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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. 

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.