regulator. For me, this is to be embraced. It is to be welcomed. We obviously expected the policy statement, and that probably didn't contain too many surprises for those of us who are familiar with the consultation that preceded it, CP19/25.

    What was most pleasing for me though, is actually the guidance consultation, GC20/01. And I'm going to refer to that throughout the presentation today. I kind of really dismissed the word almost consultation from it. For me, it's a guide. It's guidance from the FCA, and it's what best practice looks like. And as I said, I will continually flick back between the two papers, because I think the guidance paper is at least, if not more, useful than the policy statement for advisors.

                                                    I'm not just in the DB advice space, I would like to stress really at the outset. Again, I think the level of clarity and consistency from the regulator that we're getting across all areas of my world, of the pension space, is to be welcomed and is to be embraced. And let's be clear. The objective of all of these changes is to get a healthy, well-functioning, well-regulated commercially acceptable defined benefit advice market. And that's clearly in all of our interests. It's clearly in the consumer interest as well. So that's really the direction of travel.

    Just before we do that though, I do just want to quickly touch on freedom and choice. Obviously I'm not going to spend long on this, but this has been a game-changing pensions policy of just over five years ago now, continued to be embraced by the UK at large, and I think really the way I relate this to defined benefits advice is this is people really valuing that flexibility. And whilst I totally understand that and I get that, that flexibility does come at a price. And there's a lot of analogies to be drawn from pension freedom of choice that read across to defined benefits. So yes, freedom of choice had been clearly embraced. It's clearly proving popular. The trends continue to rise across the years that we now have the data for in terms of folk taking encashments flexibly from their pensions. The peaks you see there are always around the change in tax year, Q2 in every year, as people plan their payments to be as income tax efficient as possible.

    My only slight question mark around freedom and choice, because I've always been a big fan of it, is that customers need to be making informed decisions. And this is really at the heart of the defined benefits advice space, I think. While ever we have freedom and choice, there is going to be a demand from consumers to understand the trade-off of that certainty of income versus that flexibility of a lump sum today. And I think as an industry, what we need to get better at, is articulating at what price that flexibility comes.

    So are people making informed decisions? Well, the most recent example I came to when I was doing a bit of research on freedom and choice, was this chap here. It's a Telegraph article fairly recently, who made a pension withdrawal to start his own ‘Dorset’s answer to Jurassic Park’, apparently, which certainly put me in mind of the film. It's a bit of a tenuous one, but just bear with me for a second. I think this encapsulates not only freedom and choice, but also defined benefit advice perfectly. Just because somebody could do something, it really just bears in mind it is worthwhile to stop and pause, and think if they should actually do that thing. So as I said, that's my tenuous link back to Jurassic Park there.

    So let's have a look at final salary advice specifically. Now these slides almost go out of date as quickly as I produce them, because this is a fast-paced area of change. We know that. For those who've been across the headlines, British Steel and the poor practices that went on specifically with British Steel, have driven a lot of the Parliamentary scrutiny, the Work and Pensions Committee looking at the behaviours and the outcomes there particularly. And clearly the suitability is not great. The outcomes were not great down there, and that's driven a lot of this change.

    Obviously that is then played out across the wider DB market, less extreme but still the British Steel issue, as I said, is what's caused a lot of this change, I think. And as far as I'm aware, the British steelworkers were to receive their letters this weekend, in terms of asking them to proactively review their advice that has been received. So clearly it is important for all of us to ensure that we are getting good customer outcomes, evidencing best practice, removing as much risk, regulatory risk from what is the highest-risk, most complex area of pension planning I think there is.

    And the final update you see there in terms of people giving up permissions, I think we've seen that as an industry over the last 12 months. I personally believe that this will now start to slow down, and potentially stop, now we've got this level of clarity from the regulator. For me, demand is always going to be there, because of the freedom and choice reasons I talked about a second ago. And it's obviously in all our interests that there is enough supply in the market to cope with that demand for advice. And again, a final point from me on this more generic headline, is when it comes to DB, again for those of you who've heard me speak over the years, I'm very passionate. I always talked about defined benefits advice. I think where we've gone wrong as an industry is we've too many times jumped to outcome. We've headlined it as defined benefit transfers. And I think that is part of what is inherent in what's gone wrong in a lot of instances. This to me is a review of a legacy asset, and the outcome obviously is the outcome. But the advice is the commodity that the customer should be paying for, and it should be that they are attaching the value to. I appreciate though that DB is unique in the sense that customers cannot self-serve in this space, and that has instead paradoxically probably led to some of the poor outcomes also.

    So let's have a look at the actual policy statement. As I said, for those of who are familiar with the consultation paper, we kind of saw the direction of travel. It was probably the most robustly worded consultation paper, CP19/25, in terms of the FCA for me. We're obviously seeking views, but they were basically signposting a future direction of travel. And we've seen that in terms of the rules that have come in are broadly in line with the consultation paper, with a couple of notable tweaks, and one certainly -- an interesting one for me, which is a beefing up actually of one of the requirements that were contained in there.

    The timeline, essentially all of these changes are going to be enacted from the 1st of October. And that is the FCA actually listening to feedback from the consultation. Because if you remember in the consultation, the timelines for implementation were incredibly short. They were talking about a couple of weeks. They've now pushed that out. As I said, it's going to be implemented from the 1st of October, with some transitional arrangements for the following three months to complete recommendations for customers by the turn of next year.

    So as I said, this comes on the back of a lot of data gathering by the regulator. These are evidence-based decisions that the FCA is making here. And although we should take this clearly very seriously, it's not necessarily a personal slight against anybody on this call, because obviously as I said, some of the problems have been very well-documented, and have been very high-profile issues. But while ever the FCA is seeing suitability outcomes of around 60%, and more importantly looking at this slide, they're unclear. There's still a lot of unclear outcomes. And we must remember that this area of advice, unlike any other, we are giving a starting premise by the regulator. And that starting premise is that the customer shouldn't be giving up that pension promise. That is your starting position when advising. And that has been consistent. There was talk of changing that with previous policy statements back in 2018. But in the end, because of some of these poor practices, it never changed. So that's been an entirely consistent view via the regulator that we start from the premise that the customer is best served by retaining that pension promise.

    Now again, this is something I -- we hear the word unprecedented a lot in the news these days, so apologies for using it in this context. But I think this is unprecedented levels of consumer clarity from the FCA. They've really focused a lot on the consumer sections of their website. They've done two things which I think all advisors on this call would be worth taking a few minutes to just go and invest the time to have a look at this stuff. So firstly, they've produced some retrospective support for consumers who've received DB advice since pension freedom and choice, since April 2015 up to the current state of the nation. So people to look backwards and say, well actually, what does good look like in terms of the advice that I've received, and that there shouldn't be anything on there that is of any concern or of any surprise to anybody who's active in this space. This is just a reiteration of best practice. So the FCA is saying, if you look backwards, these are some of the things you should have been concerned about, if your advisor didn't ask these questions.

    Again, I think historically the FCA had too much concern about almost too binary a decision in terms of advice being based on one overriding consideration, whether that be potentially death benefit, whether that be potentially increased pension commencement lump sum or tax-free cash; without looking at a very rounded picture. And all of this Advice Checker is designed to do is to get the consumers to fully understand that it should have been a more rounded conversation.

    Now the second bit, and this is I think very, very useful for everybody who is active in the DB space; is it then looks to produce some forward-looking support for consumers who are thinking of considering a pension transfer, a DB pension scheme, for them to actually say, well, what does good look like. And why I love this is I think most IFAs I speak to now embrace some kind of triage proposition.

    If you are going down that route, and there's many ways to deliver a good triage proposition, and as I said, I'll focus on that specifically shortly. The FCA has actually produced some really good consumer-facing balanced generic text which actually could form part of any advisors', I think, triage proposition. They talk about the risks of transferring. They talk about who is least suited to a transfer. They talk about obviously who is best suited to a transfer. And so this to me feels very balanced. It feels very generic, and feels very useful for advisors who are active in this space to potentially take a look at this and say, well is there anything we can look to incorporate, to bolster our triage proposition as it exists at the moment. So I'd take a few minutes and just have a look, especially at the forward-looking consumer support. As I said, I've never seen the FCA consumer side so comprehensively updated in terms of a very specific area of advice.

    And then finally, they talk about what you should expect in terms of what a consumer should expect, what a good advisor process looks like. And I'm aware lots of folk will embrace the online video triage services, which I think are absolutely fabulous out there. The FCA have kind of almost produced a triage video, and I think it takes about 15 minutes, something like that. Again, even if you're not going to particularly signpost this video specifically, it's a good benchmark for which you can audit your own triage proposition. So as I said, I would take a few minutes and look at the consumer sites. I think there's some fabulous information. This is all to be welcomed. This is all to be embraced. Very useful for you to kind of lift and drop this potentially into your own propositions.

    So that's the consumer side. Let's focus on the actual policy statement, the advisor-facing bit of this. Because this is clearly the biggest changes, and also the most useful information in terms of supporting your advice propositions. So as I said, the FCA is looking to address harms that have gone on in this space. And that's a statement of fact. There's no way we can argue that some poor stuff has gone on here. So let's try and break this down and simplify this as much as possible.

    So what harms is the FCA concerned about? Well obviously poor transfer outcomes, but there's a phrase I use, which is actually high conversion rate. Again, if we jump back to the statements I made previously, the premise of the consumer should be starting from the position that they retain their DB pension promise. If we look at the figures, 235,000 took advice, 170,000 of them transferred. Now that feels like a high conversion rate. Now that doesn't equal poor customer outcomes, just to be clear. But the FCA will always have a bit of a question mark around that level of conversion rate for the folk going from advice to transfer. And I'm going to talk to you in a little while about ways I think you can help to mitigate that risk. But as I said, that doesn't mean poor customer outcomes. But high conversion rates is something we all need to be mindful of.

    The second harm that the FCA is looking to address in this change, and this to me is probably the most significant one, actually, is when a transfer has been recommended, if it is the right outcome for the customer. The FCA is now intervening in terms of the product and investment options that are out there, and setting new benchmarks in terms of the product recommendation. And as I said, I think this is the first time we've seen regulatory intervention really since RU64 way back in 2001. Again, something else I'm a big fan of here is the consistency of language from the regulator across all areas of pensions advice.

    So this paragraph at the bottom that I've highlighted here, this reads back across and this is why I took a couple of minutes to talk about pension freedom and choice. As I said, if there are any advisors on the call who don't specifically do DB advice in house, this is also very, very useful for all advisors advising in the to, and at, and through retirement space; especially the retirement income space. We know ASR2 advice suitability review 2 has been kicked into I think next year now. But you will also be aware the FCA is issuing questionnaires to advisors now around drawdown and CRP propositions, et cetera. So this transfer of responsibility, this transfer of risk and obviously in the DB space it's a transfer of risk essentially from the employer to the end client in terms of providing that pension benefit at retirement. That is where the FCA are going to be paying particularly attention in their new sort of slimmed down business plan.

    So as I said, the FCA specifically looks at DB in this instance, and they're going to take all of the changes that were headlined in CP19/25 in the middle of last year, and they're going to basically implement that as planned. Which as I said, I don't think comes as a surprise to anybody. The contingent charge ban I think was broadly expected within the market. Obviously the FCA have listened to feedback and have given us this greater transitional period, this timeframe. It was, as I said, I think it was originally intended to be nothing more than a couple of weeks before changes were implemented. They're now giving us until the 1st of October. So clearly this comes with a caveat that the FCA is going to be monitoring the market very closely between now and the changes coming into effect, to make sure there isn't any sort of short-term behavioural changes in terms of transfer activity. So that's just something for everyone on the call to be mindful of.

    So, what are the changes? Well, clearly bearing in mind this call is finishing at 12:00 and we will finish at 12:00 including question-and-answers, I'm not going to get a chance to run through all of the changes. I'm going to pick out probably three of the biggest changes. And actually the first one, the first bullet bullet I've brought on, on the screen here, for me is actually the biggest change. Because as I said, this to me shows a direction of travel in other areas. If you remember, the FCA issued a Dear CEO letter at the start of this year, and they highlighted areas for potential consumer harm, and products and investment cost was an area of particular scrutiny. And for those who are active in the DB space, you may well have received the latest FCA questionnaire in this space. Regulatory scrutiny isn't going away, and they specifically looked at product recommendations that fall into various kind of charge bandings. So I'm going to spend a minute looking at this requirement in terms of here's a new requirement where the FCA are now saying, here's a benchmark of what they believe good looks like in terms of the product and investment customer outcomes.

    The ban on continent charging, as I said, I think we expected it. There's no real surprise there. I think it's a positive move. I think it removes any possibility of outcome bias. If there is no remuneration differential between the two different advice outcomes, which is to transfer or not to transfer, then that should remove a lot of the consumer harm we've seen with some of the poor practices. So that's to be welcomed. But I realize also that will bring some challenges in terms of accessibility for advice. But I think then this is the one area of policy change that I don't mind admitting when I get things right, and I certainly don't mind admitting when I get things perhaps wrong. And this area is something I've changed my mind on certainly. I wasn't a fan of abridged advice. I was concerned it could sort of seep into full advice, that the boundaries wouldn't be clear enough. It wouldn't have that clear blue water between the different types of advice, that customers wouldn't understand it, and that actually IFAs by embracing this could bring more risk into their business.

    I think again, whether you are personally a fan of these changes or not, you've got to be a fan of the clarity that these changes bring with them. And the clarity the FCA has given us around abridged advice is to be entirely welcomed, and I'll come back to that in a second.

    Disclosure changes, again, I'm not going to cover that. But I will refer very briefly to the guidance or really the guide to DB I suppose I would call it, in terms of the FCA is giving you some sample wordings for how you could set out your advice propositions. Again, absolutely brilliant, you guys can lift and drop this, if you wish to, to fully embrace these changes in a way that the regulator is telling you looks like good practice. And CPD changes I'm not going to cover. Basically, you have to have more robust CPD, 15 hours of CPD to improve the professionalism. But I'm not going to spend any more time on that.

