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.
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.
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.
If you would like more information on any of the topics mentioned in this article please contact your local sales consultant.
Head of Investment Solutions
Lorna is Head of the Investment Solutions team at RLI and has responsibility for the development and promotion of Royal London's investment proposition including the award winning Governed Range. She has worked in pensions and investment since 1990 and holds the IMC qualification and a Masters in Investment Science.