The future of retirement planning: risks and opportunities

From professional connections to defined benefit transfers, how can advisers take advantage of pension challenges?

If you want excitement in your financial planning life, then the at- and post-retirement space is where you need to be.

This was certainly the message that came out of Money Marketing’s annual Retirement Summit last week, when the best minds in the profession discussed the most pressing issues for clients who want retirement advice.

Yet the sheer range of subjects tackled, from how advisers can make the most of pension tax rules and develop sustainable decumulation strategies, to defined benefit transfers and regulation, highlights the complexity retirement planners face today. The opportunity an adviser gains from meeting a client that wants to transfer a DB pension, for example, is tempered by the risk of the process going wrong.

The potential danger of poor advice can be exacerbated by sequence risk in drawdown, where matching an appropriate investment strategy to a client’s evolving needs is far from straightforward.

All of these financial planning dilemmas are occurring in an unstable political and investment environment fostered by Brexit.

No financial adviser will have quite the same answer or approach to dealing with these issues, as the profession continues to debate a host of grey areas. Impassioned views were shared frankly from all sides of the debate at the Retirement Summit, but advisers suffer from limited time and resources, while being buffeted by these headwinds.

Against this backdrop, how can retirement planners prioritise the most pressing challenges, and set themselves up to take advantage of the most fruitful opportunities available?

Building alliances to help clients

Some advisers argue the profession could do a better job of using the skills of accountants and lawyers to serve clients with retirement needs. This is because professional connections might be capable of helping with a query the adviser is not able to answer, or provide a service they cannot.

Furthermore, a legal practice or accountancy firm might be a potentially lucrative source of business for advice firms by way of introductions. That is particularly true if an accountancy or legal firm has strong roots in the local area.

Essential Wealth managing director Sonia Wheeler says: “I refer a lot of business to accountants and solicitors, and I do get referrals back. It is useful to have a good introducer agreement and, for me, what is important is the introducer provides terms for new business.”

For Kingsfleet Wealth managing director Colin Low, the attraction of reputable introducers is that they are a way to vet clients he might not want to work with.

He says: “We want clients who are recommended to us from a lawyer as they are engaged.

“We do not want people who have found us on Google, as it is likely they will not be engaged then.”

Nonetheless, First Wealth financial planning director Claire Phillips warns advisers should manage their expectations about how much business they can secure from introducers. She says: “It takes a long time to get [accountancy and law firms] to understand the clients we want, so do not expect overnight results. Keeping sources of referrals updated is a good idea as well.”

Apart from using introducers to find suitable clients who need retirement planning support, advisers say cashflow modelling is essential, especially for decumulation.

But some say there are limitations to cashflow modelling and it needs to be more holistic, given the complexity of the pension freedoms world.

Progeny Wealth director and chartered financial planner Tracey Evans says: “We insist on annual reviews and use cashflow with realistic assumptions that model scenarios for clients. But the majority of clients rarely draw down solely from pensions income and we should be talking about managing the whole of a client’s assets sustainably.

“There is no utopia or silver bullet, and there are also no hard and fast rules. As clients age, they do not want to take so much investment risk.

“In decumulation, difficult conversations need to happen and those depend on the skills of the adviser to succeed.”

Paul Armson: The seven deadly sins of cashflow modelling

Others, such as Timeline chief executive Abraham Okusanya, go even further regarding the limitation of current cashflow planning tools.

He argues that improvements in life expectancy, how it differs from person to person, and how asset classes actually perform cannot be accounted for by traditional cashflow modelling software.

He says: “What we try to do is capture the underlying boom and bust cycles in the capital market.

“We do not just look at pension pots in isolation, and so the state pension and DB pensions are factored in.

“We can only model what we know, put it in the machine and then run scenarios for clients.

“If there is a decline in the capital markets in the early phase of retirement, that is a problem.

“To get around that, an adviser can have withdrawal changes agreed with the client before capital markets go south, to ensure the withdrawal rate remains sustainable.

“Traditional cashflow tools are not fit for purpose for financial planning as the capital markets and the world we live in work differently to them.”

Expert view

Advice is very important but TPR cannot legislate for it

Savers want to know where their money is and ensure their pensions are run properly. At the regulator, we want savers to make informed decisions, but my feeling is that bespoke advice is expensive.

The importance of advice and the value it brings have to be made clearer. But one of the elephant traps for the regulator is how we communicate the importance of advice without straying into saying what we think good advice is. We are not going to legislate for outcomes and tell savers what they should do with their money, or what their objectives should be.

How we communicate the importance of advice is something we could look at more closely with the FCA in our joint strategy.

Over the next few months, you will see a few developments that will help members. We are starting a communications hub, where trustees can go to find good-practice guidance to communicate with members. As part of the communications hub, TPR will also be reviewing our own material on DB transfers to see if that can be refreshed and made clearer.