    And the final point is the one that, as I said, this isn't going away. Data gathering, data requirements, constant monitoring, the FCA is going to be continuing to do this in the run-up to October, and then clearly beyond October to see how these changes are being managed within all of our businesses. And I think that's to be welcomed, given this level of clarity, quite frankly.

    So as I said, the first one is actually the most simple one really, the simplest one, the contingent charge ban is going ahead. Given that starting premise, they believe if consumers can't afford advice, they keep their DB scheme. And given that premise, effectively nobody is harmed by retaining that pension promise. Whether you agree with that or not, I think the final point on this slide for me is the most important, and it's something I've always been passionate about. I think that's brilliantly worded ‘a ban places a value on the advice itself, rather than on the transaction’. And for me, that will undoubtedly enhance market integrity. And that is to be welcomed. For those of us who want to play an active part in a well-functioning market after October, that's absolutely to be embraced.

    So yes, the FCA, although high conversion rates are a concern, it's difficult to prove that causal link. But basically everybody is going to have to charge that same monetary amount for the advice, regardless of the outcome. Now I know from speaking to advisors up and down the country over the last five years at least, most IFAs have probably moved to a business model that was a flat fee, together with a potential implementation charge if a transfer proceeded. And I understand that, because arguably there is more work involved in recommending a transfer product, so actually an investment process, risk-profiling, et cetera. And so one could argue this is going to mean that there's some cross-subsidy in the DB advice space. The FCA acknowledges that and is comfortable with that, because that is preferable to the extremes of remuneration differential for different advice outcomes, so different consumer outcomes. So for any advisors out there that they're charging an advice fee plus an implementation fee, just to be clear, that won't be allowed from the 1st of October. You are going to have to have an entirely unbiased, in terms of no difference in terms of the remuneration that the customer is going to pay regardless of the outcome, so pretty clear in that view.

    As I said, there's an interesting point here though which the FCA acknowledged actually back in the consultation paper that this will mean some people can't get access to advice, because they can't afford to pay for it. As I said, just to be clear, I think the FCA are pretty comfortable with that actually as a heading. However, what we could say, and again this does make sense to me, is that starting premise may not actually make sense for two specific groups of consumers. And this is obviously a massive generalization. But effectively, those who are in ill health, they may not receive the full value of that pension promise and they may be better served by getting access to a lump sum today, and there could be obviously an inheritance tax benefits, taxations benefits, et cetera; and those who are in serious financial hardship. And so they've proposed and they're going to implement two carve-outs.

    Now actually this is a slight change from the consultation paper. Effectively, this is one carve-out dressed up as two, and I'll tell you why that is in a second. These are to be used by exception only, and these are clearly not a way to gain the contingent charge ban. These are a way for people to access advice who haven't got the means to pay for it in a specific set of circumstances. So serious ill-health is the first carve-out. This was going to be a standalone carve-out, and this is where the FCA have actually made a change. So if I'm in serious ill health and I receive a terminal diagnosis, some bad news from my doctor; that doesn't necessarily mean that I am not able to have an affordability -- to be able to afford to pay for your advice. That doesn't impact on that at all. So although serious ill health was going to be a specific carve-out on its own, serious ill health will basically be applied alongside the affordability criteria. So the affordability carve-out is effectively the lead carve-out if you'd like. So customers can self-certify that they have reduced life expectancy prior to age 75 the FCA have picked for taxation reasons I think. But you still have to demonstrate the affordability issue.

    So this is really the key one now, the serious financial difficulty, which was previously financial hardship carve-out. And the FCA is looking at things like the money and pension service definition of financial distress basically. And clearly this is significant distress in terms of unable to keep up with domestic bills or credit commitments. Clearly there is a lot of risk in embracing these carve-outs, especially obviously via the affordability one, because there's behavioural issues there. So as I said, these are in my mind to be used by exception. But I think it is important and this ties in quite nicely with one of the expert series that we did recently, my colleague Jan Holt, a real expert on vulnerable customers within our business. We're very fortunate to have her. She delivered a webinar and the recording is available online, if you want to go back and have a listen to that. So if you are in serious ill health, if you are in serious financial hardship, clearly you are by definition then a vulnerable customer. So it's very important that firms have clearly articulated vulnerable customer processes in place, and obviously indebtedness, there could be other ways to solve that particular problem. So as I said, these carve-outs make sense to me. They're clearly articulated now, clearly defined. But if you're going to use them at any point, you need to embrace the vulnerable customer updates from the FCA.

    And again, this is my first foray into the guidance. As I said, I'm going to call it guide to DB advice, although actually I think it's even broader than that, quite frankly. As I said, it's almost a guide to our retirement advice. This is GC20/01. This is your how-to guide really. As I said, this is where the really interesting stuff is. So this talks about how advisors can manage the carve-outs and how your policy can be articulated. So again, I'm not going to dwell on it, but please take the time to go and have a look at that, if you're going to be using any or offering any of the carve-outs as an option within your practices.

    So let's talk about abridged advice, because the biggest objection to all of these changes as an industry would probably be consumers are really going to struggle to pay for our fees. So there's going to be an accessibility challenge there. And as I said, we must remember the FCA is broadly comfortable with that, because people are best served in their view by retaining their DB anyway, all things being equal. So I think abridged advice does two things really well. I think it does enable you to offer an overview of the client's holistic financial situation, including their pension promise, without specifically considering the CETV and the transfer itself. So it improves access to at least some form of advice for consumers. And actually I think it helps advisors demonstrate this kind of funnelling process, as customers move through your advice process. So from triage at the first touch point through to abridged advice, through to full advice, and then obviously to an eventual transfer or remain recommendation. Abridged advice could be a really useful filter.

    And I think, and quite frankly a lot of advisors have almost been doing some form of abridged advice. But this allows you to formalize this process. It is regulated advice. You have crossed that boundary from triage, which is generic education, or balanced, et cetera, non-client-specific. Abridged advice is personalized. The FCA has given us now real clarity in terms of what abridged advice can and can't look like. So firstly, you can't include an APTA and therefore consider the TVC as part of that. So you're just considering the customer's overall financial position and the pension promise as part of that. This is not in the guide to DB advice, this is Gareth's own personal tip. Because abridged advice could only lead to either a remain recommendation or to an unclear, and if it's unclear it's then up to the customer if they wish to proceed to full advice or not; again, just for the sake of clarity, you can offset the cost of abridged advice against full advice. So if the customer pays for abridged advice, they're not effectively having to pay twice for the work you've already done at that stage of the advice process. You could offset that, if you choose to.

    But as I said, I think abridged advice improves that accessibility. But the risk of remaining in a DB scheme is probably a mortality risk. That's the biggest risk. I know we can talk about employer funding and strength of covenant. But arguably, we're probably not in a position to comment thoroughly on that. But the one risk of me keeping my DB is obviously dying and not seeing the full value of that pension promise. So my view is, if you're going to consider abridged advice, it might be worth evidencing some form of protection conversation at this stage, just to show the customer the inherent risk of retaining their DB scheme, which is as I said, a mortality risk, and then the fact that they could insure that, they could look to insure that risk if they want to; that's just Gareth's tip. As I said, that's not included in the guide to DB. And important to state, this is regulated advice, so it still has to either provided or checked by a pension transfer specialist.

    And again, I love this. Skipping across back to the guide, the FCA has articulated for you abridged advice and how that could fit into your advice process. They articulate that as a 2-stage advice process, which is brilliant. So if anybody wants to kind of come up with the wording in terms of how are we going to describe abridged advice to our customers, then there you go. The regulator has already done it for you, and they've said what then could lead to stage 2, which is your sort of full fat advice, and what the differences are in terms of your advice proposition. And obviously, I'm going to come to this towards the end, you're going to have to disclose the cost and charges around that as well, importantly, up front.

    So as I said, that's abridged advice. I think it's to be embraced. Important again, you can't do any of this stuff until the 1st of October. So just to be clear, this is all preparatory stuff to give you time to consider if you wish to factor any of these opportunities, these options, into your proposition. Obviously, a lot of this stuff is mandatory that you don't have a choice regarding the contingent charge ban, et cetera.

    So let's have a look at this one, because this to me is the biggie, as I said. And the reason why this is the biggie is not because this is just about DB advice. This dovetails into all other areas, certainly of my little world, which is pensions. As I said, the FCA have already issued Dear CEO letters, talking about potential consumer harm with product cost. And I just want to be clear here. This is about our value proposition. This is not about your value proposition. So this is about the product and the investment solution ultimately that would be recommended if a transfer proceeded. And the FCA is setting, as I said, I view this as a revisiting of the RU64 stakeholder legislation, except this is more robust. It cannot be done as a standard paragraph, and it needs to be a robust consideration of the workplace pension scheme. And this is quite a clever move really, because workplace pension scheme comes with a lot of protection around default funds, which aren't available in other pension propositions, and also it comes with an inherent charge cap, which is 0.75, 75 bps.

    Now the other reason why I want to really draw your attention to this is because there's a direction of travel consideration here. Pretty much all of the other changes with tweaks in the consultation paper, the common-sense tweaks in that have been brought in. This is a change that's been escalated, that's been beefed up. In the consultation paper, the original proposals with the workplace pension scheme had to be at least suitable -- sorry, the products you're going to recommend instead of the workplace scheme have to be at least as suitable, now has to be more suitable than the workplace pension scheme. So that gives you, as I said, a good insight into the regulators' thinking in this space. And as I said, it shows you the level of importance they're putting on this.

    I believe, through speaking to advisors across the UK, although many people may have considered the workplace scheme, it's probably been dismissed a bit too easily, shall we say. This is going to be more work. We might as well call this out straight away. There's going to be more work involved, because this is going to have to be a big part of your ultimate product and investment consideration. The good news is though, the FCA again has listened to feedback from the consultation, because there could be consumers out there who have jumped around the workplace. They've got several workplace pension schemes, and it would be obviously a pretty time-consuming activity to go and consider all of their historical schemes. They've now amended their rules that you only have to consider the most recently joined workplace pension scheme. But because of the success of auto-enrolment, 10 million folk auto-enrolled into pension, more people saving than ever before because of auto-enrolment. You're probably going to find that the vast majority of customers that you speak to have a workplace pension scheme potentially that can receive the transfer.

    And I think the challenge for everybody on this call is probably that you're not the advisor. And again, it's a generalization. But you'll be the advisor for the consumer, for the client, but the employer won't be your client, I think, in most instances. So straightaway, there's going to be an extra data-gathering requirement there to understand the consumer's workplace pension. Will it receive a transfer? What are the charges? Because most workplace schemes via product providers such as ourselves and our competitors, are priced on a bespoke basis. So you need to understand this. You need to build this into the APTA that you're going to do. This will be factored into the APTA software, this consideration. And this will apply to everybody, so that there's no exemption from this.

    So you've always got to consider it. How would you actually then potentially not -- what are the valid reasons for not using the workplace pension scheme? Well, again, really interesting. I think that the FCA has learned a lot of lessons from RU64, where people have perhaps used insufficient fund choices as a way to sort of sidestep the stakeholder requirement. The FCA is going to be really scrutinizing when you've not used the workplace scheme in the future. And things like fund choice on their own may not be a good enough reason, unless the customer has got a history of needing more complex investment decisions.

    I think this actually does something else. And this is just my view actually, just as an aside. I think this pushes DB advice to the older demographic, and by older I probably mean age 50 and over, because many workplace schemes won't facilitate or don't currently facilitate the range of drawdown options, beneficiary's drawdown options, et cetera. Most advisors will probably operate a very different CRP to their CIP, their centralized retirement proposition. We hear a lot of folk who keep short-term they need cash, or for these types of two or three parts for drawdowns, or using DFM, whatever it happens to be. So I think this will -- and this is basically what the FCA want to see. So those who are a long way away from crystallization and I won't use the word retirement necessarily, they believe the workplace scheme would do a very good job for them in the accumulation phase. Obviously in the decumulation phase, things could look different.

    For me, this second point though is actually the most important. Because this is an objective comparison. So we can come up with all sorts of subjective reasons why the customer might not want to be in the workplace scheme. But actually the only objective metric we can ever pick is cost and charges. So the FCA is giving you, and as long as I've been in this industry which is almost 30 years now, people have asked for clarity. So the FCA say they're interested in good value or they don't tell us what that looks like. What they are doing now, they're telling you good value in terms of products and investment consideration looks like the workplace charge cap. And just to back that up, and this presentation was put together before the recent FCA letters had gone out; the recent FCA letters specifically asked the question about products that have been recommended up to 0.75, and then 0.75 and above, and so and so forth.

    So let’s be in no doubt this is an area where the FCA are going to have a particular focus, a particular lens on product cost and charges, as I said, our value proposition, as a product provider to you. So as I said, this to me, if you're going to pick one reason to not use -- to consider but then dismiss the workplace, cost and charges is a very simplistic objective metric to use, I feel. But I appreciate that doesn't mean that everything has to come in within the workplace charge cap. But clearly it looks to me like if you're going to go above that, it's going to have to more and more be by exception rather than the norm.

    And this is the final bit. And this is received I think an undue amount of attention, is ongoing advice necessary? I think that's a fair question to ask. And I think everybody on this call can clearly articulate their own value proposition to their clients. So personally, I've got not concerns about this. This is just a clear line in the sand between our bit and your bit really. And I think if more and more of this type of advice is done in the run-up to retirement or run-up to crystallization, then it's actually very simple to articulate an advisor proposition as part of your CRP, and even as part of your CIP. I'm sure most advisory firms now have got this stuff pretty well nailed. So don't be in any doubt that the FCA is not intervening in your remuneration structures. They're not looking to price cap your remuneration structures in any way, shape, or form. There is just a challenge, the question mark there is ongoing advice necessary, because in the workplace, most employees do not get that ongoing advice, hence why we have a charge cap and hence why we have a robustly governed default fund solution. So that is just a question that I believe all IFAs are very well placed to answer.

