Retirement Income Advice Review

Hi everyone! My name's Craig Muir and I'm joined by my colleague Justin Corliss, and we're both part of the Technical Marketing team at Royal London. I thank you for allowing us to speak with you today.

Now today we're going to delve into the FCA's retirement income advice thematic review. That's the paper TR24/1. But before we do, just a few housekeeping rules. If you're watching, this is a live webinar that you'll be able to raise questions using the chat facilitator in the right-hand side of your screen. And we'll get back to you with the answer as soon as we possibly can. It won't be today, but it'll be as soon as we possibly can. Alternatively, you can raise your question with your usual Royal London contact if you prefer that.

Now, if you're watching a recording of this then the chat facility won't be available, and you'll only have the option of raising your questions with your usual Royal London contact. We get asked this question lots, so in regards to your CPD certificate, you'll need to answer some questions after the webinar, and this will automatically generate your certificate. Okay, that's the housekeeping over. So on with the webinar.

And I suppose one of the first questions is why have the Financial Conduct Authority carried out a thematic review into retirement income advice? Well, the FCA say that unsuitable retirement income advice has the potential to result in significant harm because it can result in consumers suffering a reduction in their level of income and / or their funds running out too soon.

They could be potentially paying higher charges than necessary, and they could be investing in complex solutions that they don't understand, or they're not aligned with their risk profile. But for many of these consumers, they may be unable to take the necessary steps to mitigate any losses, for example, by returning to work to supplement their income.

It's therefore crucial adviser firms effectively understand the retirement needs of their clients, including what level of sustainable income may be required, and recommend a suitable solution to meet those needs.

I'm sure this will come as no surprise to you, bearing in mind the FCA's focus on this for the last few years. But they said firms must also ensure that vulnerable customers are treated fairly. Now, although the FCA found firms had thought about the needs of vulnerable customers, they were not always implementing vulnerable customer processes in an effective or consistent manner, which risks poor outcomes for these customers.

So, what we're going to cover off today is by the end of the session, you'll be able to list the regulator's main concerns with retirement income advice, identify good and poor practices associated with retirement income advice, and then outline best practice for income drawdown reviews.

Right, before we look at the result of the thematic review, I wanted to show you the research methodology. Now the results were drawn from a representative sample. It was 977 adviser firms who responded to the latest data survey. And then there was a desk-based review of the advice models. And there were 100 advice files looked at from a non-representative sample of 24 firms.

Now do remember, this is the first time since pension freedoms were introduced and the FCA told us what good and bad looks like for retirement income advice. Yes, we had the Retirement Outcomes Review in 2018, but that was focused on non-advised at retirement solutions. So, it's important we understand the regulator's areas of concern for the advice market and look to address any shortcomings that we might have.

Okay, so let's move on and look at the main areas of concern. Now the FCA's review of advice models revealed a very mixed picture. They did say that some firms had evolved their approaches and adapted to the post-freedoms landscape. And these firms have clearly detailed processes, specific training on decumulation, and they use a range of tools to help illustrate complex information for customers. They also found some examples of good practice, where the advice and services delivered were clearly designed to meet the needs of customers and decumulation. And of course, we'll cover these off as we go through the webinar.

However, they also highlighted that not all firms were taking account of the different needs of customers and decumulation as opposed to accumulation. They saw some examples of poor practice, where some firms hadn't shown they considered the needs of the customers or set out their advice model in a way likely to lead to good and consistent outcomes. They also found instances where some firms hadn't provided the right information to support the customers to make informed decisions.

Now another area they had concerns about was the considerable differences between firms and advice while record-keeping. And they noted that 10% of the files being reviewed were missing key documents, so they couldn't even be assessed. Now, of the files they were able to review, 45 files, which was 67%, were actually found to be suitable. However, they found that seven files, they had concerns about the suitability, and then another 15 files had material information gaps, these MIGs that you might be familiar with. So, they couldn't even be fully assessed.

Now, the good news is they've now provided a copy of the Retirement Income Advice Assessment Tool. Now we're going to call that RIAAT from now on. Now why is that good news? Well, this is what they use to review the files. And it lists the information you should be getting from your client before reaching your revised solution for them. So, there really should be no excuse for any information gaps in the future. And again, we'll refer to this later and we'll explain what the FCA have suggested they're expecting from you. But back to the main areas of concern.

The FCA highlighted five specific areas, and they were income withdrawal strategy and methodology, risk profiling, advice suitability, control frameworks and the periodic review of suitability. So, we're going to look at the main concerns for each of these and look at areas for improvement highlighted by the regulator. And then we'll look at solutions for each as well.

So first up was the income withdrawal strategy and methodology. Now, they did say that firms generally use cashflow modelling or a specific percentage withdrawal guide rate that helps your clients with the income they might be able to draw sustainably throughout their life. Now the withdrawal guide rate that firms used to help calculate sustainable income varies across the market. I'll show you the rates in the next slide.

However, an area of concern for the regulator was that not all firms were effectively considering sustainability of income withdrawal. For example, many firms were not using cashflow modelling or were not using it in a consistent or appropriate manner. Now this lack of or inconsistent use of cashflow modelling or a withdrawal guide rate to estimate sustainable levels of income means consumers risk making poor decisions about how and when to withdraw their funds. So, the Financial Conduct Authority, they expect advisers to consider the client's current and future income needs, or whether firms choose to use cashflow modelling, or a withdrawal guide rate, they should adopt a reasonable approach that's adequately tailored to the client's circumstances and objectives.