We are continuing work on what a saver’s journey looks like and where there is danger. We have found putting out risk warnings does not help consumers. There will also be more work on costs/charges and scams with the FCA.

Fiona Frobisher is head of policy at The Pensions Regulator

Future trends and traps

It is not only cashflow modelling that has to evolve with the complex landscape of retirement, but the business models of advice firms as well. The pension freedoms unleashed billions of pounds worth of assets into the economy from final salary schemes.

This created demand for pension transfer specialists who have been in short supply, especially since the British Steel Pension Scheme debacle. But the accumulated wealth contained in DB schemes cannot last forever, and the eventual shift to an environment where there are few DB pots left is inevitable.

Before advisers know it, clients with huge DB pots will be consigned to history. They will be replaced with clients that came of age under auto-enrolment and have the state pension topped up with a workplace defined contribution scheme.

Will the eventual extinction of DB transfers be the final nail in the coffin for high-charging business models at some advice firms?

PensionBee chief executive Romi Savova says: “Non-advised behaviour is totally different from advised behaviour. People in PensionBee will just draw down 25 per cent tax-free cash. We are not seeing people spend their pensions in the way we would have seen in the past.

“A lot of advised clients are very well off compared with the vast majority who will rely on their state pension and a bit of DC saving to top that up.

“In 20 years’ time, we will have a world where what people have is the state pension in conjunction with a DC pot. How can advisers get to those clients early and help them? I think we will see a lot of people muddle through.”

There is an argument firms that are not forward-thinking and rest on their laurels could experience considerable price pressure on their profit margins. There is certainly a focus on value for money within advice and financial services more broadly. The FCA, The Pensions Regulator and the Competition and Markets Authority are all pushing hard to champion value for money within their own sectors. IFAs also worry that a few upheld complaints about DB transfers from the Financial Ombudsman Service in quick succession could damage the profession for years.

Goldsmith Financial Solutions founder Hannah Goldsmith says: “This [value for money] is where the industry does not do justice for clients. There will be a shift from big Blockbuster-style companies to Netflix-style companies that are more efficient and serve clients’ needs better. As a profession, we need to start looking at the way we charge, going forward.”

Centre for Policy Studies research fellow Michael Johnson goes even further, and believes technology will make many roles in financial services redundant. He says: “We do not need 80 per cent of the financial services industry. There is the question of the pensions dashboard, and I believe it could be one of the ultimate technology disruptors. If you do it digitally, the savings are enormous and it will send life insurers ballistic. Why do we just think of the dashboard in terms of assets? Why don’t we have liabilities on the dashboard?”

sam slomaAdviser view

Sam Sloma
Managing director, Engage FS

Retirement advice is about helping clients understand life is short and things can change.

You are here to advise people, but is that just about money or something more like their aspirations?

You need to tease out what clients want to do. The biggest issue is that people who need financial advice cannot pay for it.

DB decision time

High charges and poor advice were prominent themes in the British Steel debacle, where many steelworkers transferred their DB pensions into high-charging Sipps.

These had high exit fees, annual management charges and other opaque ways to rip clients off.

The fallout from the scandal is still being felt within the profession and has made some IFAs decide to leave the DB transfer market. The ongoing struggle when IFAs have to renew their professional indemnity insurance is also an issue that is unlikely to be resolved soon.

Delta Financial Management director Jarrod Ellis says there needs to be an investigation into the PI market, while Insight Out Financial managing director Jayne Gibson says talk of unsuitable DB transfers has been blown out of proportion.

But Lane Clark & Peacock actuary and partner Jonathan Camfield says: “Trustees and employers are very focused on DB transfers, and are concerned about the current marketplace. We administer 100 DB pension schemes and some of the stuff that crosses our desks from IFAs is worrying.  There are some cowboys out there and British Steel is not an isolated incident.”

Regardless of what changes there are, one aspect of retirement planning remains constant, and that is understanding the objectives of a client.

This is a universal truth and will survive whatever regulatory and political changes are made.

At times, advisers can confuse a client’s objectives with the product they have been put in, some argue.

Better Retirement retirement director William Burrows says: “People are not rational and retirement is far more nuanced than people understand. The plan is the strategy and the product is the tactic.

“The financial planning or strategy challenge the industry faces is getting the client to reveal their objectives.

“I feel passionate about this; just because you have a modest pension pot does not mean you should be a second-class citizen.”

Adviser view

Steve Buttercase
Planning principal, Verve Investment Planning

There is a conflict going on in the retirement space as there was a patrician-style approach, but it has given way to a total free market model, where there is no protection at all, with many wanting to put protections in place. IFAs have to tell clients to eat their vegetables and then their pudding.

If they eat pudding all the time, they will get financial diabetes.

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