    So let's start to bring this to a close in terms of some of the other bits. Those are the main sort of three areas that I talked about there. The FCA again are looking very clearly at disclosure. My view is, I think advisors could start to disclose as part of your triage actually. I think you could drag it right up to the very first customer touch point. So the customer could go through your triage proposition, and then see exactly what abridged advice is going to cost, and see exactly what full advice is going cost, and then you will see that drop out as customers move through those processes. And again, absolutely love this stuff. Here is your guide, jumping back to the guide, good practice. This is what good looks like. It's complete clarity from the regulator in terms of here is a good charging disclosure. You'll see there this is a percentage-based charge. I said before the FCA isn't intervening in terms of moderating your remuneration structure or price capping in any way, shape or form. Percentage charging is still fine, as long as you charge that percentage for the advice, and not for the outcome.

    So again, the FCA is giving you that brilliant level of clarity here. Here is a sample service proposition. So for full advice, this is what we charge. For abridged advice, this is what we charge. And they're actually articulating it there brilliantly. This will be offset against the cost of full advice, if you proceed. And there's some sample costings there. Most advisory firms I've spoken to so far are probably having another look at abridged advice now. They think it does bring something to their advice proposition, and they probably typically are going to charge between GBP 250 to GBP 500 from what I've seen. In terms of your actual advice process and full advice charges, I still see a sort of range in terms of do people charge a flat fee, are people planning on charging a percentage fee, some kind of mix and match of the two, with decency limits, a cap and collar. We'll never charge more than x. We'll never charge less than y, whatever it is. Important the FCA is giving you still the freedom to set your service proposition as you see fit, which is great.

    Now cashflow modelling is a presentation in itself really, and I would urge anyone who's on this call who wants any further information on any of this stuff we're talking about this morning, please get in touch with your local Scottish Widows contact, because we've got a lot of supporting information on all of these areas. Again, an area I've been very passionate about, I think we should be moving away from provider proprietary type tools. There's an awful lot of independent tools out there. It's up to you to do due diligence. I think cash flow modelling is a very powerful part of not just DB advice, any advisor retirement proposition quite frankly. But there is a challenge around cash flow modelling, because effectively it's an illustration, and therefore it's out of date as soon as it's produced in many ways. So the FCA wants to see more robust stress testing, so building a volatility stress test in there. I would build a mortality stress test in there as well in terms of what age you might drag that out to. Again, the guide gives us some indication here.

    But in terms of cash flow modelling, again, this is sort of Gareth's tip really. I would actually get the client to specifically sign off on the assumptions you use within the cash flow model. Because I think that's very, very important that the customer is comfortable with, let's say, the growth rate assumptions or even the inflation and interest rates assumptions that they're using. And this could be a brilliant part of your review conversations with the customer. Because with the best will in the world, it is just assumptions. It will turn out to be wrong either as I said, optimistic or too cautious, and it's important the client is comfortable with the assumptions that are used. So in terms of your cash flow modelling, I would specifically get the customer to sign off on the assumptions you use, as well as the stress testing within the modelling that you're doing.

    Data collection kind of speaks for itself, doesn't it? If you're not already, and you are using triage, please ensure from the very first touch point the customer has with you that you are recording that all the way through that advice journey, so from triage to abridged advice if you offer it, to full advice, to obviously transfer, the outcome will remain outcome. This is not going away, and this is going to be beefed up. So clearly the FCA has slight concerns around the carve-outs and they want to make sure they're being used in the appropriate way, which is absolutely understandable. I would suggest as well the workplace requirement. You always have to consider it, from the 1st of October -- sorry, you have to consider it. If you're going to dismiss it, the FCA is going to want to understand why you're dismissing it. And as I said, we're seeing the letters going out right now in terms of the charge basis and them understanding those product selections.

    So as I said, this is useful stuff. This will help with the future PI market. And I suppose that's one of the most important aspects of these changes, is this will give us a better functioning PI market. I honestly believe that in the future. I think actually this is going to make the DB advice space as attractive as I've ever known it within this industry, once these changes are implemented. And I think that's for the good of us, and I think that's for the good of the consumer as well.

    So as I said, recordkeeping becomes incredibly important, and please record-keep from the first touch point, as the customer moves through your process, even if they don't proceed from triage to advice. Ensure you're recording that kind of dropout, if you like, of all of those consumer interactions.

    So I talked very briefly about triage. These changes effectively came in almost at the time actually, because of the fact that most advisors should have been doing this anyway. In terms of what good triage looks like, that shouldn't have come as a surprise to anybody. But again, it's covered in the guide, so it should be balanced. It's should be unbiased. It should be factual and it should be non-personalised. I think every advisor that I speak to is pretty much has been in that place. There's obviously various ways to deal with the triage process. As I mentioned before, you can have a good robust generic document and that you can construct yourselves, and you can do that with support from the FCA. As I said, looking at that consumer site. Incorporate that balance into your triage, and incorporate there. You know, well who's best suited to transfer and who's least suited to transfer? Thank you very much. That sounds like the makings of a really good balanced factual, unbiased, non-personalised triage document. So that's why it's worth having a look at the consumer site, I think. But again, as I said, whether it's a written document, whether it's one of the online services, there's some great support out there. So just whatever you embrace, make sure you're recordkeeping and make sure it ticks all of those four boxes as an absolute minimum.

    And this is the customer journey really that we go through, and this was included in the consultation paper, just very quickly really. If you imagine this as a kind of funnelling process, so every one of the approaches you get triaged, because that's probably no cost, for the reasons we've talked about before. You then cross the boundary into abridged advice. People will probably drop out at that point, because there's a cost involved. Proceed to full advice, there will be a further dropout at that point, and then proceed to transfer. So when I talk about the mitigation of high conversion rates, I think that type of customer journey, embracing all of those tools in your DB kit bag I think will be very useful in the future. And as I said, turning back to the guide, they've actually set out some scheme data templates. So to help with your data gathering,  it's all covered in there, the DB guide.

    So I'm conscious of time and I just want to finish off on one last bit really, which is this. Because this has been a hard one to quantify. Advisors have talked about this. So attitude to risk is easy. Attitude to transfer has always been a challenge since it was first talked about way back in the policy statements in 2018. What's brilliant here is the FCA have finally given us absolute clarity in terms of assessing attitude to transfer, as well as attitude to risk. And they talk about capacity for losses, the phrase I've heard a lot from my investment colleagues. And again, what's brilliant here is the FCA had talked to you about well, this is what capacity for loss looks like. Can you identify these things? How reliant is the customer on their DB pension promise? Is it literally their only asset in retirement, in which case their capacity for loss is clearly significantly reduced? Or actually is it part of a retirement kit bag that the customer's got where actually if they were to suffer a fall in their DB value, they've got other areas?

    And I suppose the final point for me in all of this, and this just doesn't apply to DB advice, is I would be looking to at least illustrate to the customer the opportunity to secure that income via annuity illustration. That's all areas, as I said, not just DB. I would be getting, as well as I talked about a protection illustration as part of abridged advice and full fat advice as well; I would be getting an annuity illustration for the customer. And I don't think that just applies to DB. As I said, I think freedom and choice has been embraced, which is brilliant. But customers need to understand what the options are in terms of that pension promise. It goes right back to the first studies Scottish Widows did when freedom and choice came in, which is if you ask people if they want an annuity, folks say they're not that bothered. If you ask them if they're interested in a guaranteed income for life, suddenly everybody sits up and takes an interest in that. So an annuity illustration can be a very, very useful tool to help underpin that discussion about the customer's needs and objectives. And the FCA talks about three levels of spending, three tiers of spending here, it's essential, lifestyle, and discretionary. However you do it within your own practice, three tiers feels about right to me. And whatever badges you put on those, I think there's one thing you've always got to be super clear on. The FCA wants to see that clear articulation of needs being secured before objectives, and that clear blue water between both of those things.

    And again, just to finish, this is what the FCA says. These are the types of questions you could ask to establish client needs, and to establish needs and objectives, and how to balance that out. So again, whatever we think about all of the changes I've run through over the last sort of 45 minutes or so, we can't say there's a lack of clarity now from the FCA. And as I said, if you don't read the policy statement, go and have a look at GC20/01, because I think it's absolute dynamite.

    I'm conscious of time and bearing in mind Siobhan probably took a couple of minutes, I'll say, to introduce me; then I think that's pretty much 45 minutes. All of the support that we've produced for you today, together with a shortened vodcast of this, together with other DB supporting material, will all be available on our Change Hub within the next week, updated to reflect PS20/06 on the guidance consultation. Obviously this is part of our broader support for you that Siobhan mentioned at the top of the call in terms of this expert series. But there's obviously a lot of other stuff we do around Tech Talk. I still think one of the industry leading publications. And I'm not just saying that because I write for it from time to time. I've always been a fan. But a range of support that's available, and just to demonstrate hopefully that Scottish Widows is standing shoulder-to-shoulder with you, even through these slightly challenging times, shall we say.

    So I'm conscious you've heard a lot from me. Hopefully you'll agree, we've pretty much nailed all of those learning outcomes. And obviously because we've got such structured learning outcomes, we will make sure that CPD follows. And obviously for those of you in the DB space, DB-specific CPD should be a very useful thing. But I'll just pause for a second now, and I will pass the ball over to Alexis and just see if we've got any questions following that presentation. But thank you very much for listening to me so far either way. Alexis, over to you.

    Alexis Ward:

    Thank you, Gareth. And thanks for your insight and passion on this really important subject for our industry. We have received numerous questions, so we won't have time for them all. But we will ensure that all the questions are answered and sent after this with the recording.

    I guess Gareth, I'll start with the first question. Do you think the FCA is moving away from principles-based regulation and that GC20/01 will lead to tick-box approach to compliance requirements?

    Gareth Davies:                    

    That's a fabulous question, and probably something I should have talked through earlier in the presentation, actually. That's a great question. So yeah, the FCA absolutely has historically or in recent times looked to this kind of light-touch high level. And I think because of the considerable harm that's gone in DB, as you quite rightly said, Alexis, I'm very passionate about this. I think this can be life-changing stuff, but sadly we see it life-changing in a bad way from time to time, unfortunately. And it's something that those of us who have been in the industry have seen sadly before as well. So I don't think it's a move to rules-based regulation specifically. But I do think this should be embraced as an opportunity. Because as I said, from my 30 years in this industry, in all of those 30 years I've been out speaking to advisors, to IFAs in one way, shape, or form; the one thing I've heard consistently across that time is well, tell us what good looks like. Give us clarity. Don't retrospectively legislate and then come and tell us how we were doing it wrong.

    So I don't think it's a move from principles to rules-based regulation specifically, and I certainly wouldn't welcome the phrase sort of tick-box. But I would absolutely agree with the direction of travel here that the FCA is being very, very clear in terms of what good looks like in terms of product and investment value for money, what good looks like in terms of how we articulate our value proposition to our customers, and obviously all of the other areas which I won't run through again. So yes, I think it marks a direction of travel, a change of direction of travel. And I think it's to be embraced across other areas. I mean I can only speak for pensions. That's my world tragically for those folk who know me in many ways.

    So pensions are my world, and I think across all areas of your client's pension proposition, this is to be embraced, and it's to be to a lesser or greater extent, as I said, factored into your advisor propositions. So yeah, I think it does mark a change in direction of travel. I think it does mark an almost losing of patience from the FCA in terms of you know, we've tried this lighter touch, especially in DB. We're still seeing poor stuff happening, so we're going to have to be more prescriptive. As I said, I wouldn't go as far as saying rules-based, but certainly more prescriptive than they've ever been in terms of what good looks like. But I think, as I said, let's embrace that for what it is. This will enhance market integrity. This will enhance customer outcomes, and this will make it actually improve the risk metrics for advisors operating in this space. And I firmly believe this over time it will improve the commercials over time, things like PI cover. PI insurers are going to be a lot more willing to get involved if we can clearly articulate our advisor propositions and demonstrate how that -- I'll use that phrase -- ticks the box in terms of what the FCA says good looks like.

    So in terms of your future PI conversations, I think this will be incredibly useful. And if I was an IFA starting from scratch, from the 1st of October. I would probably think this is one of the most attractive markets to be in quite frankly, because demand isn't going anywhere because of freedom and choice. Supply has contracted, but I think we'll see that kind of start to bottom out now, and less-- thankfully the Chancellor isn't starting up today, so I don't need to check my BBC News alerts. But unless the Chancellor changes freedom and choice in the next few days, weeks, or months; then I think this is going to be an exciting market to be involved in.

    Alexis Ward:                        

    Okay. Thanks very much, Gareth. Lots of questions about charges and VAT. And I'll try to keep them simple. Has the FCA provided guidance on what charges should be, and does a charge have to be equal no matter what the fund value is? And finally, do we have to charge for abridged advice?

    Gareth Davies:                    

    Ooh, so there's a few there. So the charge can be a percentage-based charge. So I do still speak to advisors who want to charge a percentage of the fund value, but it has to be for the advice. So if you want to charge 1% which for GBP 1 million is GBP 10,000, if I've done the math right; then that's GBP 10,000 the customer has to pay regardless of that advice outcome. So there is no moderation of your advisor charge propositions. And I suppose I should have said, and I don't think I actually clearly stated this. There is no banning of advisor charging, actually. So you can still take that charge via the product. So no intervention by the FCA, you can charge based on a fund value. You can charge a percentage. You can do advisor charge. All of that type of stuff is entirely up to, to set your own ground rules for your own practices and what works best for you, quite frankly.

    The VAT one is a really interesting one. I had this asked of the FCA. I was on a call with them last week, actually. So we know the complexities around VAT and product intermediation, and I still think the lack of clarity here; the FCA will not comment on that, and in the policy statement they specifically refer you back to HMRC guidance. So again, it comes back to product intermediation as to whether VAT is chargeable or not. The FCA won't provide any commentary on that. So their view is this shouldn't affect the VAT status of your advisor proposition. But as I said, I specifically heard this question asked of the FCA, and they weren't prepared to comment on it. So I'm certainly not going to do that.

    Alexis Wood:                      

    Okay, Gareth. And just in the interests of time, one more question. Does abridged advice require a pension specialist or is that only required at the full stage?