They expect firms to illustrate the longevity of income in a variety of scenarios, as discussed with a customer. So essentially, to stress test it. Firms should also be aware of the FCA's expectations on the use of cashflow modelling in related areas of retirement advice. So, for example, DB pension transfers and we'll cover that off briefly later on.

So, moving on to look at the use of withdrawal guide rates, and not surprisingly, the research showed that advisers use a range of different withdrawal guide rates to help calculate sustainable income. Well, some firms have a standard rate to use as a guide for income withdrawal advice, others then use cashflow modelling instead.

So just to give you some stats, 276 out of 962 firms or just under 30% stated they have a standard rate. And of these, 45 firms use 3%, 199 firms use 4%, 32 firms use 5%. Now, obviously, if 276 advisers said they use the standard rate, then 686 had no standard rate.

Now the FCA went on to ask about advisers using cashflow modelling tools and found 810 of them said they use some form of cashflow modelling and 111 firms stated that they didn’t, or they didn't have a standard rate. It's important to recognise that the data didn't say how the standard rates firms have chosen to guide recommendations were actually determined, or how these would be used in practice. For example, whether the rate might be varied according to age, the level of charges, or other factors.

However, the FCA did say that the use of an appropriate guide rate to support income withdrawal recommendations is likely to be helpful for clients, especially where cashflow modelling tools aren't used. But you need to have a reasonable basis for choosing the withdrawal guide rate you use for each client.

And also, where a standard rate is used this won't be helpful if it doesn't take into account the client's individual circumstances. It's unlikely, for example, you’ll be using the same standard rate for clients with significant age differences would lead to outcomes that meet their needs without at least testing outputs with the aid of cashflow modelling.

Now, as I mentioned at the start, the FCA provided examples of good and poor practice in the thematic review, and we've included a few of them in this webinar. And we're not going to spend much time on these as we're really just including them for your reference, so you can refer back to them if you want. Now clearly, this is an example of good practice and is in relation to income withdrawal strategies and methodology.

Right, moving on to look at cashflow modelling. As you know, cashflow modelling has a significant role to play in helping illustrate how much income could be drawn sustainably for the duration of the client's lifetime. And that would be taking into account their circumstances and the size of their pension savings. And it can also be helpful to establish the capacity for loss.

Now, there are two types of cashflow modelling approaches in use: deterministic or stochastic. Now deterministic models use assumptions which don't vary, like a future growth rate or future growth projection. Stochastic models, they allow for variability and produce a range of possible outcomes based on a statistical model. So whichever type you use to illustrate possible outcomes, you should also set out why the actual outcomes will vary in practice. You also need to ensure that the underlying assumptions or parameters used in cashflow modelling are reasonable and reviewed regularly to ensure they remain appropriate.

I just want to highlight here that the FCA have stated there are no specific requirements for firms to use cashflow modelling. However, the FCA have previously set out expectations on cashflow modelling for DB pension transfer advice. And you know what? You might find this information helpful when using cashflow modelling.

So, I'm just going to explain some of the comments they made around cashflow modelling and the defined benefit thematic reviews. And these include that cashflow models or outcomes need to be stress tested to ensure they demonstrate a range of possible outcomes. And I think that's likely to be particularly important when using deterministic tools. They also said that the output has to be in real terms so taking into account of inflation. They said that accurate tax bands need to be assumed and that tax payable by the client is taken into account. They were probably a bit more eloquent than that, but those were the main points that I wanted to get over to you.

Again, the regulator provided example good practice here. Now this webinar will be added to our advisers' hub so you can read all the good and bad practice results at your leisure if you're so inclined. And you can also receive a copy of the slides if you like as well. But I just wanted to highlight a few key points from this example, clearly, they're highlighted in yellow. So, although the regulator said you don't have to use a cashflow modelling tool, in their example of good practice, they've highlighted an advisory firm which has set a clear expectation their advisers do use one or a sustainability tool. I don't know about you, but I'd say it's a pretty good example of them tending towards telling you, you should probably use one or the other.

I've also highlighted the regulator talked about another firm who stress tested all decumulation plans, and I think it could be difficult to do this without some sort of income sustainability tool. I know our tool uses Moody's Analytics to look at a thousand different investment scenarios to stress test income sustainability. At least using something like this can aid the discussion with your client about possible fund performance scenarios and can also help to manage the client's expectations.

Now, just moving on to an example of poor practice, when moving from accumulation to decumulation, it is likely that the attitude to risk and the capacity for loss for many clients will change, so it needs to be reassessed. Now from the centralised proposition reviews from all the 24 firms, the risk profiling approach showed no clear distinction between accumulation or decumulation. And this meant the language and questions were not specifically framed for customers in decumulation. However, clients are less likely to receive employment income in decumulation, and therefore their capacity for loss will have changed and their investment portfolio should be altered to reflect this.

