There is an old joke that if you put 10 economists in a room, they will give you 11 different answers. When it comes to defining one of the newest pieces of jargon in the pensions landscape, the “centralised retirement proposition”, the industry has reached a similar lack of consensus.
This was bought into stark relief when Money Marketing asked advisers at our Retirement Summit earlier this month if they ran what could be described as a CRP. The question was met with widespread uncertainty around the term.
Platforum’s UK Fund Distribution: Advice in Decumulation report out this month categorises a CRP as a specifically designed centralised investment proposition for clients in decumulation.
CIPs in general drive a more standardised approach to the investment process and are defined by the FCA as “a standard approach to providing investment advice, including how the client’s risk profile is assessed through to a centrally agreed investment solution”.
The Platforum report surveyed 188 advisers about CRPs and asked if their firms operated one. Fifty-four per cent of respondents said their firms do not operate a CRP, compared with 46 per cent that do.
Platforum also looked at the differences between smaller and larger firms by assets, and found only 29 per cent of the smallest firms have a CRP, while 58 per cent of the largest do. Coupled with an increasing focus on managing investments in decumulation from the FCA, this suggests that CRPs need further exploration, particularly among advice firms at the smaller end of the market.
While some advisers say CRPs are a legitimate lens to look at decumulation through, others are sceptical, as they regard them as a marketing ploy by providers to sell their products and acquire assets under management.
Providers such as Scottish Widows are optimistic about propositions that could be classed as CRPs, but will advisers be convinced about a new approach to investing for retirement portfolios?
The provider pitch
Over the past year Scottish Widows has tried to increase the appeal of its decumulation proposition for financial advisers. In July 2017 it launched a CRP guide to offer additional support to advisers who believe their service would benefit from more support when planning retirement income needs for their clients.
In February Scottish Widows launched four retirement funds with the aim of helping advisers build flexible solutions. It then launched a new drawdown tool in April to make clients’ pots last longer and cut administration overheads for advisers.
Scottish Widows retirement expert Catherine Stewart says the guide, funds and drawdown tool are all linked to the introduction of the pension freedoms and the increasing demand from clients for drawdown to be managed properly.
Although many firms have CIPs for accumulation, Stewart argues a CRP is a step up from that, as it can contend with issues in decumulation such as longevity, and different investment challenges, such as sequence of return risks.
Adviser view – William Mowatt, director, Mowatt Financial Planning
We all understand what a CIP is and are moving towards CRPs. In my mind a CRP is not just about investing money for the client, although that is part of it. It also covers longevity risk, a sustainable withdrawal rate and a proper grasp of what the client will need through the retirement journey. Advisers started to think about CRPs with the establishment of cashflow modelling and the increase in clients needing drawdown planning. These trends are likely to continue over time.
Retirement planning also has to factor in changing patterns of expenditure, interest rates and inflation, as well as changing personal and health circumstances as a result of ageing.
Stewart adds many of these are “known unknowns” and need to be carefully considered, as each decision can have a significant impact on how much a client has to spend, both today and in the future.
Dentons director of technical services Martin Tilley has seen a wide spectrum of investment propositions for advised decumulation clients among the 6,000 Sipps on the provider’s books.
Some advisers delegate the investment of funds to discretionary fund managers and others manage the investments themselves. Tilley says the pension freedoms prompted a sudden shift in the way clients use pensions and the way advisers speak to clients about pensions.
Tilley says: “Before the freedoms clients would drawdown on pensions before other assets, but the pension freedoms reversed this almost immediately. Advisers have taken this on board and now recommend that clients should draw on other assets before they tap into their pension.
“When advisers think about CRPs they have to consider individual clients’ personal circumstances. With the pension freedoms there is a chance to get pensions badly wrong, especially in decumulation. If there is any part in the pensions journey when you need advice, it is decumulation.”
Building the bridges
Clearly designing a CRP is hard work, so where should advisers start?
FinalytiQ director Abraham Okusanya is not surprised that advisers at Money Marketing’s Retirement Summit did not have an understanding of CRPs, as it is a phrase bandied about by consultants and providers with little explanation.
In Okusanya’s experience, advisers often think CRPs mean changing a portfolio when meeting retirement needs, but this oversimplifies many of the challenges of decumulation.
He says: “The essential question to ask is, how should the advice process for retirement in decumulation be different from accumulation? You need a set of philosophical principles that can deal with the challenges in decumulation such as longevity, capacity for loss and sequence risk.”
Some advisers view CRPs as a legitimate lens to look at decumulation through, but others remain sceptical
Okusanya adds there are two philosophies that can be applied to managing decumulation for clients. The first is a cautious approach, where the adviser covers the client’s basic income needs and does the best possible to minimise all types of risk.
The advantage is simplicity, but the disadvantage of caution is its costly implementation and that it potentially may go against the aspirational wishes some clients have been planning for their retirement.