    Gareth Davies:                    

    Oh, and there was a question about charge of abridged advice, sorry that's reminding me. Yeah, very good. So abridged advice has to be checked by a PTS. It doesn't have to be delivered by a PTS. So it is a controlled function. So once you've crossed the line from triage and to abridged advice, then you are in a regulated advisory framework, and it has to be a PTS, if not giving the advice, then has to be checking the advice, so to be treated in exactly the same regulatory way as full advice.

    I'm not actually clear myself in terms of whether abridged advice -- I need to go back and have a look actually whether abridged advice needs to be charged for. The FCA guidance paper talks about abridged advice being charged for. For me, I'm not sure why you wouldn't charge for it, because if you are going to do that level of generic data gathering. An IFA described it to me brilliantly. They sort of said, you know, abridged advice is when we look at holistically the client's financial position and then their retirement needs and objectives, and we consider the DB income, not the transfer. The income is part of that. Now that to me is a few hours' worth of work, a couple of hours' worth of work, even if you're not getting to cash flow modelling and APTA and all that type of stuff.

    So I'm not sure why one would even not charge for it. For me, the fact you can offset that charge against full advice is a really useful tool, because the customer never feels like they're going to be paying twice for the same thing. So as I said, I don't think I've seen anything in the policy statement which says you have to charge for abridged advice. But I think I would certainly say most advisors I would anticipate charging. And actually, I've lost track of how many of these conversations I've had over the last three or four weeks since the policy statement came out. But every advisor firm that I've spoken to is looking to probably charge between as I said, GBP 250 at the low end, GBP 500 seems sort of top end to make the advice accessible, at least as a holistic planning exercise.

    And as I said, you could end up with a protection recommendation out of it, because they just want to insure the risk of remaining in the DB scheme, or indeed it's a great route into financial advice in terms of obviously identifying other needs and objectives. So I think you should charge for it. I think there's a value to abridged advice, unquestionably so in terms of what will be delivered. Whether you have to or not, I haven't seen that in there. But my view is you should, yes.

    Alexis Ward:                        

    Okay. Thanks very much, Gareth. And that brings the questions to a close today. And as I said, Gareth will go through the rest of them and we will release these answers when we send over a copy of the webinar and slides. Can I also ask that you complete the feedback survey that will appear on your screen shortly? And look out for information on our future webinars in your inbox and on Scottish Widows Advisors social media channels.

    Finally, I would like to thank our speakers today, and most importantly you, our audience. We look forward to speaking to you in the future. Thank you.




    Gareth Davies, Specialist Business Development Manage


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    VIDEO – VODCAST – 12mins


    Gareth Davies, Specialist Business Development Manager

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    Scottish Widows


    July 01, 2020

    04:30 AM EDT

    Siobhan Barrow: Good morning, everyone, and thank you for joining us today. For those of you that don't know me, I'm Siobhan Barrow, Head of Intermediary Distribution at Scottish Widows. Today I'm joined by my colleagues Gavin Jobson-Wood, our Specialist Business Development Manager; Maria Nazarova-Doyle, our Head of Pension Investments; and James Phillips, our Regional Development Manager.    

    Gavin and Maria will be taking us through the presentation, and James will host our question-and-answer session at the end. Now, to submit your questions, please use the "As a Question" function at any point throughout the presentation. The webinar is being recorded, and it will be available for you to share with your colleagues after the event. Today’s session is on the evolution of our pension funds, which has become a real focus for Scottish Widows this year. And therefore, we're looking forward to launching this new strategy with all of our stakeholders. The webinar forms part of our new expert series, which is a set of timely and topical webinars, vodcasts and podcasts, which see our experts taking on some of the key issues in our industry to help you navigate the changing markets.  

    Last week, we launched the series with a session on supporting vulnerable clients, which is now available on-demand via our Scottish Widows advisors social medial channels, and some of our future topics will include the FCA's policy statement on defined benefit advice; an update on all things policy, legislation, and regulation; as well as a session on protection mental health underwriting. I'm sure you'll find these and our other topics of use, so please keep a lookout for our registration information in your inbox and on social media in the coming weeks.

    Now, today's session is such an interesting topic, I don't want to waste any time, so let's get started. Gavin, over to you.

    Gavin Jobson-Wood: Yeah thanks, Siobhan, and good morning, everybody. It's a pleasure to be speaking to you this morning. So we'll in due course, I'll be handing over to Maria to go into some detail about the evolution of our pension portfolio and retirement portfolio funds. But before we do that, for some just background context, just an overview for those of you that aren't familiar, of our flagship individual pension proposition retirement account. First launched in 2006, a very contemporary plan, providing access to both retirement planning, i.e. accumulation and income, within the one product structure; and a broad range of investment solutions available for you to recommend to your clients, and indeed fit in with your own centralized investment proposition. And increasingly, with the advent of pension freedoms in 2015 and the popularity of flexible access solutions, the centralized retirement propositions that are becoming more apparent in the marketplace are identifying the specific needs of the clients as they approach and are in retirement.

    So a broad range of investment solutions within the one product wrapper, which gives you the ability (ph) to have both the differentiated investment and advice proposition, retirement proposition for your clients, but also the full flexibility of different styles of investment solutions that are available within that one plan. And importantly, whilst not detailed on this slide, the product or service charge, the product charge relates solely to the investment value held within the plan, as in an independent consideration from the investment funds that you select for your client.

    What we have seen in recent years, however, is a significant increase in the popularity of multi-asset fund solutions. And that's evidenced by both discussions that we have with our advisors, but indeed the fund flow that we've seen in the last five or six years into our retirement account, and in particular, our core range of multi-asset funds; the pension portfolio family of funds that are all mentioned there in the centre of this family tree of investment solutions within retirement account. So the original pension portfolio funds are at the heart of this proposition, and it's they plus the -- their very closely aligned retirement portfolio fund solutions that we'll be talking about in detail today. But they're also married up with a more diversified range of funds, a blend of active and passive components within the premier pension portfolio funds.

    So at Scottish Widows, we're not actually asset managers as such. We do clearly have a significantly large range of Scottish Widows in-house life and pension funds, totalling over GBP 130 billion worth of customer assets. But we work with third-party asset managers who manage, to a great or lesser extent, different components within our funds, depending upon the mandate. We do, of course, have investment responsibility within our business, and a responsibility for the ongoing governance and stewardship of our entire fund range, working in collaboration with our partners.

    Now the pension portfolio family of funds that we'll be talking about today are ultimately the responsibility of Scottish Widows. They're a core part of our individual and workplace proposition. And asset allocation decisions are principally in the hands of our asset allocation team, and it's they that ultimately will decide upon any of the changes that are deemed appropriate for the benefit in the medium-to-long term of our pension investor customers.

    So we've seen this huge rise in popularity of multi-asset funds, and hence, the importance of this range. And I think that's indicative of the way that the market has evolved in recent years, and the advice process that advisors have implemented. So I thought before we move on, I'd just ask you a question, in audience, in terms of multi-asset funds and just getting an idea of the popularity within the investment advice process. So Mik, if I could just ask you to move onto the poll question, if I may?

    So hopefully you'll be able to see this in on your slide, on your screen rather, I beg your pardon. So a quick question; in terms of your client investment recommendations, in the next 12 to 18 months, do you anticipate any change in the frequency of your use of multi-asset funds? So answer A, no change; B, increase; or C, decrease; over the next 12 to 18 months. If I could just ask you to answer A, B, and C; that would be very much appreciated, just to give us an indication. We'll just give it a few more seconds, and then we'll look at the results. And hopefully, you can see those in bar chart form on your screen.

    And I guess we shouldn't be surprised, around two thirds of you are telling us that you anticipate no change. Around a third are looking to increase the number of times that you recommend multi-asset funds. And a very small percentage, less than 1%, are decreasing their use of multi-asset funds. So I guess that's a clear indication of both the existing popularity of multi-asset funds in the context of investment advice within the pensions world, but also the potential growth in terms of usage that a third of you are saying that you anticipate increasing going forward; so hence, I guess, the topicality of both this presentation and indeed the investment solutions that we make available to our advisers. So if we could go back to the presentation, please Mik, if that's okay. Thank you.

    So looking at detail of the pension portfolio funds that I referenced earlier, 0.1% total annual fund choice, so one of the most cost effective range of multi-asset funds in the pensions investment world, very fairly costed. First launched actually in 2006 in our workplace environment, so they began life as component funds within our workplace default proposition, and actually do exist still there and are a very important part of our business. Because of the popularity of multi-asset funds, and we saw the need for a similar kind of solution being available in the individual wealth market; the pension portfolio funds were launched in 2010, via retirement account, a new share class, Series 4.1% as I mentioned earlier. And back in 2010, originally the life-styling solution governed the investment strategies as it was referred to and continues to be referred to, was the most popular with our advisors.

    However, as time has progressed, we've seen a shift away from the use of life-styling in our market, and the increased use of single-fund solutions. And hence, the launch in 2015 of three new funds to augment the existing range, so there are now seven multi-asset funds, a blend of passively-managed equities and bonds, managed on our behalf by third-party fund managers. And I mentioned earlier about the goal of the asset allocation team. The important thing to note about the funds is that they don't have a fixed strategic asset allocation. And some examples there since 2010 of some significant changes that have been implemented to the funds in terms of the change in asset mix between equities and bonds, and the theme that has been maintained certainly since 2014 is a move away from the home market bias of investing in UK assets predominantly, both equities and bonds; and increasingly weighting towards overseas developed and emerged market equities and bonds. So the proposition has evolved both in terms of the way it's evolved to develop and offer advisors and their customers, their clients, new opportunities; but also the ongoing management of the asset allocation of those funds has delivered, continue to deliver, very strong results.

    Just to finish off in terms of the timeline of the history, 2015 saw the launch of the more diversified premier pension portfolio range, a blend of passive and active components. In 2018, not mentioned on this slide, but 2018 importantly, the retirement portfolios which are the at-retirement version of the pension portfolios that we'll be talking about today. So any changes that Maria talks about in terms of asset allocation, will also refer to or rather relates to the retirement portfolios. And hence, we move now into 2020, and the subject matter of the presentation today, which I'll be asking Maria to take over from me, and discuss in more detail. So without further ado, Head of Pension Investments at Scottish Widows, Maria Nazarova-Doyle. Over to you, Maria.

    Maria Nazarova-Doyle: Thank you very much, Gavin. And thank you very much for joining us today. I'm really pleased to see so many of you interested to hear about the changes that we're making to our pension funds. So we are proud that our pension portfolio funds have delivered very strong returns, since inception, for our customers. Our ongoing regular asset allocation reviews have consistently been indicating that our position of high equity content should be maintained, and as a result, we have captured the longest bull market in history. So we're immensely happy about that, but we want to continue to deliver exceptional outcomes for our customers.

    Our latest review of the asset allocation in the beginning of this year indicated that we are moving into a very different environment, one which is characterized by lower projected returns and high volatility. Then COVID came all of a sudden, and we took this opportunity to remodel our original thinking, just to make sure everything still stacks up in the post kind of COVID view of the world as well. So we believe the outlook is still one of lower-for-longer returns, and high volatility. What we also believe in is that investors need high-risk exposure, that high equity content, particularly when they're younger. But we can help by diversifying the sources of return to make that return stream more robust. So we also integrate in ESG considerations as we are moving towards an ambition of becoming a responsible investor. And today, I'll tell you exactly how we're going to do all of that.

    Moving on to the next slide, we are making changes to our approach to equity positioning. We're also diversifying asset-class mix, and introducing currency hedging for overseas developed market equities, and we're integrating ESG considerations. And importantly, we're doing this to improve risk adjusted returns to customers by keeping the downside risk largely unchanged, but we're looking to get better returns. So even more importantly perhaps, we're doing this without increasing customer fees. So if that sounds too good to be true, it actually doesn't. It's really quite simple. So one of the benefits of our customers, of being with Scottish Widows, is that we have about 150 billion across all our pension investments. So we get access to the most preferable fees for underlying investment managers. So it just becomes one of the examples of how we provide value for money for our customers.

    Let's zoom in on equities, and that's one of the bigger changes that we're making, is how we think about equity positioning and equity allocation. So on the left-hand side, you can see the pie charts. So the first one is showing the average allocation to UK equities amongst UK pension funds. And that now stands at around 36%, which is called a home bias. Because at the same time, if you look at the allocation of UK against the global market capitalisation, it's only about 6% against the global market. So we have been gradually looking to reduce our home bias over time, and in this review we're taking it down to about 20% of our equity allocation. So before the review we had 30% in UK, 70% in overseas equities. Now that is going down to 20%, and overseas is going up to 80%. The rest of the regional equities, will be split on the pro rata market-cap basis as kind of as a neutral position, and we will use this neutral position as a starting point from which we will adjust according to the outlook for those different regions.

    Moving the slide, right, so what we've done in this review, we've looked at the whole universe of asset classes, and then we refined the list to those asset classes that we believe could add the most value within the same risk tolerance. Because again, if you remember what I said earlier, we're not looking to reduce risk specifically. We're looking to diversify the sources of return. So we now have regional equities still in the global corporate bonds and gilts available to us to use the pension portfolio funds. So at the moment, we only really invest in equities and corporate bonds, but gilts sort of sit on the bench, with the asset allocation of about 0%. But we can always put them in at any point when we do a review, and when it makes investment sense.

    But the new asset classes that we specifically tested this time around that work for us in terms of having that high-growth potential and not diversifying the risk weight too much, are emerging market government debt, global REITs, high-yield bonds, listed infrastructure, and cash. And cash is a bit of an interesting one, and I'll cover that later on in terms of why we're looking to add some cash as well.

    So then what we've done, we've gone through our optimisation process. And the way it works, we use Moody's analytics tools and data to model strategic outcomes from different asset allocations. So at first, we examine each new asset class, and what it's done in terms of its risk-reward profile, and how it might be benefiting the portfolio. Then we design new portfolio types. So we at step two, we have about 30 different portfolio mixes, and then we test them rigorously again to make sure that we capture our goals, which are the increase in average return, keeping risk unchanged, and no increase to customer fees. So it's a bit of a circular process, and we'll go through it a few times to refine it, until we get to what we're actually looking for. And as a result, what we have is shown on this slide.

