Defined benefit (DB) pension pots are a dying breed, with those lucky enough to have paid into one knowing they will enjoy a stable, reliable level of income for the rest of their non-working life.
But as defined contribution (DC) schemes take over for most of the working population, International Adviser asked industry players whether the sector is ready and diverse enough to handle the mass move to different drawdown strategies.
Alastair Black, head of industry change at Abrdn, believes the retirement market is “well served” with “suitable financial products” available for any type of financial needs clients may have.
Similarly, Andrew Tully, technical director at Canada Life, says there is “plenty of choice in the decumulation space, including products that combine the best of drawdown and annuity in one tax-advantaged wrapper”.
But they believe the focus should be on the rise in people going DIY when it comes to tackling retirement, alimenting the already wide advice gap.
“We need to see new models for advice that allow advisers to service more customers in a more cost-effective way,” said Abrdn’s Black. “Research from AKG shows 54% of advisers are keen to offer an upfront advice service/fee, with the option for clients to subsequently elect to access full ongoing advice service/fee should they need it.
“This is advisers recognising the current advice environment doesn’t work for everyone. The industry needs to work with the regulator to develop a range of advice propositions to suit different groups of customers – recognising for some advice can still be helpful but it maybe doesn’t need to be the full advice model current regulations demand.”
Canada Life’s Tully echoed Black’s sentiment: “Seeking financial advice is a crucial step in planning for retirement. We need to find new ways to encourage more people to seek both guidance and then hopefully go on to the next step of working with a regulated financial adviser, alongside building more capacity into the eco-system we have today.
“We’ve seen more people ‘go it alone’ in the decumulation space since the pension freedoms, and a switch from the guarantees that annuities offer to the flexibility of drawdown. This fundamentally shifts the responsibility onto the shoulders of the individual to make all the right calls. For most people this decision making is best left to the professionals.”
Not just an advice gap?
But Nathan Prior, head of PWM International, Partners Wealth Management, and Verona Kenny, managing director, intermediary at 7IM, do not necessarily agree with Black and Tully.
They believe that there currently is a gap in the market, and not just when it comes to seeking financial advice.
They said there has been a decline in products and bespoke strategies for clients, despite the recent surge in demand for drawdown products.
PWM’s Prior said: “Decumulation is a very different phase of one’s financial lifecycle to what they will have been familiar with whist accumulating or maintaining their funds. It is not as simple as accumulating in reverse, as you potentially have less time to ride out short-term volatility and the so called ‘sequencing risk’ can be very detrimental to the longevity of an individual’s funds. Pension freedoms has meant that an increasing number of people are exposed to these decumulation risks, as less individuals retain the defined benefit pensions, buy annuities or have drawdown controls in place.
“However, it is not a new risk and bespoke financial advice and investment management have had processes and techniques in place to reduce these risks, by having various pools of assets with different time horizons and risk tolerances. This means that when returns are strong, profits can flow down the buckets (from long term – higher risk to short term – lower risk) to provide liquidity needs. When returns are weak or negative, liquidity can come from the built-in cash reserves or less volatile assets. This process helps to ensure you take profits in good times but are not a forced to sell risk assets at the wrong time.
“Having a bespoke portfolio is fine for clients who have sufficient assets to justify it, but there has been a gap for individuals with smaller sums who want a reliable income stream. Recently, pension providers have been trying to provide this drawdown service in a less bespoke manner so that it can be more cost efficient for smaller sums. This can be seen through solutions such as ‘lifestyle’ or ‘target retirement’, which, in essence, gradually reduce the amount of equity and increase interest focused investments depending on your target retirement date. However, they don’t fully solve the problem, because when a client is drawing on these funds, there are still selling a proportion of equity and a proportion of bonds.
“Essentially, the challenge is that pension freedoms were created to enable everyone the opportunity for bespoke retirement plans. Therefore, unitising that back to only a few core retirement drawdown options will inevitably not suit everyone. Ultimately, each individual will need to draw upon a blend of different solutions to meet their needs, therefore guidance and advice is going to be the best solution, rather than more products that inevitably add to an individual’s confusion on what is best for them.”