Although generally the example questionnaire the FCA saw we're clear with unambiguous questions of descriptions, some were written with an accumulation-specific focus. Now this means clients could be inaccurately profiled and take on risk not in line with their circumstances. And the FCA said that the findings in this area are concerning. Clearly, if there isn't adequate risk profiling, clients may be investing in solutions not aligned to their profile or tolerance level and could, as a result, incur financial loss. And we'll talk more about risk profiling later in the session.

Right, let's move on to consider centralised retirement propositions in a bit more detail. As you know, a centralised retirement proposition or a CRP is a documented approach to help different advisers within a firm give advice to different clients in a consistent way. It helps guide you on some of the more complex aspects facing clients in retirement. For example, considering different retirement income solutions, ensuring sustainability of income withdrawals, tax efficiency and investment strategies.

Now not all adviser firms in the market have a CRP, some firms have a centralised investment proposition, a CIP, which focuses primarily on investment-based solutions and doesn't cover the likes of annuities. And then some firms don't have either a CRP or CIP. Now, whether you have a CRP, CIP or use some other approach, the FCA have said you're more likely to be able to deliver consistent and suitable advice where you've designed your advice model to meet the needs of your customers. But you need to consider a different investment approach for clients in the accumulation and decumulation stage, helping a client to generate regular income from a portfolio of volatile assets over an unknown time period represents a very different challenge to supporting them accumulate wealth.

Now to provide good outcomes to retirement income clients, traditional asset allocation often needs to be extended to include a broader range of solutions. This in turn enables more efficient investment strategies to be created that are better positioned to meet this unique challenge. Retirement income advice needs to carefully balance the need to generate a high enough return to enable a client to meet their personalised objectives while managing the increased volatility this exposes the client to. As a potential for higher returns, it comes hand in hand with higher volatility. A counterintuitively low-risk, low-volatility solution can actually expose a client to greater risk in decumulation by not offering the potential for a high enough return to meet their personalised objectives, or the potential for living longer than anticipated.

Overlapping investment approach should be the overarching withdrawal strategy. Now that could include things like total return or cash buffers, bucketing, natural yield, etc. Then each approach will have its strengths and weaknesses, and each will need to be considered carefully to determine if it's suitable for meeting a client's personalised needs and objectives.

For many clients, a holistic plan that utilises a full spectrum of retirement income solutions can actually enable a client to more confidently take the level of risk they require to meet their personalised objectives. When giving holistic advice on income withdrawal or uncrystallized funds, pensions lumps also short-term annuity recommendations. The FCA expects you to consider current and future input requirements, also, the existing pension assets and the relative importance of the plan given the customer's financial circumstances.

And to help determine sustainable income withdrawal levels, several factors are important, so how short-term income needs are met is also relevant. The timing of encashments can impact sustainability if withdrawals are made when investment fund values have dropped, the so-called sequencing risk. And you may have different approaches for mitigating this.

So, as you've just heard from me one of the key specific warnings you need to discuss with clients is income sustainability. But you also need to consider and explain your sequencing risk, volatility drag and longevity risk as well. And we've got some really simple slides coming up and I'm sure you've seen several ones many times before, but we created these for you to help discuss income sustainability with your clients, if you'd like.

So, here's just that, it’s a demonstration of a client. They've got £100,000 and they achieve a consistent 4% growth rate across a whole ten-year period. Now, throughout this period, the client has taken £4,000 per year. The fund value after ten years hasn't changed. It remains at £100,000, even after taking a total of £40,000 of income over that time period.

Now, of course, that's not really how markets work, is it? So, in this scenario, growth isn't constant. It's higher than the early years. So, assuming the same client as before with £100,000 fund value initially taking £4,000 income over the ten-year period, the fund value remaining after ten years in this example is £105,601. Now, that may not seem like a significant difference from the 4% flat return example. However, due to the large initial positive returns, the fund value accrued early on limits the downside effect of the negative performance period and that continuous drawdown. So, in this example, the initial timing of the client's investments has had a positive effect on the retirement saving.

However, if we flip that last scenario on its head and in this example, we can see the negative effect sequencing risk can have on retirement savings. Now in this scenario, investment performance was poorest over the early years when the fund value was at its highest. Now a low performance gradually turns positive. The damage of this initial negative performance, alongside the client's £4,000 per annum drawdown plan, means it's more difficult to accrue fund value in the remaining years. And for this reason, the fund value is worth £83,043 at the end of this period.

Now, as it states here, all three of these scenarios we've looked at actually return 4% on average per annum but can provide significantly different outcomes. So, it begins to feel like that impact is big enough that we need to take this into account and a deterministic model doesn't help us here. In order to give us some idea of what different outcomes the customer might expect, we probably need to use a stochastic model. Now, this type of model takes account of the fact that growth isn't linear or constant, but in reality, moves up and down. So, it assumes lots of different scenarios with lots of different growth rates.

Now, as I said earlier, typically it assumes a thousand different outcomes for the client. So, the starting fund value is compounded by a range of growth rates which move up and down over the period. That also means we can attach a degree of probability to each outcome, because, some are more likely to happen than others. Now, the benefit to the client is they get a better understanding of what their future benefits might look like and the range of outcomes they might have, and also how likely they are to occur. The benefit to use an adviser is more robust financial planning, which helps to better manage the client's expectations. And I think these scenarios highlight the need for customers to be invested in portfolios that are specifically designed to help manage downside risk.