    So the green ones are the ones that are the winners of this process, and the reds didn't quite make it on this occasion. And let me take them one by one. So the first one is REITs, so it's listed property securities globally. They proved to be a positive contribution in terms of return and provide some diversification benefits. We're also going to add emerging market government debt, which again had a positive contribution to the portfolio. What's happening with cash then is we're introducing a small cash holding in lieu of gilts, given the historically low yields. And this improves the downside risk without materially impacting returns, and as well as increases liquidity in our portfolio. So the average allocation to cash across the portfolio is just under 2%, so really it's just a small holding. And sort of to think about it as well, if we wanted to keep the risk unchanged, but increase the returns, if we get rid of some of the bonds in the portfolio and put some high return asset classes, we do need to balance out that risk, so it kind of becomes a little bit of a balancing them out as well, so it helps us get that better risk-adjusted return.

    So in terms of high-yield bonds, they just did not model well. So they didn't provide any positive contribution to our portfolio. And listed infrastructure is a very interesting example. So we're changing our asset allocation process, or adapting it, to include carbon footprinting as well, because we see carbon as an investment risk. And infrastructure, particularly listed vehicles, listed indices, they have about 8 times the carbon exposure compared to global equity indices, which is just a huge amount of carbon risk to be adding into the portfolio. So we discarded that on that basis.

    Some of the other changes that we're making is we're kind of moving away from home bias in bonds a little bit, so before the review we had our investment grade bonds split 50/50. We now have 40% in UK, 60% in global bonds. And we are also introducing currency hedging on about half of our overseas developed equities. So again, that is done in order to manage that short-term volatility, whereas over the long term the returns are not impacted. So it helps us create better returns for the same level of risk, and we're doing it as a currency overlay. So we're not investing in currency hedge funds. We're putting an overlay with a provider to make sure that that does not manage to cross our portfolio.

    If we were to move to the next slide, you'll be able to see some of the changes in practice then. So on the inside of the donut charts, you have the old asset allocation. And on the outside, you have the new asset allocation. And as we shared, this slide is very busy, and we're going to publish a detailed asset allocation report with all these charts, and so you'll be able to peruse in your free time, and just see all those numbers very clearly. But just to kind of draw your attention to a few things, so for example, you should be at least able to see that there are lots more colours on the outside than there are on the inside, because of those additional asset classes coming in, and some of the equities becoming hedged. But also if we do a bit of a closer look at pension portfolio 3, I'll be able to talk you through it a little bit.

    So before the review, we had about 70% in equities and 30% in bonds. And that's on the inside donut. So after the review, what's happening is equities are going down to 66%, bonds are going down to 21%. So we essentially free up 13% within the fund to be allocated to the new asset classes, like emerging market debt, REITs, and a little bit of cash. And that's pretty much what's going on across all the portfolios, including A, B, and C as well.

    And then the proof of the pudding is our modelling of customer outcomes. So obviously we wouldn’t be going ahead with changes if the math wasn't working our customers. So again, to remind you, our goal was to improve the average outcome for customers, and to keep the downside risk unchanged. But actually how this works out is that for the majority of customer profiles, we even improve the downside risk, if you measure by this percentile outcome somewhat as well. So we're really happy that we are, in fact, improving risk-adjusted returns. So that gives us that confidence to go ahead with the changes.

    And then the last point I wanted to talk about in terms of the shifting in our asset allocation and integrating ESG, is about our approach to responsible investments and stewardship. So back in March, we published our responsible investment and stewardship framework, which you may have seen. It articulates our commitments and our ambition to become a responsible investor on our customers' behalf. So we believe that integrating our own principles into our investments across the board will lead to better risk-adjusted returns. So this framework is now integrated in our firmwide investment policy. And it guides our decision on asset allocation, manager selection, fund research, engagement activities, and so on.

    So the framework consists of six responsible investment principles. The first one is to be investing responsibly. And what we mean by that is that we will integrate ESG factors into our processes and thinking in order to improve the returns by capitalising on ESG-related opportunities to try to get some better returns from integrating ESG, but also trying to reduce risk that comes from ESG-related factors. We will also operate an exclusions policy and we're now finalising that policy and approach that will be across the whole of Scottish Widows again. So we will have things that we just do not want to invest in, because they pose too much risk, and that risk is unrewarded. Where no amount of engagement and stewardship can resolve, so shortly we'll be able to announce the things that we're actually going to be disinvesting from, and not hold, on behalf of our customers.

    So on point three, we're going to reduce our portfolio carbon footprint, and we're already making changes with that in mind, and I've given you an example of infrastructure in this particular review, and you're probably going to see more of that pretty much in every review that we do. So we see carbon again, as I said, as investment risk. So there's no point holding too much carbon, so we're moving towards carbon reduction in our portfolio.

    So on the fund range aligned to customer values, we have noticed a big rise in social consciousness and environmental consciousness amongst the UK population. And the customer demand in this space is only growing ever stronger. So we've recently run customer research to see what are those ESG-related, sustainability-related issues that customers care about, and we are trying to fulfil customer demand by reviewing the market and identifying some funds that maybe could be added to our suite of funds to help customers address those issues in their pension investment. So we really want people to be able to align their personal choices with the investment choices, and we feel that that will help unlock pension engagements and actually make pensions relevant for people in the here and now. So there's some quite exciting developments that we're looking to do, and again, we'll communicate when we get to the point of maybe adding new funds as well to the portfolio, which is really quite exciting.

    So on principle five, we're seeking to integrate this across all asset classes, because equities is an obvious place to start, but there's obviously all the other asset classes that ESG should be integrated throughout. And we're working through step-by-step to make sure that we can one day say we are truly and fully a responsible investor, and we'll have full integration across everything we have.

     And last but not least, it's about direct investment opportunities for our customers, and particularly as it relates to responsible investment and transition to the low-carbon economy. So it's about $90 trillion is estimated to be required as investment in infrastructure for the world to be able to transition to the low-carbon economy, which is a great investment opportunity. And as we know, your DB pension funds, sovereign wealth funds; all of them will be lining up to invest. Whereas normally DC pension savers and kind of retail investors, they're more often than not a cut-off those illiquid investment opportunities. And we're working really hard with the regulators and the industry just to make sure that that is not the case anymore, so that we can bring some of that illiquidity premium into our funds as well. So it's not an easy task, but one that we are taking on. So watch this space.

    Then on stewardship, our position is rather unique in the market in that we don't really own our asset managers. So we don't have an internal conflict of interest, maybe like some other providers do when they just have to take what the investment manager internally is giving them. But at the same time, we still own the kind of the structure by which we kind of own the funds that we have. So most of our investments are run by mandates, which means we have control over them. So this allows us to do a lot more active stewardship, and we're now starting to engage directly with the largest companies that we own on issues such as climate change, and board diversity, and we're doing this in order to protect and enhance the value of customer's saving. So we're working with our managers to make sure that they're really good at this stewardship that they do, but also we are overlaying our own efforts on top, and we use this principle of additionality so that our efforts improve and enhance what our managers are already doing in the space. And we can vote our own shares, if we need to. We can take any other kind of shareholder action and right that we allowed to, and you will see more and more from us.

    So you may have seen, we've been doing this already. So for example, last year we were the second-largest co-filer on the shareholder resolution for BP, which was very successful, and it basically asked BP to publish their detailed plan on how they're going to align with the Paris Agreement, which they now have done. And we also brought a shareholder resolution to Shell to align their executive compensation with their achievement of carbon reduction targets. So we're really quite proud of those two particular achievements, because those companies are very big, and we have very large holdings in them, which helps us kind of get that seat at table, and have those conversations with them. And if you think about it, we'll have 150 billion in pension investments. We can really make a difference with these investments. We get a seat at the table, so we're not looking to exclude everything that's in any way unpalatable. We'd much rather engage and drive change for the better.

    So on the next slide, I'll tell you some of the specifics of how we are actually bringing this into practice, and particularly how the RI  framework is going to be reflected in pension portfolios. So as a first step and from the end of July, we're going to introduce tilts into our equity content in our pension portfolio funds. And we're going to be tilting towards companies that decrease carbon emissions, increase clean technology revenues, reduce water consumption, and improve waste management. So those companies, in short, who are making good progress on their way to transition to the low-carbon economy, and obviously we're going to be tilting away from the laggards in this space. So I can't tell you any more on this, but we are going to be making this exciting announcement in the end of July, when we'll be able to give you all the details of how exactly we're going to implement this. So this is just a first step into putting the right principles in practice. And we're hoping to give you a lot more, and there's a lot more coming this year, and thereafter.

    So thank you very much. I think that's my bit done. I'll pass back onto Gavin.

    Gavin Jobson-Wood: Okay. Thank you, Maria. That's -- I beg your pardon. I just took you on a slide too far. So just to recap then, there's some significant changes happening to the pension portfolio and retirement portfolio funds, which as I mentioned earlier, are very closely aligned. So today, of course, we've presented to you guys who've joined us this morning. So thank you again for taking the trouble to join us. Hopefully it has been informative. We've certainly got lots of questions to try and deal with, which we'll turn our attention to in due course.

    We'll be publishing more detailed information on our advisor extranet later today, hopefully, if I'm reliably informed. If it doesn't happen then, it will be tomorrow morning, both an email communication, but also a detailed governance document that will be available to advisors on our extranet. So please do get in touch with your usual Scottish Widows contact who will happily guide you in the right direction, provide you with the information that you need.

    Now the actual transition to the new asset classes articulated by Maria is taking place very slowly. We're very conscious of minimizing transaction costs within the funds. And I didn't mention earlier, but the assets under management for the whole of the pension portfolio and retirement portfolio range across both workplace and individual pensions is in excess of £30 billion, so significant assets under management, significant proposition which is clearly hugely important to our business, given the thousands of customers invested across workplace and through retirement accounts. And therefore, we're very keen to maintain the low cost, which includes a transaction cost of any asset allocation changes we make. So the rebalancing to the new asset weight mentioned by Maria will be done in a gradual process throughout Q3, finishing in Q4. And because of the strong fund flows coming into the funds, we're able to use that cash flow to allocate accordingly, rather than necessarily having to sell out and purchase new assets, so looking to minimize those as much as possible.

    So it will be a gradual transition, and therefore reflected in details such as fund fact sheets and other supporting literature later in the year, once completed. So fund fact sheets won't immediately reflect the new asset allocation change until it has been completed. And as Maria has just mentioned, thus were unable to go into a specific amount or a great deal of detail about the ESG integration that we're planning later in the year. We hope to be able to update you throughout Q3 with more detail around that ESG component and our plans around what percentage of the portfolios will be impacted, and detail of course about that ESG component.

    So that's the timeline. Hopefully that gives you certainly sort of the overview and detail of what's happening with this, and very, very important fund range to Scottish Widows, which I know a number of you joining us this morning have your clients invested into will be keen to understand clearly what's happening, both from the point of view of existing clients, but also the potential for the new client recommendations. So hopefully that's been helpful to you. As I mentioned earlier, there's been a whole lot of questions submitted. So we'll do our best to answer as many as we can in the time that permits. And we do have a reasonable amount of time to deal with them. If we're unable to answer all of them, then we'll follow up with some written responses to all of the questions, and publish those out to all attendees today.

    So I'll now hand it over to my colleague, James, to facilitate the Q&A session. James, over to you, please.

    James Phillips: Thank you, Gavin, and also to Maria. That was really insightful and very thought-provoking, as very much reflected in the questions that we've had coming through. So without further ado, we'll jump straight into the Q&A. The first is probably one for Maria, and that's in regards to the types of property that are in REITs, and whether there's any sector bias, for example, given the high levels of retailer are a concern at the moment, as that might change in the evolving workspace.

    Maria Nazarova-Doyle: Yeah, thank you very much for this question. So the exposure in REITs is well-diversified. So it's diversified globally across markets, but it's also well-diversified across different sectors, and particularly in terms of retail. The exposure is less than 25%. And retail is still going to exist going forward, albeit in probably the more streamlined form, as the pandemic has accelerated the structural trend that was already happening in retail space. But at the same time as retail is maybe having this transformation, there are other parts of the REITs market that have benefited from the current crisis. For example, industrial sector and primarily if you think about logistics, this is where there's a big boom and big growth, and the longer-term impact of shortening supply chain is also likely to be a tailwind for this sector. And this has been one of the benefits if you think about diversification of REITs exposure across different sectors. Some are going to go maybe have a bit of a shaky time, but some are going to have a really, really good time. But also in terms of office space, for example, as well we may be moving to more working from home. It's going to be a very gradual shift, because most of those office spaces are on a very long-term lease, so it's going to happen over time, it's not going to happen overnight.

    And we'll also potentially see a reversal in the trend in reduction in workspace per worker. So we've been stuffing people in like sardines everywhere, you know, because the space was quite expensive. So we might still keep the space, but maybe just give people a bit more of that flexibility, and have flexible offices, and a bit more space per worker. So actually it does seem to be a good investment, and it does prove to be a very good diversifier for the equities that we now hold.

    James Phillips: Excellent. Thank you very much, Maria. Another one possibly for yourself linked to the ESG agenda, is whether Scottish Widows would ever consider introducing an ethical risk-based range of funds.

    Maria Nazarova-Doyle: This is not something that's on our radar at the moment. So we have a Scottish Widows Ethical Fund. And we’re looking to add some more kind of funds in this space, as I've mentioned, so an ethical space, impact investment. So we're looking to see how we can improve that range of funds. But we're not looking to introduce a risk-based ethical fund. So instead, we are going the route of integrating responsible investment in ESG into all our funds. So essentially, pension portfolio funds, they're risk-rated. They will have full ESG integration hopefully in the near future.

    James Phillips: Thank you. And there's a few questions that have come in around what will be issued to customers in terms of a policy statement with regards to our development of ESG? Is there anything we've got planned in that regard?

