Following on from a workshop presentation at Money Marketing Interactive, Just Group business development manager Martin Lines talks changing investment strategies and the horizon for retirement.
When and how should advisers be changing investment strategies for accumulating clients as they enter decumulation?
As always, it depends on the client. There are a number of factors to consider. Clearly, for many the adoption of ‘lifestyling’, where the fund was gradually moved towards safer assets awaiting the purchase of an annuity is less relevant. Some may say that no change is needed, but I think that the client’s attitude to risk should be assessed along with capacity for loss. In fact, the latter is arguably more important in decumulation. The risk of not maintaining sufficient income over the long term is probably the biggest of all! Also, for some the pension fund may be trying to achieve different things. Is it really being used for income, or is growth the objective whilst other assets are being used? All of this will play into the investment strategy. Where the pension fund is being used, there are a number of options which may make a difference to the fund make-up. What level of probability of success is being assumed? Is a ‘pots’ approach being used, or perhaps, a natural income scenario? How much of the fund is going to be used to purchase a guarantee either now or in the future? Does that have an impact on how much flexibility is left on the remaining fund to invest differently?
How can advisers make sure ongoing decumulation plans remain suitable?
Regular reviews are vital to ensure that any significant change in circumstances has been taken into account. Perhaps the clients priorities have changed or they’ve started to receive other benefits that warrant a change to the pension income levels. Any number of ‘life events’ may have occurred, including those that might impact on health, perhaps requiring further income or lump sums. Indeed, it may be that a higher level of secure income can be achieved. If the client’s priorities or attitude to risk has changed, this should also be reflected in ensuring the plan remains suitable. Where the client is invested, clearly the investments themselves will need to be monitored. There may be a case of rebalancing and assessing the impact of any current economic conditions and how resilient the funds have been. It will be important to analyse whether the plan still meets the capacity for loss requirements and is appropriately stress-tested. Also, as time goes on, the cost of securing a guaranteed income may be more cost-effective.
Are platforms and cashflow modellers set up to deal with complex decumulation strategies?
Certainly technology can help. Some would say that it is difficult to stress-test a plan without mapping scenarios out using these tools. However, these can only be based, at least in part, on projections, so clearly it’s important to review plans regularly. There are also tools that can help to determine what a sustainable level of income might look like. However, it is important to recognise that different parts of the portfolio, pensions or not, maybe required to do different things. It is not always appropriate to have a single ‘rate’ of income across a whole portfolio. The part of the funding that is in place to support essential income may bear less risk or even require a guarantee, whereas there may be certain retirement objectives that the client may be willing to take more risk on. Cashflow planning tools do allow for a significant amount of information and scenarios to be tested, but like anything, are only part of the conversation and as good as the information that is loaded. The adviser’s role in continually reviewing the client needs and aspirations in retirement and ensuring the cashflow strategy matches as closely as possible is key.
What really qualifies as a centralised retirement proposition today?
Often when this is mentioned, the assumption is that the proposition is about the investment journey. However, that is just part of the process. In decumulation, with the additional risks, such as longevity, sequencing and income sustainability, there is more to it. Of course, the investment strategy is central, but a CRP is really about a consistent advice process. There are a number of facets to consider, since the ‘choice architecture’ has changed since pensions freedoms. Arguably, since clients have more choice, and potentially more risk, a robust process needs to be in place. This would cover a detailed assessment of non-negotiable income needs as well as goals, paying due attention to capacity for loss. In terms of meeting these needs and aspirations, the reasons behind selecting a strategy and the accompanying ‘science’ should be documented. This can be complex, so selecting the right tools to help apply the science is key. The CRP should also account for stress-testing and ‘what-if’ scenarios. This may mean having a robust withdrawal statement, agreeing what the plan of action is should things go off-track. Finally, a detailed review process is needed. As well as adjusting to any new income goals, advisers may also need to bear in mind other things that may present themselves in later life, such as a need for care funding.
How should advisers be drawing the line between life planning and investment selection for retirees?
Advice is all about working out what is right for the client taking into account their objectives and aspirations. Fundamentally, without understanding what the ‘life plan’ is, it would be difficult to have an investment plan that meets it! A needs and goals-based approach is the starting point. The building blocks of ‘what’, ‘why’, ‘when’ and ‘how’ are a good place to start. It can be very tempting for people to see the availability of a relatively large sum today, but how will it be used? Are the life goals realistic? Are they prioritised? Are they quantified accurately? There are, perhaps, some behavioural biases to overcome so that the priorities are set in the right order, starting with covering the ‘non-negotiable’ income need. The investment (or guarantee) strategy here might be very different to the investment approach taken to meet other goals. Whatever the proposal is, understanding how much will it cost and when it will be needed will inform the financial plan. It may determine where to invest over what period to make it a reality. The two are inextricably linked.
Do you see any product innovation on the horizon that could help?
I think that if you look at the changing world of retirement, innovation is still needed. More clients want the potential for income and asset growth, but are taking on more risk. Meanwhile, more advisers are managing assets on platform. I think there is potential for providers to work more effectively in this environment by allowing guaranteed income to be managed alongside investment funds. This gives consumers more scope to balance the need for security and flexibility. It also means that advisers can manage more of the CRP process online. By using this type of scenario, it is also possible for guaranteed income to be used flexibly within a SIPP environment to cater for changing circumstances. Just are part of an exciting development in this particular area.