Lack of innovation
7IM’s Kenny added that while it is exciting to see a rise in demand for decumulation services, “there is still a significant gap in the market and the number of innovative solutions available is very limited”.
“In the past, I’ve touched on the fact that the introduction of the pension freedoms presented an ideal opportunity to develop innovative and flexible solutions for clients in their decumulation stage. Centralised retirement propositions have grown in popularity in recent years and, while still not quite in the mainstream, they have a crucial role to play in ensuring that clients have a range of options to deliver them a sustainable and – critically – flexible income during retirement, to ensure they don’t run out of money – two primary concerns for those in their later stages of life!
“For years, platform solutions have been the way many people accumulate their wealth, but we have entered an era where more and more clients are looking to use these solutions for decumulation. The demand for agile, flexible solutions has never been greater and with technology advancing at the rate that it is, more suppliers should be meeting that demand.
“The need for financial advice has never been more paramount. The key question a client wants to know is ‘have I got enough money to live the retirement I desire?’ As the number of solutions available continues to expand and as average life expectancy continues to rise, individuals are going to have to lean on their advisers more now than they have done in the past, to ensure they have planned to have enough capital to last the entire duration of their retirement.”
Personalisation will be key
Isobel Gingell, investment director at Brooks Macdonald, reiterated that if pension providers really want to succeed in the decumulation space going forward, they will only have one way to do it: by allowing their products and offerings to be tailored to the specific client needs on a bespoke level.
“There are different iterations of what could be classed as a decumulation product for clients to gain access to, but many lack the ability to completely tailor the product to a client’s ever-changing income requirements,” she said. “That may be keeping cash in reserve for the short term, using ‘natural yield’ for withdrawals, smoothed funds, or splitting a portfolio into different risk profiles to try and manage volatility in equity markets.
“Cash reserves may be the ‘surest’ way to ensure immediate income needs are catered for. However, with ramping inflation this may not be the most attractive asset class for large sums of money. Traditional sources of income such as cash and bonds have become increasingly less attractive for targeting a ‘natural yield’ on a portfolio. It also doesn’t wholly protect you from sequencing risk, one of the main risks associated with the decumulation phase for portfolios. Also, smoothed funds traditionally provide a low volatility solution for clients, where the unit price is adjusted based on the underlying investment performance.
“The final decumulation strategy would be to split a portfolio into different risk buckets, which can help mitigate sequencing risk in the short term and provide an opportunity for long-term growth. Overall, I believe, although there are various type of decumulation ‘products’ in the market, there are still very few options that can tailor specifically to client needs on a bespoke level.
“Lots of decumulation strategies, including the investment pathways (the FCA initiative) are off-the-shelf solutions that can offer a simple solution for investors, who may want a cost-effective solution to drawing from their pension funds. If, however clients need a solution which is more tailored towards their individual needs and want their portfolio to continue to grow in order to sustain their withdrawals, then they could take financial advice in order to manage adequate risk in portfolios. There aren’t as many investment managers currently offering that type of tailored service in the market, but is definitely an area of growth.
“For financial industry professionals this clearly represents an opportunity. There are more pension holders, with greater accumulated wealth and opportunities to spend and invest money in retirement. But with greater freedom and choice comes more risk and responsibility. The decumulation phase, unlike the accumulation phase, has additional risks which, if not managed appropriately, could have a much more damaging impact for investors. Planning is critical and investors can benefit from strong guidance that will help them to make good decisions and avoid getting into difficulty.
“Drawing from a pension without having some sequencing risk protection during times of market volatility (experienced more recently) can have a detrimental effect to the longevity of a portfolio. So, by obtaining good advice when it comes to tax implications, cash-flow planning and withdrawal rates, this can help overcome any risks of an individual running out of money in the long-term.”