At Royal London, we have got our Governed Retirement Income Portfolios or our GRIPs, and that's what they're there for to help manage that downside risk. And also look out for tools offered by providers. Now again at Royal London, we have something called our drawdown governance service and that monitors income sustainability to check if a client's plan is on track or not. If you do want further information with that then, please get in touch with your usual Royal London contact.

Now, this is what we call our heatmap. And it shows how sustainable different terms and withdrawal rates are. Now it assumes investment in a low-risk multi-asset investment. It's actually our Governed Retirement Income Portfolio three and we're assuming a 1% total charge. Now we've categorised the scores into different bands too, so we can understand what good and bad looks like.

For example, we think 85% or more is highly sustainable because it means that 85% of the time the customer will achieve this level of income or more and 15% of the time the customer will achieve less. A score of 50% means half the time the customer will achieve less than their desired income. Therefore, we've categorised this as not sustainable.

The purpose of this is to generate a conversation between you, the adviser, and your client to discuss what the score actually means for them and you can see that over 35 years a withdrawal rate of 4.5% is highly sustainable, that's the 86%. And that only over a 20-year term is a 6% withdrawal rate highly sustainable. And where it starts to get interesting, it is really between that 5 and 7% rate. As term increases beyond 25 years, 7% quickly becomes unsustainable. And this is useful to show how term and income withdrawal rates impact sustainability and it can be a good starting point for a discussion with your client.

Right, as well as income sustainability, we also need to talk to clients about inflation and life expectancy. And you've probably got wonderful tools which explains about likely life expectancy. But, don't forget about the one that's on the Office of National Statistics, (ONS). Perhaps you could even send a link to your clients in advance of any meeting. So, you can then discuss the results. We know people underestimate their life expectancy by between roughly five and ten years on average. So, if they look at this themselves, they'll be much more likely to be engaged with the life expectancy conversation.

Now, the ONS tool it gives the average life expectancy for each age, as well as the chances of reaching 92, 96 and 100. And if you're discussing this with your client, you can highlight that the Office of National Statistics just looks at average life expectancy in the UK. And if their client is wealthier than average, then their life expectancy will likely be longer. Because you know what? Wealthy people tend to live longer than average.

Okay, the next thing that the FCA highlighted in their thematic review is risk profiling.

Now one of the key points they make around risk profile is there's a difference between attitude to risk and capacity for loss. Now they say and I'm quoting here, "Attitude to risk represents an individual's mindset or willingness to accept risk whereas their capacity for loss considers their ability to absorb losses". And that's a really important distinction, isn't it? Particularly in relation to retirement income. You could have a brash risk-taker whose attitude to risk may be completely suitable for income drawdown. But their capacity for loss, how much their fundholding or withdrawal rate could reduce without materially impacting their standard of living. That may not support using income drawdown in the same way.

Of course, there's often an information asymmetry at play here, too. Many clients, even those with a pretty robust financial knowledge, may not be able to identify how their retirement income needs, which will increase with inflation during retirement, can be sustained over decades. So, I'd argue that capacity for loss is very much an adviser-led analysis and while both attitude to risk and capacity for loss are important, I think clients are less well positioned to be able to identify their own capacity for loss than they are attitude to risk.

Now in this thematic review, the regulator highlights the client's attitude to risk and capacity for loss is likely to change as they move from accumulation to decumulation, and due to this, it will need to be reassessed. And we'll look at that a bit more in just a second. But before we go to that, there's the point around finalised guidance. Now in this thematic review the FCA actually say and again I'm quoting "We have also published final guidance on how to establish the risk a customer is willing and able to take in making a suitable investment selection". I think it's fair to say this isn't a new document. It was produced in 2011 by the then Financial Services Authority, the FSA. But I guess it pleads into the Audrey Lord quote "There are no new ideas, just new ways of making them felt". Now if you haven't done so recently, it'd be worthwhile dusting this off and have another read and we will include this in the follow-up email.

Right, and as you can see, based on the data survey that 221 of 970 firms that only around a fifth of firms have a different process to assessing attitude to risk and accumulation as opposed to decumulation. Now while that's a bit higher at approximately 30% when it comes to capacity for loss, it's still pretty low considering that the FCA make it clear that people's attitude to risk and capacity for loss can differ significantly as they move from accumulation to decumulation.

Although I don't have it up here, the thematic review also states for the desk-based reviews, so the 100 files from the 24 firms, the risk profiling showed no distinction between accumulation and decumulation.

Right, here are some examples again of good and poor practice relating to the periodic review of suitability and I won't go through it in any detail just now. I just want you to have it for reference later.

Okay, the next point highlighted in the thematic review was that of advice suitability. And integral to this is information gathering. In fact, within the first paragraph of the advice suitability section, the FCA states, and I'm quoting again, "Establishing sufficient information about key areas helps firms show they have properly considered all relevant factors about the customer. So, fact-finding should be complete with no gaps, inconsistencies or missing relevant information".

