As at the end of July 2019, there were 10.1 million workers automatically enrolled into a workplace pension.1 Most of these members have been defaulted into an investment strategy which keeps them invested in growth assets beyond retirement in response to the downward trend in annuity purchase. Drawdown is where it’s at. However it brings a different challenge - how to manage client savings in the income phase so the money doesn’t run out. It’s a hot topic and features in the FCA’s Retirement Outcomes Review which is a package of reforms designed to address the potential consumer harm and emerging issues it has identified in the At Retirement market, particularly around non-advised drawdown. The report considers the efficiency of the retirement market since the introduction of pension freedoms and while there’s a significant focus on the plight of non-advised consumers, the findings are likely to impact the advised market too.
One of the key recommendations is the introduction of investment pathways for people who don’t have an adviser. The pathways are objective driven and are based on taking cash, taking annuity, taking drawdown, or alternatively, have no plans to take an income in the next five years. The FCA has said it is looking to amend COBs rules to effectively state that advisers will need to consider these pathways for clients where they are making a personal recommendation. We believe this is likely to put more focus on the investment solution the adviser recommends and how it delivers value for money compared to a pathway solution, particularly if it has higher charges. We expect this to take effect in August 2020 which gives advisers a year to consider how they adapt processes and review their client bank and investment propositions to ensure they are fit for purpose.
A read across to PROD?
The investment pathways can act as a useful guide when considering client life stages and how needs and objectives change as clients move into the income phase of their savings journey. It can also help to identify suitable investment options aligned to customer needs. This is certainly relevant in a post-PROD environment where the FCA is turning the focus back to client suitability. PROD is about starting with the client and building a proposition upwards and having a robust process in place to differentiate your accumulation clients from your decumulation clients.
We are starting to see signs of advisers reviewing their investment propositions and adapting them to take account of the different risks involved when taking income, however there’s still a long way to go. A survey by The lang cat of 235 advisers in 2018 showed that the vast majority of advisers keep their clients in the same investment when they reach retirement.2How advisers adapt their CIP for clients in decumulation will depend on client needs and objectives, and if advisers cannot show they have considered this then the regulator will expect an explanation.
How Royal London can help
Our Governed Retirement Income Portfolios (GRIPs) have been designed specifically for customers who are looking to take a regular, sustainable income. Launched seven years ago they now have a strong track record of risk and return and delivering an opportunity for sustainable income in challenging market conditions. There are five GRIPs to choose from depending on the client's attitude to risk.
The table below3shows the amount leftover from £100k pot invested in each GRIP after taking different amounts of income over the month since launch. It includes the impact of a 1% fee.
- Auto enrolment has resulted in huge numbers of employees ‘defaulted’ into decision-free pension saving, only to be faced with an active decision at retirement.
- Many are ill-equipped to make these choices and the FCA’s focus on investment pathways is designed to avoid people drifting into inappropriate solutions which are not aligned to their needs.
- These can also act as a useful guide for advisers who are reviewing and segmenting their client bank and considering how they adapt their CIPs for their clients who are taking retirement income.
If you would like more information on any of the topics mentioned in this article please contact your local sales consultant.
- Source: The Pensions Regulator Automatic enrolment: Declaration of compliance report July 2012-end July 2019
- Source: The Lang Cat: A game of life retirement income functionality, May 2019
- Source: Lipper, Royal London, as at 29.08.2019. All performance figures inclusive of 1% annual management charge. Past performance is not a guide to the future. Prices can fall as well as rise meaning you may not get back the full amount of capital originally invested. Investment returns may fluctuate and are not guaranteed.