Who controls pre- and at-retirement guidance and what sort of adviser questions are we likely to see in that guidance? Whatever happens, there is going to be a bun fight.
First, an admission. In an earlier life I was a retirement income product bod in Australia.
As a life company man, I ran a suite of annuity- and investment-linked drawdown pensions, or allocated pensions, as they were called.
Later, as an independent industry consultant, I designed and in some cases on-sold allocated pensions and annuities for most of Australia’s banks, life companies (we still had them back in the 1990s) and investment managers.
So for what it is worth, and by no means wishing to preach, here are some questions I think advisers may consider asking clients in this new flexible retirement world we now inhabit.
Yes, some are gobsmackingly basic, but others are a bit more probing.
Foundation (obvious) questions:
- How much money do you, and your spouse, have to invest?
- In what tax wrappers, if any, is it held?
- What other income and capital do you have?
- How much regulatory risk are you prepared to accept?
- What are your plans in relation to working beyond retirement age?
- What are your, and your spouse’s, realistic longevity expectations? (Not just life tables plus five or 10 years)
- Do either of you have any health issues and what sustainable insurance policies do you have in place?
Retirement income planning questions:
- What are your liquidity and income expectations and goals during your and your spouse’s lifetime, and afterwards?
- Should there be any reversionary rights?
- What impact may those expectations have for your joint and single money management?
- Do you have any preference for guarantees?
- Should the guarantees be to income and/or capital?
- Should the guarantees be flat or indexed?
- Should the guarantees be applied at the beginning, middle, end or throughout the life of the client and any spouse?
- A term-certain annuity with a nil residual capital value to fund the first several years of retirement only, allowing time for the investments in equities and property to grow
- A deferred annuity maturing at age 80 and converting to an immediate annuity to meet the income needs of the client for the rest of their life
- An immediate annuity bought some years after retirement when higher payments may be expected than if the contract commenced at retirement
- An immediate annuity bought at retirement.
Practice (harder) issues
As an adviser, you will also have to deal with several other issues, which may include any of the following:
- What proportion of moneys, if any, should be on a platform, taking into account the FCA’s concern that all advice must be for the benefit of the client?
- Where would you find appropriate suitability software to assist you in the calculations?
- How do you take into account clients’ capacity for loss?
- What role does individual risk tolerance play in the planning process?
- How will you create planning processes that build towards clients’ informed consent?
The FCA asks that you undertake due diligence on all services, products and calculators that you use. This means that you must recognise their weaknesses and compensate for them in your professional practice.
I do not profess to understand much of the political intricacies of the UK retail advisory marketplace but I foresee the following:
In the short term, up for redirection is about £12bn a year that was originally destined for the welcoming arms of life company statutory funds; and in the longer term, there is up to £4trn in legacy products that will leach out to the platform world, or new alternatives, over the next 20 years. Stage one of the battle is platforms versus life offices with new “visible and transparent” retirement solutions. Stage two is to survive to be a beneficiary of the £4trn tsunami.
The UK advisory community is unique. Compared with other countries it has a stranglehold on both distribution and advice.
But that situation may be temporary. Over the next few years there is little doubt that the banks and life companies will be back, the robo advisers will arrive and Amazon, of the social media monsters, will join the fray.
As Daniel Kahneman wrote in his book entitled Thinking, Fast and Slow, the critical issue in determining an individual’s response is not the question itself but how the question is framed.
So the battle for control of retirement guidance remains an important one.
But hey, what do I know? I’m just an innocent Aussie abroad.
Who is expected to deliver the Budget guidance guarantee?
The Money Advice Service and The Pensions Advisory Service have both been suggested as possible third party organisations able to deliver the at-retirement guidance service. There has been widespread criticism of the idea that providers would deliver the guidance, particularly as Chancellor George Osborne wants the service to be impartial.
How much is it expected to cost?
The Government has committed £20m to fund start-up costs, and will impose a levy on providers and trust-based schemes for the remainder of the costs. Cost estimates published by the Association of British Insurers, published last month, put the cost of the service at up to £13m a year.
Based on the ABI’s “medium uptake” scenario for 2015, the trade body estimates 200,000 people will use the guidance service, costing £7.2m. This is based on an average cost per client of £36.
If 375,000 people take up guidance, the bill is estimated at £12.8m.
The “lower uptake” scenario, based on just 25,000 seeking guidance, would cost around £1.5m.
The ABI assumes 10 per cent of users will want face-to-face guidance and factors in the cost of hiring staff with pensions experience on a salary of around £45,000 to provide 30-minute sessions.
The trade body’s cost estimates assume the remaining 90 per cent will access guidance via the phone. But if more go online, the costs reduce significantly. For example, the £13m higher uptake scenario reduces to £9.5m if 30 per cent take guidance via the web.
What is happening now?
The FCA has been tasked with developing a set of standards for the guidance to ensure it is impartial and of high quality. The work is being headed up by FCA adviser and former ABI director of conduct regulation Maggie Craig. The regulator is consulting with the industry on the guidance and is expected to report on its findings later in the summer. The guidance has to be in place by April 2015.
Paul Resnik is co-founder of FinaMetrica