I have written before on the question of longevity and “knowing your number”.
My approval of the idea that everyone should be given details of their expected lifespan, while extending the principle to telling people much earlier in life and then on a continuing basis as their cohort expectancy changes, has attracted some criticism.
We are arch purveyors of statistics: critical illnesses, income required, fund performance, market returns, postcodes, life expectancy and gilt yields.
So the suggestion that financial plans should take account of the fact that one in six people will survive beyond age 99 seemed eminently sensible, and no less controversial than the good practice of reviewing and, if necessary, updating other statistics used in personal financial planning, such as interest rates, inflation, equity risk premium.
But a presentation on the investment impact of the pension reforms got me thinking. If a number of our clients decide they prefer the flexibility of the new arrangements and have no interest in annuity purchase then what is the impact for our financial planning and our businesses?
The vast majority of clients currently combine a core of known and secure income with income from a range of other more variable sources, whether that be Isas or drawdown arrangements. The security of that core income means that there can be a degree of risk taken with the other sources of income which does not need to be as secure, as long as it is “there or thereabouts”.
But if your client wants all of their income to come from flexible pension or investment arrangements how will you manage that? What assumptions will you use? Presumably your client hates the low returns available from gilt-based investments (annuities) and wants a higher income, probably transferable to a spouse or other family, probably increasing over the years.
If your client wants all of their income to come from flexible pension or investment arrangements how will you manage that?Annuity rates provide the market cost of that income and is a good benchmark which allows for the complete transfer of risk from the client to the annuity provider with a profit margin to boot.
So, I wondered, how will adviser businesses, their PI insurers and the regulators themselves deal with the wholesale transfer of investment risk, not to annuity providers but to adviser firms and their advised portfolios, while giving clients the security they want alongside the profit that firms need to advise these clients throughout their lifetimes, however long they may be?
It gives “capacity for loss” a whole new meaning.
Gill Cardy is network development director of ValidPath