    Maria Nazarova-Doyle: So we constantly update our customer pages on the website. And any developments that we make or in new policies and new approaches that we'll have, we'll publish on that website. So far, this has kind of been just doing that this year. But we're looking to see what else can be done, particularly in the coming months. We're also looking at different tools that our customers use, and how we maybe improve that functionality. So once customer actually log in to see their investments, like what can they see and what can they see in terms of ESG in particular? Should there be ESG ratings of the fund? Should it be like carbon footprint or some kind of scoring? So we're looking at different ways, and working with a few fin-tech firms to see how we can bring those ESG considerations to life to customers.

    James Phillips: Thank you. There's a few comments that have been made and a couple of questions have been asked in regards to our increasing exposure to US asset classes, based on what you were talking us through earlier. Have you got any particular views on the decisions that we've taken as far as that, particularly with regards to the current situation?

    Maria Nazarova-Doyle: So our changes in asset allocation is to become kind of neutral allocation, in line with the global market capitalisation of different countries. So we're not moving necessarily to say that there's like a really massive opportunity in the US. But we want to use that as a starting position from which we will then make adjustments, based on the further outlook. So this is a structural change in how we do the asset allocation, which is actually, if you look at, other providers of similar products. They already have that. It's sort of more of a market practice. And we're seeing that that's going to be beneficial over long term. So if we have market-related capitalisation weights of our regional equity split, and then we'll be able to use that kind of tactical positioning on top of that.

    James Phillips: Thank you. Gavin, possibly one for yourself, and that's in regards to our retirement portfolios and DVM, and whether it means that clients are being kind of locked out of recent market low points with limited scope to recoup this, given the market rebound that we expect. Do you want to just offer some commentary around that?

    Gavin Jobson-Wood: Yeah, yeah. No problem. So retirement portfolios launched in 2018, they included this innovative mechanism that we refer to as dynamic volatility management. We worked with Aberdeen Standard Investments back in 2017. And it was designed specifically for the requirements of clients in drawdown, those taking regular withdrawals from their investment pension funds, and with a consideration around the impact of sequence of the term risk, i.e. if sharp falls in the market occur, in the investment market occur, in the early stages of drawdown, they can have a significant detrimental effect on the duration, the longevity of the pension fund for that drawdown investor.

    So the whole concept behind them was an automated mechanism to de-risk the equity allocation of the funds, whenever there was a cut of volatility measured in the market. So two factors being measured that was volatility on a daily basis, and the trend of equity market returns being measured over 52-week rolling return, but again, on a daily basis. And importantly, the de-risking mechanism, when it kicks in and it did kick in, you aren't surprised to hear back in March. It isn't a binary -- either in equities or out. So it's not risk-on, risk-off. It uses derivatives to hedge out equity market risk on a proportionate basis. So it does vary each day.

    At the maximum level of de-risking that we've experienced in recent weeks, around 78% of the equity allocation of the four funds was de-risked. But it has dropped because of improving equity returns to between 20% and 30% at one stage. And as I say, it varies on a daily basis. So it's true with the surprisingly strong rally that we've seen in markets post the trough as well as on around the 23rd of March. The fact that the funds have been de-risked to an extent, and I'm reiterating not fully de-risked, so there has been some equity exposure, means that the retirement portfolios haven't benefited from the same upside as the funds without the DVM ie.the pension portfoliso. But they have worked exactly as intended, and most commentators in industry third-party asset managers, et cetera, I think are consistent in their view at the moment that we're certainly far from being out of the woods. But markets have thankfully, for all of us who are invested, have performed very well since the middle of March. However, they continue to be volatile, continue to be fragile. And actually the retirement portfolios for a client in DT relation with that mechanism in place, are well-placed to weather any ongoing uncertainty, any ongoing volatility in markets.

    Clearly, if markets do -- if we have a significant positive outlook to what's happening in the world economy, particularly with the spread or the impact obviously with COVID, and markets continue to perform strongly, then there will be over this period of time a lag in performance. But I think we are far from being out of the woods yet. So DVM has worked exactly how it's anticipated, and we're very pleased with the results accordingly.

    James Phillips: Thank you, Gavin. I think another question for yourself, and this is actually broader with regards to our drip-free drawdown solution, whereby protected withdrawals, it needs to be on a 75-25% split. And the particular example that's used here is where a client may want to use their person allowance, and take a different percentage split. Do you want to just comment on that particular--?

    Gavin Jobson-Wood: Yeah. So drip-free drawdown or used to be called phased income withdrawal, 10-plus years ago, is the ability to crystalize a proportion of your accumulated obviously 50-50 (inaudible). That way you're able to benefit from drawdown. Crystalize small amounts of your pension fund to be able to be taken in a blend of tax-free and taxable income. So what it's not possible to do is take income that is taxable only, when the only way to take income from a pension fund is to crystalize funds. And obviously when you crystalize, you release tax-free cash. So our drip-free drawdown that was introduced over 18 months ago is very flexible, to the extent that the client can choose the classic 75/25 split, 100% tax-free cash is there, regular income, and leave the residual invested, or indeed a 50/50 split. And the purpose of course is, as highlighted in the question, to be able to take the appropriate mix of taxable and tax-free income to suit both the income and the tax planning requirements of the client to fit in with their own -- the tax efficiency and what suits them best. So we think it is one of the most flexible in the market, but happy to pick up with the individual who has posted that question directly, which I'll do after the call.

    James Phillips: Excellent. Thank you very much, Gavin. Maria, possibly one for yourself. Will SSGA, State Street, still provide the majority of the funds in the pension portfolios?

    Maria Nazarova-Doyle: Yes, it will probably be the majority of the funds will be provided by SSGA. But the new asset classes that are coming in, they'll be managed by BlackRock. So we're going to have two managers, essentially manage pension portfolio funds.

    James Phillips: Thank you. And are there any changes to the Glidepath program in pension portfolios planned?

    Maria Nazarova-Doyle: No, we're not planning any Glidepath changes. So we last reviewed the Glidepath, and tested it in 2019. So we'll review it on the regular basis. But as of the last review, we haven't recommended any changes, so not at this time.

    James Phillips: Thank you. And in regards to the shift to US markets versus UK equity, does this mean that we previously got the strategy wrong?

    Maria Nazarova-Doyle: Good question. Thank you for that, nothing like a difficult question. No. It's an interesting one. You know, so I don't think we got it wrong at all. So I'd categorically say, no, we didn't get it wrong. We had an approach that worked for us really well. We are one of the best performing fund provider of this type of funds in the market. So we delivered exceptional returns for customers over a decade. So it clearly worked. The question is about going forward, as we evolve our thinking, what's out there, what's the better approach. Because we just want to get better at what we do, rather than say, well, because we've always done this, let's continue to do it exactly the same way as we've done this. We want to look forward and want to evolve our approach to pension investment.

    James Phillips: Thank you very much. And this is a question possibly for either one of you. It's in regards to communication that would be issued directly to employers and/or employees of our asset class changes and ESG integration.

    Gavin Jobson-Wood: Yes. So I guess absolutely, for the workplace environment, yeah, I believe there is a comms strategy being produced at the moment to publish the results of this review, certainly to employers, not so clear on employees or members of schemes, but certainly to employers.

    Maria Nazarova-Doyle: Yes. And I'd second that. I think the comms are going out either today or tomorrow morning, so there's kind of a big communication wave.

    James Phillips: Thank you. In regards to ESG, do you see Scottish Widows launching an ESG-focused pension fund similar to the pension portfolio with an ESG-only mandate?

    Maria Nazarova-Doyle: I think I'll probably echo some of the statements I've made earlier on this, is that what we're trying to achieve is we're trying to achieve full ESG integration across everything we do, because actually that's a much better result then for our customers, than just having something on the side that does ESG, but us then just continuing to go forward with the majority of our investments in a non-ESG way. So that's just untenable and it's just not the right approach, not the one that we believe then. So instead, we want to make sure that we have ESG throughout, that you'll be able to say that whatever fund you pick up, you know that there is ESG integration.

    James Phillips: Excellent. Thank you very much. I think this is probably touching on some of what you've spoke about already. But when will the ESG integration be included within the pension portfolios? Or will it be a separate investment choice?

    Maria Nazarova-Doyle: Yeah, I think that's a very similar question, to be honest. So we're doing both. So we are integrating ESG into everything we do. But at the same time, we're also evolving the fund range, because in the fund range we can go further. So we can go into ethical investments. We could go into impact investments, where potential for returns is maybe not so clear cut, and maybe like the positive social impact goes ahead of the fund trying to achieve good return. Whereas what we are doing in terms of ESG is still very much with a good return at kind of acceptable level of risk for our customers. So ultimately we are managing investments in pension funds that people rely on us for their lifelong savings. So we believe that integrating ESG makes us better investors. But certain things like ethical investments just goes way further than that. But we want to offer that to customers, for those who really feel passionate about those things.

    James Phillips: Excellent. Thank you very much. And the final question, because I'm very conscious of time, is whether these changes will affect the DT risk rating on the multi-asset fund range?

    Gavin Jobson-Wood: Yeah, and that's one for me --

    Maria Nazarova-Doyle: I think it depends on the providers of those risk ratings. So we don't do our own risk ratings. So I couldn't tell you for certain. So it's all going to depend on what Distribution Technology is saying, and what like other people think. So they all have their own methodologies. So we can see what's going to come out when they review the new changes.

    Gavin Jobson-Wood: Yeah. Well, just to add to that, we're engaged with the Distribution Technology, Defaqto Engage, and Synaptic are the three independent agencies that funds are risk-rated by. So we've engaged with them for the last few months, giving them an indication of the changes that we're implementing. So we are hopeful there shouldn't be any – potentially one or two, possibly. It depends upon the methodology employed by each of those agencies. But given that the whole basis, the principles that Maria articulated earlier were to try and achieve a situation that was projecting better customer outcomes without any increase in risk, we're confident that any changes will be very minimal, if any, as I mentioned earlier. But we'll update you accordingly, once we have clarification from those three companies.

    James Phillips: Excellent. Thank you very much, both. I'm very conscious of time. So we will bring this to a close. If there are any questions that we haven't been able to answer live today, we will follow up off the back of the session today. I'd like to thank our speakers and our host, very much, both for joining today and for taking so many question. I'd also like to thank all of you for joining us. As Gavin referred to earlier, there will be content hosted on our advisor extranet site either later today or tomorrow. And the final thing I'd just like to say is as you exit the session today, there is a very short survey. It would be really appreciated if you would complete it. Because it does help us just get an insight on these events with many more planned in the future.

    So thank you all, and I hope you all have a very good day. 




    Maria Nazarova-Doyle, Head of Pension Investments and Gavin Jobson-Wood, Specialist Business Development Manager

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    Scottish Widows



    August 19, 2020

    9:30 AM EDT


    Tracy Jeffery:                      Good afternoon, everyone, and thank you for joining us today. For those of you who don't know me, my name is Tracy Jeffrey, and I'm the National Sales Manager for Scottish Widows Protect. And today I'm joined by my colleagues, Scott Cadger and Carol Anne Mitchell. Scott will be providing some really timely updates on mental health, the protection market, and how Scottish Widows have approached these areas in recent times. Joining Scott and I will be Carol Anne Mitchell, our other National Sales Manager, who will be facilitating your questions today.

                                                    Please do use the "Ask a Question" function to submit any questions you have during the presentation. Whilst we will endeavour to answer all your questions today, should any relate to client-specific cases we will look to answer these offline on a case-by-case basis.

                                                    This webinar is being recorded and will be available for you to share with your colleagues after the event. And it forms part of our Expert Series, which is a set of topical webinars, broadcasts, and podcasts which see our experts talking on some of the key issues in our industry to help you navigate the changing marketplace. We've been building the content in this series since June. So, please do take a look at our website within our advisor extranet section if you wish to review any of our previous recordings.

                                                    We also have another great session coming up at the end of September, and we are delighted to be joined by Paul Johnson, Director from the IFS, who will be providing his thoughts on how the post-COVID economy will affect pensions, going forward. Additionally, Johnny Timpson, who is our Protection, Technical, and Industry Affairs Manager within Scottish Widows, will be recording a podcast where he will be providing an overview of his Access to Insurance initiatives. So, please keep a lookout for further information within your inboxes and through our social media posts during the coming weeks.

                                                    Now, feedback from our previous sessions suggests that this is a really popular topic. So, on that point, I don't want to waste any time. And I would, therefore, love to pass you straight over to Scott Cadger, please.

    Scott Cadger:                       Thanks, Tracey, for the introduction, and good afternoon to those who are listening live today. And good day, good evening, and good night to those who are listening on-demand whenever you choose to listen in.

                                                    So, today's session is going to cover a bit of background around mental health and how it's been root-tapped over time, how we as insurers now face the challenges of underwriting this risk, and how we at Scottish Widows have taken on that challenge and taken a really different approach in terms of the rationale and the outcomes you can then give to customers.

                                                    As a bit of more background on me, as Tracey introduced, I head up the underwriting claims and commercial strategy functions for our protection business. And I've been with Scottish Widows for the last 15-plus years and the last 10, or so, within the protection industry. Of that, it's probably been split 50/50 between leading the underwriting team and, prior to that, leading the launch of Scottish Widows Protect, along with (inaudible) and some of our colleagues on that front.

                                                    Also, probably kind of linking to why we want to talk about mental health, as part of Lloyds Banking Group we've had a partnership now for the last two years with Mental Health U.K., and as we go through this we will kind of show you where we've worked really closely with them to understand both customer concerns around mental health but, equally, how we're adapting to current practices.

                                                    So, with no further ado, we'll move on, and we'll start looking right to the very start. So, if I take us all the way back – and there's been a bit of kind of digging through history and kind of through the Middle Ages – we've looked around to kind of understand when mental health as a condition or as a media topic has been around from, and it's fair to say it's been around forever, although probably not disguised or talked about as something called mental health.

                                                    As you can see from the slide, a range of different theories around what was going on with people. And from kind of psychogenic theories – which are based around having a traumatic or stressful experience, and therefore, you have distorted perceptions of reality – and right through to some probably, as we now look at it now, back like through sort of the lens of hindsight, some very strange views around being possessed and being a demonic possession are the cause of (inaudible) with you.