The FCA do actually highlight areas of concern relating to advice suitability and I've listed the main ones here. Now they identify these areas of concern through the use of their Retirement Income Advice Assessment Tool that I mentioned earlier, and to me this just highlights once again, how useful it is that advisers have access to this tool so you can test the suitability of advice. I'd always suggest that if you do use this tool to check files, assume that if information isn't clear on the file, the regulator will assume it isn't held. And if that piece of information is integral to the path leading to why a particular recommendation is suitable for a client, that is unlikely to be rated as suitable.

So, let's have a look at these points in a little more detail. I'll not cover the investment risk point again, as we've just spent some time looking at it and there are other things we want to cover off.

First of all, we consider the advice suitability findings from the desk-based review. Now that was a smaller one that looked at the actual files rather than the survey response. And as you can see, of the 67 files assessed using the RIAAT, two thirds were rated suitable, and the other third had material information gaps or there were concerns with the suitability.

Okay, so focusing on the database review and looking at unnecessary or excessive charging. And actually, it's pretty good news for most of the firms in the desk-based review, 21 of the 24, the FCA actually said they had set out their charging structures transparently and in a way customers could understand. It was generally clear how charges varied for initial versus ongoing advice, different fund values and the type of service provided by several firms consider circumstances where charges might not represent fair value for customers and would apply a cap or consider a reduction.

And with these firms, the FCA found that the level of charges recorded in their advice models broadly aligns to the work involved in delivering the different levels of service. Now, it's not that surprising the FCA gave so many firms a positive review here, because the points the thematic review highlights show that these firms are following the essence of their consumer duty. In fact, the FCA didn't make too much noise in this thematic review about costs and charging and whether the product or service met the consumer needs and objectives at the most competitive price. But I think that's perhaps because price and value is one of the four outcomes of the consumer duty, which is the overriding regulation in financial services.

For a small proportion of firms though, there were concerns around transparency in how easily a client could understand the charging structure and therefore their likely costs. Elsewhere, the thematic review comments on a small proportion of firms not accounting for the different needs of clients in the fee structure, and really the umbrella covering all of this is as the price and value outcome, as I said in the consumer duty. Obviously, this is hugely important, but as I suspect we're all fairly cognisant of the requirements under the consumer duty, I won't elaborate further today.

However, I have included the poor advice examples. I think it illustrates something the regulator definitely don't want to see. They don't want ambiguity around charges. The client needs to know upfront what these are. Right, I'm now going to pass you over to Justin. He's going to look at the next area of concern, and he'll take you through to the end of the webinar. Over to you, Justin.

Thanks, Craig. Hi, everyone. Look, another area of concern highlighted in the desk-based review was that of the recommended product not meeting the client's objectives and there were a few key points made here. The first I want to touch on is that of maintaining independence to ensure advisers are exploring sufficient options to meet the client's needs and objectives.

Now, I've drawn out a few quotes from the thematic review around the diversity of retirement income products used where pension money remains invested. So, they weren't talking about annuities or later life lending here. But if we look at the comments, I think the regulator's position is pretty clear. To be independent, advisers need to show they have a diverse range of products to meet customers' needs. The long-term nature and complexity of retirement income products makes fair charges and continued value (sounds pretty consumer duty to me) over the life of the product important factors. And the last point is highlighting that if you're only using one platform, then it may be more difficult to show that you have a sufficiently diverse range of products and providers.

And do you know what? I think this ties in with the concept of target market groups in both the consumer duty and of course, PROD before that, there is an expectation that firms will segment their clients into target market groups and then create solutions that match the needs and common characteristics of that group. While it's not impossible, it would seem less likely that one single platform has the features to satisfy the needs and objectives of all your target market groups, or even that all of these groups need a platform solution, and that some of them wouldn't have been more suited to a lower cost solution. Perhaps with a range of investment solutions suitable for drawdown, maybe already mapped to target markets.

Now, another point raised in the thematic review was the frequency of using the same product for accumulation and decumulation. And I know we've touched on that a couple of times already. Once again, while it may be suitable in some instances, the FCA make it clear they expect clients' needs to change from accumulation to decumulation, and that would often lead to the need for different solutions in each phase.

So, we'll move on now and look at some of the key issues identified in that survey of the 977 firms. And the first one there will be no surprise in the consumer duty world. Potential vulnerabilities not identified, recorded or explored, despite there being evidence on the file to suggest vulnerabilities may be present. Now, client vulnerability is probably a session in itself, but in decumulation, where presumably most people's capacity to earn further income is reduced, and they're faced with this new concept of income sustainability, it's easy to see why vulnerability could lead to greater detriment that it would perhaps in accumulation.

Next point we're touching on there is knowledge and experience of investing and understanding risk and that was sometimes given insufficient attention or not documented on the file.

And the last point, expenditure analysis not being recorded or completed, so it wasn't always clear what income was needed and what proportion of this was non-discretionary.

Now, anyone familiar with the DBAT, which relates to pension transfers, as Craig mentioned earlier, will know about the split between discretionary and non-discretionary income. The concept aligns with the idea that capacity for loss is not only breached when the client can no longer cover the essentials (which I always describe as heating, eating, shelter and clothing), but rather when they can no longer afford those things that are not essential but make life worth living. In other words, when they experience a significant drop in their standard of living.