Okusanya says many people have not worked hard all their lives to save into a pension only to hand it all over to an insurer to purchase an annuity that gives them a meagre income.
Many say the popularity of drawdown is partially explained by the widely held view among consumers in the years just before the introduction of pension freedom and choice that annuities were poor value.
The second philosophy is using a client’s savings to invest in capital markets to generate income for drawdown, but this is where retirement planning can become complicated.
Okusanya asks: “How do you design a retirement proposition that answers these questions: How much income does the client need? Is the amount sustainable? What do the answers mean for the client?”
According to Okusanya, these principles are the bedrock on which a CRP is built and only after these have been decided can the actual portfolios be designed.
He says: “There are several different portfolio models that can be used for a CRP: the natural yield, total return portfolio – which I favour – and the bucket approach, where multiple funds are tied to a client’s risk appetite for a specific period of time.
Adviser view: Scott Gallacher, director, Rowley Turton
The concept of a CRP is fairly easy to get your head around, but I am sceptical of it. Every few years the insurance providers will push a product on to advisers and the record of these are not good. Examples include with-profits, stochastic modelling and Skandia funds. You have to remember providers want assets and customers so have an interest in pushing these products. They are well intentioned, but you cannot create a one-size-fits-all solution for retirement. It is too complicated, especially for decumulation. Also, advisers can get confused by mixed messages as the providers are pushing one-size-fits-all solutions while the government has come out against default decumulation pathways.
“But whatever CRP advisers develop, it should have a robust withdrawal strategy so clients do not run out of money before they die. This is the central insight and the risk to worry about, whatever philosophy you use and portfolio you design.”
AKG communications director Matthew Ward says advisers should not get too hung up about definitions of CRP or worried about providers pushing products on to them.
It is also important advisers do not focus on the processes of their decumulation proposition at the expense of client needs.
AKG’s recent paper Grasping the Nettle: Working Together to Achieve Better Retirement Outcomes shows drawdown is the area where advisers want the most product development in 2018-19. This coincides with drawdown becoming the popular option when clients exercise their pension freedoms, and the fact that the advice clients receive for drawdown becomes more critical as their savings diminish over time.
Ward says: “One of my concerns about decumulation is how advisers address the risk appetite for their clients. The personal touch is key, and advisers must pick up on individual client circumstances and produce solutions in line with those needs.
“The term shoehorning has been used for CIPs, so could that happen with CRPs?
“It’s a point to consider and whenever you get a process, there is a risk it becomes a tick-box approach.
“Retirement is different now and advisers have a golden opportunity to go and find the solution for the services the market demands.”
The pension freedoms and the drawdown needs of clients have pushed advisers to adopt a more holistic approach to financial planning. Advising a client on decumulation well is harder than planning in the accumulation phase.
An adviser has to contend with longevity, different investment challenges as well as changing patterns of expenditure.
Whatever name is given to an investment proposition and the thoroughness of the process is irrelevant if the underlying advice is generic.
And as Okusanya makes clear, any decumulation strategy must have a sustainable withdrawal rate built in to prevent a client finding themselves left without an income before they die as a result of a poorly thought-out investment solution.
Expert view: Danby Bloch, chairman, Helm Godfrey
Advisers can build a fair, robust CRP for clients
A CRP is an agreed approach for clients who are investing their funds where there is more than one adviser.
Generally in investments there is a tendency for people to go off in different directions, but a centralised proposition requires some coherence to work.
This is even truer for investments meant to help clients in the decumulation phase of retirement. The investment issues in decumulation are more complicated than in accumulation.
The two main risks advisers have to be aware of are pound cost ravaging, where a client sells investments at a lower price than they bought them over a sustained period of time, and sequencing risk, where early losses in retirement have a much bigger impact on a portfolio’s performance than if they occurred later.
Advisers can take a variety of approaches to portfolio design for clients to manage these risks.
One is to have a bucket approach where advisers may set up three portfolios that are attuned to the risk appetites of clients at particular times.
So the short-term portfolio meets immediate spending needs and, for instance, could be cash deposited in an account. The second is a medium-term bucket that might be looking to meet client needs over the next three to eight years. Here the investments might be bonds, fixed interest investments and some equities. Then there is the long-term bucket that would have different investments from the first two.
Other advisers put clients into one portfolio that might make things simpler or riskier, depending on your point of view. Some advisers track these portfolios at regular intervals and others try and time the markets, which is more adventurous.
One of the questions since the introduction of the pension freedoms is to do with inheritance tax. What assets should you draw on first? Pensions or other assets? The consensus is the pension should be used last.
All of these factors are something advisers need to think more about given the introduction of pension freedoms. As the freedoms are fairly new some advisers are still to get their heads around a CRP.
Advisers should have a proposition that treats clients consistently and fairly.