The real enemy in retirement is risk

The long-awaited findings of the FCA on the retirement income advice market – known as the thematic review on retirement - has been released. In January last year when the review was launched by the regulator, it explained what it hoped to achieve with it. Largely driven by the pension freedom reforms of 2015, which dramatically changed how savers accessed their retirement savings, the FCA was keen to understand amongst other things, whether the advice models of firms addressed client-specific needs in decumulation and also consider whether these clients were being provided with suitable retirement advice when accessing the benefits they had built up in accumulation.

So what do the findings reveal? In a nutshell, the regulator has asked advisers to review their processes when providing retirement income advice. Which sounds like something we’ve known all along but the details make for interesting reading.

FCA Findings

On risk profiling, the regulator says:

And we agree. We have said this all along. Back when FE Investments launched our decumulation proposition, we reimagined risk in retirement around the percentage chance of running out of money. We have a stochastic forecasting tool that works with a different investment strategy for decumulation to ensure the right client retirement outcome is achieved. Some advisers consider risk in retirement by doing an ATRQ and coming up with the client’s risk profile. However, as the FCA says, for a different client segment (decumulation) this risk will be different. Our retirement tool and investment solution helps solve that problem.

Some advisers do it this way because they only think about the variance of capital value in retirement rather than assessing the risk of their clients running out of money. What this leads to is an expectations gap when it comes to how much some clients believe they can sustainably take as retirement income.

This gap has considerable consequences for pension savers reaching retirement. Some clients may well have to squeeze a little bit more out of their portfolio or be slightly disappointed with the style of retirement they are going to be left with. This is because if people don’t have the sort of money they were planning to retire on at sustainable withdrawal rate, they face either a more austere retirement or the potential of exhausting their retirement fund.

We have always maintained – similar to the FCA findings – that advisers need a solution that fits into their retirement process and considers the potential risk of running out of money and does not obsess over things like the variability of a client’s capital value. The shift to consumers drawing an income from pension funds which remain invested has been prominent since 2015 and could remain this way for a long time. In understanding the needs of their clients, the responsibility is on advisers to have solutions that consistently deliver suitable advice.

Centralised Retirement Propositions (CRPs)

On CRPs, the FCA notes that not all firms have one but they are more likely to be able to deliver consistent and suitable advice where their advice model has been designed to meet the needs of their customers in decumulation.

Whilst it is not a formal regulatory requirement, having a CRP sets out how advisers work with their clients in retirement. A greater emphasis on capacity for loss, assessing a different kind of risk and sustaining an income through retirement means the advice process changes and the types of solutions recommended should be different.

It is essential that advisers document their approach when advising clients who are moving into retirement and it’s recommended that a CRP is in place to support this rather than shoe-horn retirement advice into any existing centralised investment proposition (CIP).

Conclusion

In addition to an investment solution, advisers should also use tools that monitor the progress of their clients’ retirement plans and respond to changing consumer needs. The last few years have shown us that investment markets can be quite volatile and using the wrong tools to manage decumulation advice and to explain risks to clients using drawdown will most likely achieve poor customer outcomes – which goes against the Consumer Duty which sets clear and high standards of consumer protection.

Advisers need to be confident that if there ever was a need for their retirement processes to be reviewed, they would have done the right thing by their clients and are able to evidence and justify their recommendations.

Important information:

This is a marketing communication, intended for financial advisers only. Not for use by retail investors. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. The value of investments and the income from them may go down as well as up and you may not get back the amount originally invested.