The pensions revolution will provide “key moments of truth” that advisers should seize on to prove their worth to the sceptics, says Clive Bolton.
The managing director of the insurer’s retirement solutions division thinks there is “some work to do” to switch a whole new cohort of customers onto the benefits of advice, including a rethink of the options offered to people who might only have the appetite for one-off help.
Bolton says: “Increasingly, advice is a non-advised, self service journey that spikes into advice. Decumulation is a lot of steps where you can’t go back. That is a fantastic opportunity for advisers to make sure clients are making the right choice before they’re pressing a button – once you take money out of a pension, you can’t put it back in; once you retire you can’t unretire; once you downsize you can’t upsize.
“Those key moments of truth are where advisers can really demonstrate the value of their services.”
He says helping customers understand the basic rules around the freedoms – such as the tax implications of taking cash in chunks – make it easy to show, in pounds and pence, the advantages of speaking to an expert.
“It is a case of instant payback, compared to recommending a fund where you need five years or so to prove to them it was a good idea,” he says.
Bolton himself is a relative latecomer to the life industry, having spent the majority of his career in general insurance until making the switch in 2006. He started out as an actuary at the Pru in the 1980s and worked on some of the great insurance innovations of the time, including creating the first flood map using radar and using postcodes as a proxy for wealth.
It was work like the latter – “which helped stop poor people subsidising rich people’s pensions” – that gave Aviva a “campaigning platform”, Bolton says.
“That was the translation from doing something because the maths says we should, to this has an industry and societal aspect to it, we want a fair retirement process.
“The retirement solutions manifestations of that is the next stage. It’s all about outcome, not products.”
Small pot challenge
For Bolton, today’s challenge is making the system work for someone with a pot size that takes them above trivial commutation limits – where often it will make sense to take the whole lot as cash – but well below the kind of savings that can be drawn down slowly or produce a decent annuity income.
“We focus on the person with £50,000 in their pension fund”, he says.
“It sounds like a lot to an individual but if they’re in their 60s, it’s not a lot if they live another 25 years. I don’t think they’ll cash it in and spend it but advice will be quite expensive as a proportion of their funds and someone with that size of fund is not used to being financially engaged.
“As an industry we need to find ways to support those individuals.”
He notes that pensioners need a pot size of well over £100,000 before the state pension makes up less than half of their income, meaning thousands – if not millions – of people will find themselves on much lower incomes than they might have expected.
Retirement income portfolio
Bolton thinks the reforms mean people will increasingly divide their pensions into “easy access” funds, income producing investments and some form of guaranteed income. The results, he believes, is that decumulation (“horrible, dehumanising language”) is beginning to mirror accumulation, how people save in the first place.
He says: “You’re beginning to look at a retirement income portfolio that’s starting to speak the same language as your savings portfolio.
“At the moment we have two many ‘versus’ – standard annuities versus enhanced annuities, variable versus fixed income – but they have different qualities.
“Our research over the last 15 years of income drawdown and annuities shows there’s been no clear winner, so we shouldn’t ask customers to bet one against the other. It’s very easy to say a blend is the answer; the question becomes what is a good blend?”
He says the investment industry is at a “relatively early stage” in working that out.
“If the market goes down and up over five years, it really matters at which point in your decumulation journey that is. Even if it goes back to the same level, you never recover your losses because you have to take income to live. From an adviser perspective that will be a lot more of an involved conversation than just setting someone up.”
Peering into the future
So far, Bolton thinks the industry has responded well to the bombshell that rattled the windows of the life and pensions companies nearly a year ago.
“I think the industry is behaving very responsibly. We all had to act quickly and if it continues with that ethos, that will bode well,” he says.
“We’re not called upon to be parents in this but we do have a responsibility to explain options that are clear. I think the industry is set up to do that. “
He does warn, however, the many debates swirling around at the moment are “a priori” – people making guesses at customer behaviour.
“We’re peering into the future. I think it will take three years of people going through the system before we see what the new world is like. I don’t think 2015 is indicative of long-term trends. I think it will be informed by how well investments do in that period. If there’s a bull or bear market, that would give a very different feel to the new environment.
“There is also considerable uncertainty around interest rates, which underpin some of the more guaranteed products like annuities. So there’s a lot of volatility, there’s a lot of moving parts in this.”
What’s the best bit of advice you’ve received in your career?
Things are never as bad as you think they might be, and they’re never as good as the propaganda. Keep a clear head and focus on the facts.
What keeps you awake at night?
I don’t lose sleep over anything. But getting everything in place for the first half of this year is a real priority.
What has had the most significant impact on financial advice in the past year?
The Budget and it is still ongoing. We still don’t have all the rules.
If I was put in charge of the FCA for a day I would…
Make sure everyone who works in the organisation works on the front line and actually talks to a customer.
Any advice for new advisers?
If you want to make a name for yourself, crack my £50,000 pot problem.
April 2014–present: Managing director, retirement solutions, Aviva Life UK, and executive chairman, Aviva Equity Release
2012-2014: Managing director, at retirement, Aviva Life UK, and executive chairman, Aviva Equity Release
2009–2012: At retirement director, Aviva UK Life
2008–2009: Pricing and annuity proposition director, Aviva UK Life
2006–2007: Life & UK Strategy Director, Aviva UK Life
1991-2006: Aviva General Insurance