                                                    And equally, the treatment around mental health in those days were particularly gruesome. Some things, like asylums, have still existed all the way through the 20th century and beyond, but trepanning was one of the areas that and probably when looking back through really sort of stood out for me, where people would bore holes into people's skulls to allow the bad spirits, the demons, to leave the body. It is an area that, obviously, from a mortality perspective and worrying about the risk of (inaudible), that is something obviously you really didn't want to be doing too often.

                                                    As we move forward in time and probably closer to more recent views around mental health, there are now two main theories that kind of came through in the late 19th, into early 20th century: from Freud, around psychodynamic features – that is, the kind of play between what's going on within your unconscious mind and how that plays out into your conscious behaviours; and also from John Watson, around behaviours and the ability to condition yourself to either like or dislike something. And a whole range of activity has come off the back of that in terms of the type of treatment. So, kind of following on from Freud and delving into people's pasts and looking at root-cause triggers through psychoanalysis has been an area of treatment that has continued up till present day.

                                                    And equally, looking at reconditioning. So, this is where you would almost continually repeat experiments. Facing into your fears, challenging yourself, and making that challenge harder and harder until you've overcome them have been around since the early 20th century, but we see a lot more within it.

                                                    Equally, we're still, I suppose, a view that we would take on treatments that are still, quite literally, shocking. ECT therapy, where you would literally put electricity through people to try and shock them out of their mental health conditions. Again when we look back with hindsight and look at how we are approaching things these days, it seems very much on the extreme side of the scale.

                                                    And so, to kind of bring it up to present day and kind of look at the more modern approaches to mental health – and this is where we've really worked with a range of our charity partners and we've been speaking across industry experts in the field of mental health – what we identify is that there's a range of behaviours. Your mental health is very much like your physical health, in that you are on a full spectrum. It is not just one particular treatment to solve (inaudible). There's a range of activity and different aspects that you should then take forward.

                                                    So, ranging from how you deal and handle with your emotional side of things, right through to the fact that there's a very clear link between financial pressures and how you're feeling and your stress levels and how that can have an impact on your mental health, and all the way through to (inaudible) that you're in, and we'll touch later in the presentation.

                                                    But we are in a much more heightened environment around fear to our health or challenges to our health with coronavirus and COVID-19. And as we come out of the severe lockdowns we've been in, but still (inaudible), there's still to do in looking at vaccines and beyond.

                                                    If you then look at the treatments that are then now taken, there still are the medical treatments. There are still drugs being used and medication being taken, and they're still using talking therapy, psychoanalysis, but there's a lot more wider and holistic therapies. So, art and creative therapies, exercise being prescribed, and we've just seen very recently Public Health England making a bigger push now towards how they use complemented therapies and willing to prescribe that and sort of social prescribing to help with mental health, going forward.

                                                    And so, all of these build themselves up to be a very different approach to mental health than where we have been in the past.

                                                    And alongside that, we've seen over the last 10 to 15 years a real shift in the public attitude to mental health and, in some ways, similar to some of the physical illnesses that are out there. And as we understand more and more about that, that understanding comes into empathy and helps people move forward, to help them focus on how to recover and what support is needed.

                                                    When you look at the two images – and we could have picked any two images – of celebrities in here that either have triggered events (inaudible) deaths of loved ones. But they've talked far more openly in the last five years, or so, around the impact of that bereavement and the impact on their mental health than you would have seen if you looked back 10, 15, 20 years. And the big part of that is that public perception and that shift in attitudes in terms of the confidence that if you speak out, you will get the help that you need and people will look forward to help and support you.

                                                    And so, I suppose with all that context and that background, I suppose the big question is, from a protection industry perspective why is this important? It's massively important. One in four of us will affected by a mental health condition in any given year. And when we look at what see in our application forms, once you get past smoking and your BMI, it is the highest disclosed area. We've seen from our own data ranging between 15% to 20% of all applications have some form of mental health disclosure on there.

                                                    And also, when we look back at income protection claims and across AVI data, mental health bounces around there at the top of one of the most common causes of claims. In 2017, it was the most common. Historically, it's always been up there in the sort of top two, top three.

                                                    And these changing practices make it incredibly difficult for us to then consider how we wish to approach underwriting the risk. So, from our perspective, when you're looking at assessing the risk, one of the key sources of data is your past claims and past experience across a population. But equally, what you're seeing is a very significant change in the approach around interventions, around treatments, and around the prevalence of people willing to talk about it. But equally, they talk about where they are with mental health probably on cases that are far less extreme than historically would have been disclosed to a GP.

                                                    And so, the challenge when we then look at this is, are we seeing more disclosure errors and what's the impact on this and how we should be best make sure that our underwriting practices are fit for purpose?

                                                    If we start with sort of changes in population around mental health, what we see is over the last 25 years, or so, year by year a decline in the number of days lost through sickness. And if we kind of – we can't unpack this whether the sickness is due to mental health or due to physical health, but we can say that in that same period we know that the number of people talking about mental health when they're going to see GPs and that's getting treatment are continuing to rise. But equally, the impact, the severity of their condition is not to the same degree and to the same extreme as it has been historically.

                                                    And if you move on, we can also kind of look at the levels of suicide. And that is, ultimately, the risk that we are trying to consider when it comes to life cover for mental health, is that is somebody at a higher risk of, unfortunately, taking their life. And what we see is that over the same period we're seeing – other than a slight uptick last year – an ever-declining rate around suicide rates once we allow for changes in the age profile of the U.K.

                                                    But one of the things that is quite interesting at the same time is the CISR score. Now, this is a scoring system used by the medical profession that indicates whether a person has the current – it indicates the most severe symptoms (inaudible) that we'd want them to take intervention and medication. So, this is where you would be if you were scoring kind of upwards of 12, towards 18, is where medication and intervention is really required. And we are seeing an increase in that, but we are seeing at the same time reduced impact in terms of the ultimate poorer outcome around suicide.

                                                    And therefore, with that, around that perception piece, we've seen very recent events. So, the FA Cup final was a major piece where kind of the renaming of that to kind of heads up the FA Cup final, to see the association and the number of charities to help raise awareness and to get people talking about at an early stage to remove any remaining stigma that's there. And you can see from the data that the rates of ultimate impact is coming down. I suppose it does get us to challenge the question around why are insurers interested in mental health.

                                                    And so, when we look at this, what we see is there's quite a lot – and there's a lot of data on here, but actually there's a lot of co-risks that are correlated with mental health and we see a lot of kind of adverse behaviours with people with poor mental health. So, heavy smoking, substance abuse, you see higher levels of physical inactivity, and that we see levels of poor diet then coming through.

                                                    And equally, there's quite a large cross section of people who went into schools having a mental disorder, and a large proportion of them are also people who are suffering from a physical medical condition at the same time. And those comorbidities, those co-challenges, the relative risks that come along are then the ones that we need to be quite mindful for when we come to underwriting a risk. It's not just looking at the individual pieces; it's looking at it in the whole.

                                                    One of the challenges when we've gone through all of the working review over the last nine months, or so, within the underwriting strategy here has been to kind of understand what are people's views and identifying the link between suicidal thoughts and attempts and around then the subsequent people who then go forward and commit suicide and look at the population data that is within that. And a number of studies have looked at this, and it is a very difficult area upon which to underwrite accurately. And there are some areas where we can see identified triggers and we can see some areas where the risks are significantly increased, and they are the areas that we focus within underwriting.

                                                    But equally, a number of people may not have disclosed to a GP. They haven't talked about it yet. And therefore, being able to predict from those who distinguish between who  will attempt and those who just consider the idea becomes very difficult. And as you'll be aware, on the majority of policies out there in the market one of the areas that prevent us in an underwriting aspect is to have a short-term policy exclusion for a early suicide, because that ability to predict or ask questions to understand those risks in the very short term become very difficult to do.

                                                    So, with all that in mind the team and I took away the challenge last year, at the end of last year, looking at our application question form, looking at the rules that sit behind that on our online systems, and also how we would approach the condition (inaudible) and where to hit a manual underwriter. And had a real good look at the application form and think about how we can change it.

                                                    And as you may have noticed over the last few months, you will have seen the changes come through in the way that what we come through in the application form. And on first glance, the changes between the old, on the left, and the new question it is that we look for further conditions, on the right, it doesn't look any different. But equally, what we worked on and are trying to look at in a great depth was, how do we word and phrase the questions to allow customers to feel comfortable talking about their condition? And a lot of the feedback that we got – and we'll come to that – kind of draws us in that direction.

                                                    And equally, one of the key items – and we'll come to it in a bit more detail later as we look through a couple of case studies – was allowing customers to tell their individual story, to give the opportunity for free text and to hear from that customer first-hand how their particular condition is impacting them and what they're doing to help themselves and the support that they have got.

                                                    So, if we move on, we'll see in terms of some of the old questions around looking for medication, historically what would happen is that if you were on medication the underwriting philosophy would treat that as a bad thing. And as we've worked with the charities and looked at a lot of the risks of people when they are on medication, actually the area that we are most worried about is where people don't have their condition under control. And if we weren't talking about mental health, but talking about, say, diabetes, we'd be having a very similar discussion. When it's a physical condition where you've got that under control, we would reward for that. And where it isn't under control, then that would be a case where we wouldn't; we would see a heightened risk. And it's no different. And that was a challenge the teams worked through, to consider this when it becomes down to a mental condition.

                                                    So, the revised questions that we now have then looks at, if you are on medication, has it increased or has it been changed in the last 12 months. If it's level, if it hasn't changed, we will not add any further review on that front.

                                                    And similarly, we've looked at use of drugs, attempted suicide. We've shortened the period upon which the risks are there and tried to kind of remove the word "suicide." It was something that became from a lot of customer feedback a word that we just really struggled with when it was on the application form.

                                                    And then when we talked about episodes and length of symptoms, what we were really clear to kind of understand is, what was your last experience and how much time have you taken off for any periods, as much as possible. And it's very difficult to remember everything that has happened in the last five years, and that's why we're kind of looking at the most recent aspects and trying to understand when that was.

                                                    And one of the further changes we made within the application journey is looking at some support and signposting and guidance as you go through that point in that particular area. So, we put some further text into the journey around indicating why providing your medical history, both about your physical and mental health, is incredibly important. We've also made some real signposting to our Scottish Widows care support service, which includes a telephony support around mental health for you and for your family.

                                                    And one of the things that we added in that was brand new was how do we capture what the customers are doing in terms of making positive lifestyle changes. So, when I talked about the wellness wheel earlier in the presentation, how do we reward customers who are got a regular fitness exercise, who are taking on new hobbies, new crafts new activity? And that allowed us to put in some free text boxes that would then end up looking an underwriter to look at and look at how we can reward somebody for that in terms of their overall underwriting outcome.

                                                    One of the things that we did as we were going through this – and we mentioned our partnership with Mental Health U.K. – was as we were walking through the old model, what it was that was new and what it was that they felt customers were saying about our journey and is there anything more that we could learn about that, and a lot of what we got back was that your questions are in the negative; they're almost framed, as such, that you are looking to catch somebody out. So, we made a real conscious effort on that front to move away from that and to get to a point where we were looking at making the conversation talk about your mental health in exactly the same ways we talk about your physical health, and that everybody knows it's on a spectrum. You have good days, you have bad days. And so, there's been a real change in the language that's in there.

                                                    Alongside that, we've looked at how we balance the evidence that we get. So, if we can't underwrite everything at point of sale, then when we do require an underwriter to look at a case, what's the best way of approaching that? And so, historically, you would send out a questionnaire that has some very black-and-white questions, or we might ask a GP's report or ask for a specialist report.

                                                    But what we found from the feedback from the charities and from feedback from the advisors and as we've been working in this area for a good while now, the key point was actually listening to that story. So, what we've done, as well as making amends to the rules and the outcomes that we get from the underwriting journey online, we made a real push with our underwriters and the operations team to make sure that they are picking up the phone and having a conversation with the customer to help understand their story, their situation, and with that, be able to make sure we've got the right rewards for customers as they go through.

                                                    And alongside and why is this so important, it's so important to make sure that people don't see that having a mental health condition will prevent them from being able to get cover. And one of the things that we've been very transparent on and have talked to the markets a lot and to the broader Access to Insurance working group that is working across the industry is about being able to demonstrate that the vast majority of people are offered cover. As the slide shows, 96% of people will get life cover, and about 80% of that does so at standard rates.

                                                    So, a big part and a big plea from us is to encourage people to disclose. Trust that we will do the right thing. I hope that the changes that we're going to put through make it very clear that we are approaching this in a way that encourages people to talk to us and to give us full disclosure. We will treat it in the right way, and we'll reward the people who are taking the right positive steps to improve their mental health, which is all in keeping with the work that the Access to Insurance group and the EVI are focusing on around accessibility, improving the process in the same posting, and being very transparent around the approach.

                                                    And to try and bring that together, I thought I'd kind of talk through a couple of case studies. So, the first one is relatively straightforward. A female, aged 24, was diagnosed with depression by their GP four years ago. Hadn't had any time off work. And their last symptoms were over a year ago, and they were on medication but they hadn't had any change to it. And under our old philosophy, we would have been offering standard terms for life and CI. But what you would have got when you define for CI with TPD, total permanent disability, is you would have had a mental health exclusion. And when we've now worked that through and understood that that medication is stable, has reached a level of control, and behind the scenes in the journey we actively have a complication (inaudible) the number of risk factors that have been identified through the journey. So, historically, that would have triggered a further complication count.

                                                    With the new journey, with the rewarding of people who are actually taking medication but have it under control, that complication count would come down. And therefore, the decision now under the new philosophy is you would get standard grids for life, CI, and for TPD.

                                                    If we jump on to the second case study, what we have now is a male, aged 35, and suffers from anxiety and depression that was diagnosed three years ago, and has been treated by a psychiatrist. They've had 35 days off work in the last five years. They have started on medication, but have had no change to it. The last symptoms, eight months ago, and no episodes of self-harm. And they also participate in group therapy. They've increased their exercise levels and they've done a lot of work to improve their diet.