Now this image is actually part of the RIAAT, not the DBAT. And this is the template used by the FCA, as Craig mentioned, when assessing the suitability of retirement income files. Now at the very least your file needs to contain this information. But in addition, a robust methodology for how you arrived at these figures, evidence to support them and to be able to demonstrate suitable stress testing of retirement income expenditure.

Although I don't think you can rely solely on the RIAAT, as your file really needs to have a lot more information than is required just to populate the RIAAT, it can be quite a useful checklist with regards to information gathering.

Now, some questions are more useful than others, I would say. But when we look at the top bullet point here about wider financial circumstances and things like state pension forecast missing, okay, the RIAAT can be very helpful to highlight the main areas that the FCA expect to be covered. If your files aren't capturing some of this information, then it's likely that they will be deemed that there's material information gaps, MIGs as the FCA call them. And the FCA deem that if you're not in possession of all the material information, you're unlikely to be able to arrive at the most suitable recommendation for the client. Now, just judging by the tone of this thematic review, the focus has been on material information gaps, certainly since the DB thematic reviews. It feels like material information gaps are an area that the FCA is really looking to tighten up on. Best premise to work from is that if the evidence isn't clear on the file, then the FCA will assume that you don't have it.

Okay. Now, looking quickly at these next two, the review found issues with the needs for income or lump sums not being quantified or timeframes for which income was needed not being stated. If it's not clear why income or lump sums are needed, then it's very hard to evidence whether another option would have better suited the client, or indeed, why the client needs to do anything at all. If the time frame for income need isn't clear, how do you assess sustainability of that income? And the bottom point there, future lifestyle changes not explored or recorded without accurate information on this, income sustainability once again is virtually impossible to assess.

Now, the final point raised just in this section of the thematic review with regards to advice suitability, was this, it was "unclear whether information relating to the risk of capital erosion, the potential for annuity rates to be worse in the future or that income levels might not be sustainable, had been disclosed".

Now you'll see, I've put this comment on its very own slide. You might be thinking that that's because I couldn't fit it on the other one, and that would be a very good guess as well. But it is also to point out that these are the same risk warnings that the regulator has insisted income drawdown clients be given since income drawdown was introduced back in 1995. Now, it might be these warnings seem so basic, so inherent within drawdown, that they're barely worth highlighting, but the thematic review was confirmation that the FCA absolutely do expect these risk warnings to be explicitly given to prospective clients.

Okay, on this occasion, we only had an example of poor practice. I would like you to read that at your leisure once again. But now, moving on and looking at the control framework.

Now, the FCA stated advisers must take reasonable care to establish and maintain appropriate systems and controls over their business, and that this should include providing their management with information to identify, measure, manage and control risks relating to regulatory concerns, for example, the treatment or the fair treatment of customers.

Now, of course, this was a message hammered home by the consumer duty, wasn't it? But the thematic review highlighted a number of firms had difficulty providing fully completed advice registers, which meant that the FCA didn't receive a full record of advice transactions from which to select advice files to review.

From the files they did review, they identified inaccurate or inadequate management information (MI) for over half of the firms, and in several instances, they found advice registers were so inaccurate that the advice scenario didn't match what was recorded.

Now the main areas of concern for the control framework were, that recommended solutions were not recorded, which made it difficult to identify transactions that might pose a higher risk of customer detriment. Now, when it came to the ceding scheme details, there were a number of issues and I'll just run those off there.

The ceding scheme arrangements weren't shown, so the arrangement the customer held before the retirement income advice was given was unknown. The ceding scheme-provided names were missing on occasion, so it wasn't possible to identify plans that might have held underlying guarantees or safeguarded benefits. And where ceding scheme provider names were recorded, there were instances where the ceding plan features such as underlying guarantees and safeguarded benefits were not always noted, and when it came to the advice, whether it was just initial or ongoing wasn't recorded in some instances. And likewise, the level of initial or ongoing advice fees wasn't always shown. And finally, it was on occasion unclear whether files had been quality assurance checked.

Now, fortunately, the RIAAT once again can help with this as it highlights the details the FCA are expecting you to gather. Firstly in this, which is sort of question 7 about the ceding scheme, where you can see the pertinent information which they said should be gathered but wasn't, and then secondly, on the next slide, of the RIAAT, the tool highlights what information should be gathered for the purpose of the proposed new scheme, and makes clear that if you're using multiple propositions for the client or you're moving to multiple propositions, the details will need to be included for each one of these propositions.

Now, one area which may need extra thought is whether the client has or is eligible for state pension benefits. As for many people, state pension will be a key part of their future retirement plans and will provide a guaranteed level of income, possibly to cover essential expenditure.

However, based on the DWP figures from May 2023, it said that only 52% of people aged 65 to 69 were entitled to the full new state pension, and this might therefore mean that individual clients have a shortfall and great care should be made with any assumptions for those who have, maybe, lived abroad for a period of time or have had long periods of economic inactivity without claiming benefits, or perhaps they've had long periods of low-paid employment, or simply for those people who have retired early.

All of these clients may not receive a full new state pension. Of course, you can and probably do get the client to do a state pension forecast using the government's website so that you've got a clear and accurate picture of how much state pension they are entitled to.

