Personal PensionOct 30 2014

‘Bringing drawdown to the masses’ now key challenge: report

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A new report, published today by the Association of Professional Advisers, states that the key challenge facing the at-retirement market now is “bringing drawdown to the masses”.

The statement is contained within an article authored by Steve Lewis, head of distribution for retirement solutions at LV, for the report, which focuses on the future of investment products including in the retirement space ahead of radical changes coming in April.

Mr Lewis explains that while drawdown may now be viewed as the new default product following radical changes announced this year, it is still a risky product.

He writes: “The changes announced hit the masses, as well as the wealthy elite. Now the money in your pension really is your money - and not just held in reserve for the annuity company to eat up.

“The challenge we now face as a result, is ‘bringing drawdown to the masses’”.

He outlines a number of questions facing the market as it grapples with the overhaul of risk assumptions presented by changes, asking how to serve a mass market with solutions which are inherently less secure, and whether warning statements are sufficient for the risk being taken.

He adds: “Will the client say to their adviser in ten years’ time: ‘I know you said I could run out of money, but I didn’t realise you meant it’?”

The report builds on concerns raised by other experts in recent weeks and months, who have argued the Financial Conduct Authority needs to develop new risk warnings for at-retirement products such as drawdown and give more of a steer on suitability and risk in the ‘decumulation’ market.

Mr Lewis also notes ‘simple’ solutions for previously complex products like drawdown need to be developed, arguing that while the ‘wealthy’ are served by advisers, the cost of taking full advice is likely to be “inhibitive in the mass market”.

“The mass market demands simple solutions that are easy to understand. A director of an advice firm that focuses on the mass market recently commented: ‘We don’t all eat gourmet. Trying to distribute some of these products is like selling Michelin star priced food in a Happy Eater’.

“The reality is that people want to plan a retirement they understand, they don’t want hassle. It is possible to build solutions with the options that make the product or solution more adaptable and complex - in the places where complexity is required.

“There is no doubt the product manager of today needs to decide where on the spectrum their product sits -between simple and complex.”

There has been much industry discussion as to what a ‘simple product’ looks like.

Last year the FCA cast doubt on a ‘simple’ products initiative. Published in March 2013, the Sergeant Review recommended the introduction of a “simple financial products badge for qualifying products via a robust accreditation process”.

However, the FCA said it “remains to be seen” whether the introduction of a “simple financial products badge” can be “transformed into tangible changes”.

Chris Hannant, Apfa director general, added: “Changes to the regulatory landscape and to the way consumers access advice are driving innovation and the development of new products. But a crucial consideration for the products of the future must be simplicity.

“There is a desire among the industry and consumers for products which are easy to understand and easy to track. Language also needs to be simple, so that better conversations between advisers and customers can take place.

“These are exciting times for financial services, and the last thing we need to see is unnecessary complexity which has blighted us previously.”

donia.o’loughlin@ft.com