The long-awaited FCA thematic review of retirement income advice has finally been published, and Dear CEO letters sent. What are the key findings and what should adviser firms be putting in place to improve their proposition?
The roll out of retirement investment “pathways” for the non-advised market had been the regulator’s focus following the Retirement Outcomes Review to create better protection for consumers in decumulation, following pensions freedom.
The latest focus on retirement income advice is about ensuring better outcomes for consumers in the advised market.
The two frameworks are however linked as providers may offer pathways to advised and non-advised clients alike, and also advice firms should consider pathways as an option as part of their retirement income advice process, as made clear in the new Retirement Income Advice Assessment Tool.
The key challenges for decumulation
As a result of pensions freedoms, the key challenges for consumers in decumulation is deciding on the level and frequency of withdrawals, and to what extent their portfolio is sufficiently durable to last their lifetime.
Furthermore, consumers may have other goals aside from matching expected retirement expenditure such as a desire to leave an inheritance for dependents.
It’s welcome that the regulator recognises that “advisers have a key role in this market” with an “opportunity to demonstrate the value of their advice and services” to help consumers meet their income needs.
Advisers should seize the retirement income advice opportunity with both hands as it enhances the overall value of their business as customer lifetime values are extended.
But to this sensibly means mitigating the risk of giving poor advice, or having weak processes and controls in place.
From a risk perspective, the review illustrates how unsuitable retirement income advice has potential for significant harm to consumer outcomes. In particular focus are the risks that:
- Consumers suffering a reduction in the level of income they expected and/or their funds run out too soon
- Consumers paying higher charges than necessary
- Consumers investing in complex solutions that they do not understand or are not aligned with their risk profile
The key areas for improvement
The regulatory has highlighted key areas of the retirement income advice process, where there is scope for considerable improvement, summarised below.
- Ensuring the approach to determining income withdrawals considers individual circumstances and uses methods and assumptions that are justified and documented. Standardised cashflow modelling frameworks and withdrawal “guide” rates (and supporting evidence) can help here.
- The need for risk profiling for retirement income in a way that is consistent with objectives, customer knowledge and experience and – crucially – considers capacity for loss
- Ensuring all necessary information about customers is obtained including expenditure and other financial provisions as well as future objectives or circumstances including income needs and potential lifestyle changes
- Ensuring periodic review of suitability is delivered to customers that are paying for ongoing advice
- Proper, documented control framework to enable customer outcomes to be assessed and track whether periodic review services are being delivered
- All recommendations consider requirements of the Consumer Duty and that adviser firms are complying with the requirements to 1) good outcomes for retail customers; 2) act in good faith, avoid foreseeable harm and support customers in achieving their financial objectives; 3) comply with rules and guidance around products and services, price and value, consumer understanding and consumer support.
How does this compare with our expectations?
The bulk of the findings of the thematic review are consistent with our expectations: firms needs to have a documented retirement proposition; firms need to have a defined process for assessing suitability in retirement in a way that considers not just attitude to risk (which is psychological) and “risk profile” but capacity for loss (which is economic) and “withdrawal profile”: the shape and term of withdrawals.
The emphasis on cashflow modelling is also very welcome. Our position has been that it’s a “nice to have” in accumulation, but a “have to have” in decumulation. Policy owners in adviser firms should ensure consistent methodologies and assumptions are used throughout their firm, not left to individual advisers.
Furthermore, when building a cashflow model, firms should use justifiable return estimates that are not just “plug and play rates”, but are actually aligned to recommended investments but also consider fees, taxes and inflation.
The regulator is proposing as standard that results should be expressed in real terms and plan beyond average life expectancy. The FCA’s article on cashflow modelling will help advisers understand in more detail what good looks like.
