As we’ve already discussed, a centralised retirement proposition (CRP) is a much more sophisticated vehicle than just taking a centralised investment proposition (CIP) and swapping the investment fund for one aimed at retirement clients. Retirement advice is fundamentally different to advice in accumulation and a CRP framework reflects those key differences.
However, there’s no getting away from the fact that the isolation measures introduced as a result of Covid-19 and the subsequent economic downturn has contributed to a sharper focus on the investment element of a CRP.
The impact of sequencing risk and volatility drag on retirement clients taking a regular income continues to present a significant challenge for advisers and having a robust process in place to review income sustainability is perhaps more significant than ever before.
Since the beginning of the pandemic, we’ve seen nearly half of UK companies scrapping their dividend payments for 2020. Shell has cut its dividend for the first time since World War Two in part due to both Covid-19 and the oil price crash. What exactly does this mean where income funds are being used as the investment vehicle within a CRP framework?
Well, it’s looking increasingly likely that exit strategies are going to be much more drawn out than the initial lockdown period and it certainly feels like lower payments will last for longer. This will obviously trigger significant implications for those funds targeting specific levels of income in which have found their place in a CRP as a means of generating client retirement income.
The Investment Association (IA) has announced the suspension of its yield rules in both the global equity income and UK equity income sectors as a direct consequence of the downturn. These are the very rules that were put in place to ensure funds within both sectors produce a reasonable level of income for investors.
Without doubt this is a sensible move from the IA and they’ll review the rule suspension once the outlook clears. Let’s face it, these are extreme times and had the IA not suspended these rules, it could have created absolute carnage within both sectors. We could have seen funds ramping up their risk and chasing yield to maintain their status in the sectors – that would not have been in the best interest of clients but it does beg the question as to what do you do if you’re using income funds as part of your CRP, particularly due to the ongoing economic uncertainty?
Ongoing suitability of investments under the microscope
There are obviously many other planning considerations at play here. Many advisers are already aware that they are responsible for reviewing the ongoing suitability of the investment solution but this has been brought into even sharper focus in light of the material change in valuations and potential client circumstances. It is more important than ever that advisers review clients’ risk tolerances as well as income and expenditure needs to determine whether income sustainability can be improved over both the short and long term.
Ultimately, advisers need to demonstrate that their process is robust and set-up to deliver good client outcomes and also against client expectations. In the current environment, it makes perfect sense to review the robustness and appropriateness of whatever investment solution you use in your CRP, or CIP for that matter. That should start with a review of the client’s individual objectives through to the investment portfolio’s overall construction, risk metrics and governance.
Having a robust CRP framework in place for your retirement can help you mitigate some of these challenges and help your clients achieve a more sustainable retirement. What’s not to like about that?