The question of why don’t we see more transfers in drawdown is coming up more and more.
Advisers switch clients from one personal pension to another, either as the client’s needs and objectives alter, or product and technology developments mean these can be better served by a different offering. However, when it comes to income drawdown plans, advisers seem reluctant to change one drawdown contract for another.
I’m not saying it never happens, but given the size of the drawdown market in a post-pension freedoms world, and the pace of regulatory, product and technological change, it’s much less common than you’d expect.
Throw in the fact we have “Assessing Suitability Part 2” looming on the horizon, which the Financial Conduct Authority (FCA) has already acknowledged will focus heavily on retirement income advice, and it becomes a real headscratcher.
Perhaps it boils down to the fact that the FCA hasn’t been particularly vocal since the beginning of pension freedoms about what “good looks like” in at retirement advice.
COBs give advisers the nuts and bolts of it, but perhaps we need to look a little wider, to the Retirement Outcomes Review and the PROD rules within MiFID II to get a clearer idea of the regulator’s thinking in this market.
Retirement Outcomes Review (ROR)
From February 2021, providers will have to offer investment pathways for non-advised drawdown clients.
These are low cost, governed solutions which broadly match one of four client objectives. The FCA has been clear it expects advisers to consider these for their advised clients too. This has the potential to create a benchmark to be bettered in at-retirement advice, in much the same way workplace pensions are for defined benefit transfers since PS20/6 was published.
ROR highlights another significant issue - many clients access their tax-free cash at the earliest opportunity, often while they’re still working, but don’t take income for many years.
There are two points worthy of consideration here. Firstly, people focused on accessing their tax-free cash may not give a lot of thought to the long term functionality that plan will need once it becomes a regular income-producing tool. In fact, people may not consider taking tax-free cash as starting to take their pension, so possibly don’t seek advice for this.
Second, even if advice is taken when accessing tax-free cash, peoples’ needs and objectives can change significantly as paid employment reduces or stops and maybe they move from aggressively seeking growth to a mindset of sustainability. This can mean a different drawdown product can better meet their needs and objectives.
The PROD rules, which add to the existing FCA rules on how at retirement advice will be judged, call for clients to be segmented into target market groups with similar characteristics, needs and objectives.
As part of a robust Centralised Retirement Proposition (CRP), these target market groups are aligned with a particular service model, plan and investment strategy which meets the needs of that target market group.
Firms adopting this process may find they have clients in a drawdown plan that doesn’t match the solution for the target market group they’re a part of. Perhaps there’s enough flexibility within the existing contract to make it suitable, but if not, a transfer in drawdown may be required.
We’ve only scratched the surface of the issue here, and while we don’t know exactly when ‘Assessing Suitability Part 2’ will land, COVID-19 is likely a reprieve rather than a cancellation.
So there’s an opportunity now to get out in front of this, to create robust CRPs, and to future-proof business models against the concerns the regulator has already raised.