Okay, to some extent, the points the FCA raised with regards to the periodic review of suitability, also relate to the last section that we looked at, the control framework, but at a high level, the points the FCA made here concerned clients paying for an ongoing service but not receiving it. Now, clearly that is not acceptable.

So the FCA consider the ongoing review of suitability to be of paramount importance for decumulation clients. And my top two points here highlight the main reasons why.

Okay, not only does the regulator state there's a higher likelihood of decumulation customers displaying traits of vulnerability, but that, and I am quoting here "failure to review factors such as income needs, changing circumstances, objectives, risk profile and health conditions, and to put in place appropriate systems and controls to support those clients who are vulnerable, risk such customers not being treated fairly". That's the end of that quote there.

Now they provide a reminder that cross-subsidy is not acceptable. So, the ongoing adviser charge in respect of a pension plan must be for the provision of personal recommendations or related services for that plan. Now, what would seem the purpose of reiterating this is to make it absolutely clear that if an ongoing adviser charge is being taken, then the review needs to take place. The ongoing charge for this can't be used to fund a different service for a different planning product altogether.

Well, I thought the FCA were reasonably positive on the subject of ongoing reviews. They did highlight some instances of reviews being paid for but not being delivered. Now, by a long way, the main reason for this was clients declining or not responding to the invitation. But if you're being paid for a service, it's no real surprise the FCA would like to see significant action from firms to rearrange these reviews. And if the client continually declines or declines to respond at all, I suppose. And if that pattern is repeated over a period of time, then to take steps to ascertain if paying for an ongoing review is in the client's best interests if they're not taking them.

Now, it wasn't quite so positive to disclosure to the client of what is involved in the ongoing review service. Of the 24 firms involved in that desk based review, the FCA found four of these firms did not set out clearly what services were included in an ongoing review, and their concern here is that customers may not be receiving the expected levels of service on a consistent basis.

Now, in addition to this, the regulator has concerns around the monitoring of reviews they and I am quoting once again here, “expect firms to track and monitor when review meetings are due and identify whether any are missed where firms don't measure key information or are not able to access this easily, they may find it more difficult to demonstrate the delivery of good customer outcomes”. And that's the end of that quote there.

Once again, here are some examples of good and poor practice relating to the periodic review of suitability. Once again, I won't go through it now, you can review that at your leisure, later on.

Just before we look at some best practice points around ongoing reviews, let's revisit what COBS says. COBS 9.3.3 states "when a firm is making a personal recommendation to a retail client about income withdrawals, it should consider all the relevant circumstances, including the client's investment objectives; need for tax-free cash in their state of health; their current and future income requirements; existing pension assets; and the relative importance of that plan given their wider financial circumstances and the client's attitude to risk", ensuring that any discrepancy is clearly explained between their attitude to risk in this income withdrawal product and against their other investments.

Okay, so of course these things change over time. So, our starting point with reviews could be to reconfirm how the current plan meets the client's needs and objectives. Now, you would expect the client to know this, but it might just help to revisit why you and the client arrived at the decisions you did last time you met. Just remember, many people take PCLS first and then income perhaps much later on, and therefore might not be giving enough thought to the functionality that the plan needs to have when they do start drawing income.

There's the nuts-and-bolts aspect updating the factual information, assets and liabilities, income and expenditure, who's reliant on the plan, that sort of thing. Perhaps you may want to send out the fact-find in advance of the meeting so that you can focus on aspects which have changed, kind of like a re-fact-find really, if you like.

We need to identify changes in the client's personal circumstances and whether these require action. This requires, clearly, a lot of open questions to draw out the softer facts. Do changes in the client's attitude to risk or capacity for loss or interest rates or other circumstances, perhaps meaning annuitising needs to be reconsidered. Regardless, it might be worthwhile producing an annuity quote, particularly with rates having increased and keeping it on the file with an explanation as to why this is still not best suited to their needs and objectives. Do the beneficiaries need updating, maybe grandchildren noted on, so that the scheme administrators have the option of giving them income rather than just a lump sum? If you don't know what I'm driving at there have a word with your usual Royal London Business Development Manager, they'll be able to explain that.

How is the client's health? Their spouses if they have one and any dependents?. Will any changes mean that there will be a change in the client's circumstances? Have the client's cognitive abilities deteriorated? Do they have a power of attorney in place? Do they need to review their expression of wishes form? Is there a need for ad hoc withdrawals for special purposes, or just to create an emergency fund that can be accessed really quickly if needed? Does the level of regular income need to increase or decrease? Have new sources of income kicked in, maybe from DB plans or from the state pension or inheritances, meaning that withdrawals from this plan can reduce or conversely, have other income sources now been exhausted, meaning withdrawals from this plan actually need to increase?

Of course, the investment performance needs reviewed, once again, probably a session in itself, so I won't try to do it justice in 50 words or less. But the best practice generally suggests income sustainability should be reviewed, at least on an annual basis, if not more frequently.

Now, just to bring this to life a little, I do know of one adviser using the Royal London drawdown governance service, and that adviser got a real shock one quarter when they discovered that one of their clients' income sustainability rating had changed from green, which you won't be surprised to hear means on track to red, which doesn't mean it's on track when they checked that quarterly update. Now, as it turns out, the client had taken a further £20,000 from the plan without consulting the adviser. The client thought they were doing the right thing because they'd withdrawn that money to maximise their ISA allowance, but what it had done was make the withdrawal strategy unsustainable. Now, the point that I'm driving at here is that it's these regular reviews that stop issues like this getting out of hand. They saw that had happened pretty soon after and were able to speak to the client about it.