                                                    And historically, again this would have attracted a plus-50 action mortality rating on a life decision and for a CI case it would have ended up with standard rates, and again you would have had a mental health exclusion on the TPD. Now, in this scenario, again with the improved position that we've taken around medication, if there is no change in the last 12 months, now that doesn't count against you as an additional risk factor. And equally, that further sort of balance of positive around participating in group therapy, increasing exercise, and improving diet now means that the new decisions that would come through would be standard rates for life and for CI. Because there are current symptoms, we would still look at applying a mental health exclusion on TPD. And given where we were only eight months ago, it is still a very much improved life decision, as we see coming through.

                                                    As I move along from the case studies and I think, to some extent, I've probably done reasonably well to not mention COVID-19 so far as we've gone through, but I think it would be foolish to kind of ignore it as we walk through this; in particular, the interactivity between the physical condition and what it could potentially do to your mortality. And as you know very much, there's lots of information out there around the impact of COVID-19.

                                                    Balancing it with that co-risk of mental health, it has been an incredibly stressful time where there have been direct health fears and fear from the whole population, from those that have, like, a shield or are more vulnerable, but equally from the additional stressors that it has and that apply to all of us. We're all finding a balance at home and at work. And there are a lot of us who are working from home, and it has been quite – very much different. And I know personally for me the joy of being able to be around your family and the kids, it's a positive; equally, the fact that they're back to school now here in Scotland means they haven't come busting in at any point over this presentation and shouting and screaming and trying to knock lumps out of each other. And so, it does raise that level of stress and anxiety that sits around the population, and it does – we are seeing mental distress rising into lockdown, rather than kind of pre lockdown.

                                                    From our position it is our role as an insurer to look at we can manage the future. It is an unknown. We are being very mindful in monitoring the position here and the toll that it takes. We know we can – we have been very resilient so far through all of the aspects here, and we feel that we have the wider support services that sit across our propositions to help customers who are in situations, whether it be financial stress or whether it would be mental stress, anxiety around the impact of COVID, that we aren't looking at changing anything in this case around the additional mental health risks, but we are very mindful of the impact we could see as this goes forward.

                                                    So, that covers the main piece. I think probably the key bit for me to kind of take away for everybody across that is that mental health and poor mental health has been as prevalent for as long as good mental health, as well as it's been there for physical health. It is a spectrum, as we think about it, in the same way as we do about physical health. There are good days, there are bad days. There are people who are super fit, and there are people who unfortunately have to suffer some quite horrible physical illnesses and diseases. It is exactly the same with mental health.

                                                    It is also not something that you put kind of in a box on one side, and it's independent to your physical health. There is huge interplay between the two areas. And as you've seen earlier in the session, our new focus on covering good physical health can also really benefit you in having great mental health, as well.

                                                    Treatments have varied significantly from, as I say, back in medieval times of boring holes to remove the demons from skulls, to the much wider holistic model that we now have in place that is focusing on your whole self and not just medication or medical intervention.

                                                    We've seen huge increase in public awareness and acceptance that mental health is a condition like every other health condition, and that has really helped kind of allow people to talk about this. We do see a higher prevalence come through from GP records, from data that sit there. But the average impact is significantly reducing.

                                                    We do find there aren't a very consistent evidence base to assess the risk. And therefore, what we've done when we've assessed how we want to approach underwriting is look at the key factors, look at the key triggers that are real long-term risks, and look at how we from an underwriting perspective can make sure we are rewarding people who are doing the best they can to control the risks that they've got.

                                                    And I suppose that one of the big key takeaways we're really keen for you to make sure gets out there much wider into the market is that it's a lot easier to get protection even with a poor history of mental health than you might think, given the level of cover we can offer, and that we are at Scottish Widows Protect adopting a far more sympathetic approach, absolutely avoiding underwriting, aware of the uncertainty that is there in the market, but doing what we can to make sure for those and for everyone who's looking out and trying to help themselves we are trying to make sure we help you with our underwriting experience, as well.

                                                    And that's where I'll finish just now, and I'll hand back over to Carol Anne, who will take us through the Q&A session.

    Carol Anne Mitchell:          Thanks, Scott, and thanks for that presentation. Really interesting points and thought-provoking conversation I think.

                                                    We've had a lot of questions coming through. We did say at the beginning that we wouldn't identify any personal or client-specific questions, but I can certainly summarize some of the questions that we have there. I've picked out some general kind of questions, and I think we have covered off a few of them. But what (inaudible) if we don't get all the questions answered in the time that we have, we will issue a PDF at the end with any questions that we don't get covered. And we have also been asked if we will issue CPD certificates, and we will issue CPD certificates after the presentation, as well.

                                                    One of the common questions that's come through – but I do think that you have covered this off towards the end of the presentation there – was just the impact of COVID affecting our underwriting decisions. I don't know if you've got anything more to add to it or if you feel that you've covered enough on the COVID piece there.

    Scott Cadger:                       So, in terms of COVID, it is a shock event and it is a shock event to the whole population at large rather than, say, a local shock event. A couple of examples earlier in the session was around individual bereavements that impact the family and immediate people around that, but it's not a national or international piece.

                                                    To some extent, the fact that it is national and we're all going through this together helps I know, and people have been, I would say – and this is probably a personal experience, but I've seen it observed right across both my organisation, but right across peer groups, friends, etc. – people are far more mindful now to support and look at and reach out to others.

                                                    And therefore, it's still early days from an underwriting perspective. We're not looking at changing philosophy, and we will continue to approach mental health based on people taking particular treatments, what they're doing to help support themselves, and what they're doing to help improve their mental health if they are struggling at any particular point. And it is always the case that we can come back and review further down the line when somebody – if their condition improves, as well.

                                                    But yes, that would – I think the fact that people are looking out to support each other, my personal view is that the direct impact will be – it's not going to be at the severe end where we would be looking at excluding or removing people from the underwriting flow. I think we've got a very balanced position, and we look to maintain that as we go forward.

    Carol Anne Mitchell:          Okay. Thanks for that. Another question that's come through is how would decreasing medication apply? Would we see that as a positive in our underwriting?

    Scott Cadger:                       Absolutely. So, as we see people coming off medication and we can see the kind of broader track record of why it's been reduced, we absolutely – that would contribute and reduce the level of complications, the counts that we talk about within our rule system, which would then result in more positive decisions for the customer.

    Carol Anne Mitchell:          Okay. And someone has asked a question specifically about the last case study. Do you ever apply temporary exclusion?

    Scott Cadger:                       Yes, we have the capability to apply temporary exclusions when we know it's a specific, whether it's mental health or a physical condition, but it has a shortened period. As it they are relatively rare, but we have the capacity to do so. And we usually find that they are more permanent. And particularly with mental health, we know it does need to be looked at on a case-by-case basis. There can be some shock events or traumatic acute events that can trigger a particular episode. We need to be able to distinguish them from an ongoing chronic condition that needs ongoing support and management.

                                                    But yes, we can apply temporary when necessary.

    Carol Anne Mitchell:          Okay. Great. One question that we've had – and you touched on sort of talking therapies, alternative therapies, arts, and creative therapies, and it is obviously difficult when historic data is of less relevance when it's maybe look at data on morbidity or people's health and mortality data – are we going to take some of the data, potentially, from alternative sources like that, that we can apply to underwriting strategies, going forward?

    Scott Cadger:                       So, as part of the review that we looked at here, we looked at not just hospital and GP incidence rates, but we also looked at the treatment methods that were there and how we could best reward people for it. So, we look at the broader data. We did want to try and capture the levels of activity. We felt this (inaudible) of allowing for kind of free text for allowing a customer to explain their particular treatment, the particular approach, and then if we need to have a further conversation with them, having our underwriters to contact and talk to them in detail was probably the right first step, rather than designing outcomes that almost predict what you should be doing.

                                                    So, if we were to put something out there that says if you're doing "x" number of steps more than you were previously doing you'd get a better outcome, that might work for one individual but it may not be right for another. And therefore, we need to be really careful that we let the data build up and capture that, but actually let customers tell their stories, because it will be different for everybody. And therefore, we've got to just make sure that we get the right overall outcomes for customers there.

    Carol Anne Mitchell:          Okay. Thank you. Another thing that comes through on a few – I'll maybe finish on this one as a summary and we can answer the rest of them in a Q&A because there are quite a few questions coming through that we may not be able to answer them all – but as a summary one, we've been asked a few times if a client's condition becomes less severe over a period of time can we review the existing policy or would they need to reapply (inaudible) or do they need to reapply?

    Scott Cadger:                       It is one – we will take each case on its merits. So, I think we have the capacity to look at reviewing cases. And is not something that we do on a sort of regular basis, but it is something that we're incredibly keen that we'll look at how we can evolve that. We need to get mindful around what else has happened within that individual's life at that point. So, perhaps they may have reduced medication. Has all of the other remedies kind of improved and has their health changed significantly? And that, therefore, becomes the harder bit between applying brand new and just removing the exclusion or looking at how we can come to an appropriate risk assessment without having to go back through the new business process. It is something that we're looking to develop further on. If we've got some very clear evidence, then we can look at how we can review that condition and review the terms that are on offer.

                                                    And we do so – we approach that with smoking, which is probably the current, the most relevant one, where people do or can see a material and ongoing change in their smoking position. We would then to make that change and we would look where we can to remove any further exclusions.

                                                    I think the key point to kind of refer to and kind of remind ourselves under this ability is that the vast majority of customers are still getting standard terms even when they disclose through the journey. And I know the two case studies kind of picked up almost the outliers, where we don't have standard rates decisions. But it is worth bearing in mind that the vast majority of people will still end up with standard rates if they go through the (inaudible) and through their disclosures.

    Carol Anne Mitchell:          Okay. I've actually looked just to clear a few more questions coming in as we're speaking, I'll maybe just take another few questions, because quite a few more have actually just been coming through as we've been speaking and we still do have a few minutes. So, I will just go through on them.

                                                    And maybe one of the points that would answer one of the questions coming through here is just (inaudible) to use the pre-underwriting therapists if they have a client who they are concerned about from the point of view of they may think that they've got mental health issue or condition that maybe wouldn't be strictly a process case. Because obviously, we talked about the percentage of cases that were offered standard terms. So, I think it's probably a good point to remind people that we do have the pre-sales process and to let (inaudible) speak with an underwriter if they are concerned about the client details and they can give us more information than would be answered on the actual questions itself.

                                                    One other one, as well, is just a reminder around the additional services and the Radark (ph) and the fact that Radark doesn't exclude clients who have pre-existing mental health conditions, where the Radark information service doesn't exclude people from pre-existing mental health conditions. So, I think that's an important one. Again it's coming up as a generic question to remind the people that the Radark therapist is there and doesn't exclude people from that.

                                                    There is one other one that's coming through, asking if there's an additional risk factor if a client had a previous drug abuse relating to mental health issues, but is now fully engaging in meetings and treatments. Would that be treated differently or separately?

    Scott Cadger:                       As I say, we focused on this session around kind of that individual aspect of looking at how mental health operates within the mental health disclosures, rather than the broader sort of wrap rules that we kind of set and then we can look at all of the relevant disclosures and look at the interactivity between the two.

                                                    Again, if we've had people in that situation where they have been with previous drug abuse but we can see a clear link and we can see clear remedies, then we would be looking at how we can, as I say, come to the right decision that looks at the ongoing risk that's relative, rather than just saying that this has happened in the past, therefore we expect it to happen again in the future.

                                                    We would – obviously, with cases like that, that are more complex, they are likely to land more with an underwriter who would then want to work with the advisor and the customer to truly understand the situation. And as Carol Anne mentioned, both at the application stage but, equally, at that pre-application stage, the team are really keen to understand as much about the individual case that is going through so that we can make sure that we give as clear and as direct a set of outcomes that would then help you consider whether to come our way or other lines. And the more data we've got even at that stage we'd then go to look at it right through the whole journey, not just look at individual condition and disclosure.

                                                    So, I know that's not an exact answer. We'd look at how we could, as I say, much of the word is "reward," but take credit for the fact that they were engaging in treatment, and then the appropriate meetings, and are kind of engaging with that. We'd obviously have to understand (inaudible) skills, etc., as well. But it is something we would make sure we are giving the appropriate credit, but also considering the broader risks.

    Carol Anne Mitchell:          Okay. Thank you. And another question that's just popped up, will the (inaudible) have any influence on the underwriting decisions taken? I don't know if you'd just want to touch on the underwriting limit.

    Scott Cadger:                       So, with any case, whether it's physical or mental aspects of the underwriting form, we have a pre-agreed set of non-medical events that we view as being competitive there within the market. We don't have any additional triggers beyond that from a mental health perspective that is specific. We would wave through smaller cases but kind of challenge the kind of middle cases. We look at it in the round and where we require further medical information because of the non-medical limits or whether it is for broader financial reasons. Ones there, there's sort of very high value cases. And we treat all conditions equally on that front.

    Carol Anne Mitchell:          Okay. Great. Thanks, Scott.

                                                    I think, on that, we will summarize everything. We've got quite a lot of questions here. A lot of them are thematic. As I said at the beginning, we will sift through all of them, and we'll create a document and make sure we answer the questions that have come through. And we can get that published, as well as a recording of the session for anybody who has any colleagues who haven't managed to dial in today.

                                                    We'd like to thank you all for your time today and for dialling in. We hope you did find it to be informative. I know I always learn things at these expert sessions. Everyone that was done, I have certainly learned something.

                                                    There will be a short feedback questionnaire when you exit the webinar this afternoon, and we'd be really grateful if you would take a couple of minutes just to fill in that questionnaire. It really does help us shape future events. It helps us understand what has been successful from your own perspective. So, we would really appreciate it if you would take a couple of minutes now to fill that in when you exit the webinar.

                                                    So, I would just like to thank you once again for your time this afternoon, and enjoy the rest of your day. Thank you.


    VIDEO – WEBINAR – 60mins 


    Scott Cadger, Head of Protection Underwriting, Claims and Commercial Strategy

    Your questions answered (PDF)

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