Now, if you want further information on our drawdown governance service, which acts as an early warning system of trouble brewing, get in touch with that usual Royal London contact to find out a bit more.

But also, how are the changes to the investment strategy and investment portfolios identified in action? Now, the FCA clearly differentiate, as we've mentioned a few times, between accumulation and decumulation. Also, from a fraud perspective, distributors (so financial advisers can be distributors) must identify a target market and have a distribution strategy for each of those target markets. And they say in there and I'm quoting again, "the target market identified by distributors for each financial instrument should be identified at a sufficiently granular level". And that's the end of that quote there.

So, for example, segment your client bank by maybe life stages and have specific strategies for each segment. And what we're highlighting here is advisers who currently use centralised investment propositions for drawdown might want to consider a centralised retirement proposition instead. It's less likely that the same investment strategies will be suitable for both accumulation and decumulation.

Now, charges obviously need to be considered as they have a major impact on fund values, and we need to monitor changes in the client's attitude to risk and capacity for loss. And all of this will help identify if the client would benefit from the move to a different proposition. Are there any legislation changes likely to impact the sustainability of the current advice? You know, perhaps your adoption of a PROD or CRP or consumer duty style process means the recommendation you'd give the client today looks quite different to the plan that they're in. Maybe income tax changes, benefit level changes, inheritance tax changes, or even just the recent abolition of the lifetime allowance mean the client needs alterations to their plan.

Now, if any circumstances are identified that require changes, then these need to be agreed and implemented. Crucial within this is to clearly outline the roles and expectations for both the firm and the client, so there's no confusion over who needs to do what and by when. Now, this is probably a great time to manage expectations as well, particularly if a switch of provider is being considered as it could, certainly in the short-term, impact the flow of income.

Of course, the review meetings need to be documented so that we have a lasting record on the file. Now, just on that point, if you identify when establishing the drawdown plan that the client would benefit from reviews, but they decline this service from you, it might just be worth considering having the client sign a document that outlines the importance of ongoing reviews that they've been offered by your firm, and that the client has chosen not to take that offer up.

Finally, you might want to discuss the frequency of meeting, you know, whether that needs to be altered. Schedule the next meeting. And if the client is approaching age 75, schedule a full review meeting in advance of that 75th birthday. I do appreciate that age 75 is no longer a benefit crystallisation event since the abolition of the lifetime allowance. But we've got to remember you can still take PCLS post age 75, so not everyone will have taken their PCLS by then, but of course, if that member dies post age 75, that tax-free lump sum dies with them. Everything is taxable at the beneficiary’s marginal rate. So as a result, people might want to, I'm not saying they should, but they might want to, take that PCLS before 75.

Just to finish off, I want to bring to your attention the meaning of value report we generated at the end of last year in conjunction with The Lang Cat. Now, in a consumer duty world where you need to evidence and document that your clients are receiving good value on an ongoing basis, being able to identify what value means to different groups is obviously of paramount importance. So, this report explores what consumers said value meant to them, what advisers think their clients value, and how well the two overlaps. It also outlines a method that you could use if you so choose, to measure value within your own firm in a robust way and on an ongoing basis. Once again, we'll make sure that there is a link to this document available for you as well in the post-event follow-ups.

If you need help with any of the things that we've spoken about today, remember, Royal London has a range of robust, sophisticated tools that can help support your client conversations and your advice process. And, there are a number of reasons why you might want to speak to your usual Royal London contact about them. Firstly, they work. Secondly, they're free, and I don't just mean free for the first stage of the tool and then a charge for the really useful bit. No-no, absolutely free to you advisers. Thirdly, they aim to enhance, not to compete, with your existing tools. And finally, what I think is probably the most important part of all to be honest, we all know that tools are great if you're comfortable using them, but they're less use if you're not. So, we offer free online training delivered by our Business Support Unit Team, covering not just the tools that we've mentioned here, but also systems such as, best advice systems, the likes of ONM, pension profile, select a pension, my apologies to any of the ones I haven't mentioned there, and so on. So, please speak to your usual Royal London contact about any and all of these services.

That's pretty much all we've got time for today. I'm going to let you have another look at the learning outcomes. Now I do hope you found this webinar beneficial, and you managed to get something out of it. You can see the learning outcomes there, I hope we've met these. If you do have any questions about this presentation or you'd like to know more about Royal London and how well our propositions can help you in this market, then speak to your usual Royal London Business Development Manager.

Now remember, after this webinar, you can answer the CPD questions, and it will generate your CPD certificate. But do bear in mind, it can take up to 24 hours to generate, so don't be alarmed if it's not with you immediately. And also, as I think Craig mentioned, the documents that we think are relevant, including the thematic review and a copy of the slides for this will be available on our CPD hub, along with a video session of this recording within the next few working days as well. Okay, that's pretty much all we've got time for, really just leaves me to say thank you very much for your time. I hope that was of some use.