Pensions  

Does decumulation need a shake-up?

But while the industry can agree that all these issues present risks, opinion is split on whether products need to change alongside adviser and platform practices.

The FCA appears to think so: its sector views paper flagged identifying appropriate retirement income products as another area of concern with respect to advised sales.

“A lack of innovation in retirement income products, product complexity and fee structure opacity, together with the complex nature of the financial needs these products aim to meet, make this a challenging area for both consumers and financial advisers,” the regulator said.

“The presence of a few large providers that control the majority of assets held in pension savings products limits the incentive for competition in this space.”

Lawrence Cook, director at Thesis Asset Management, says although there isn’t a shortage of literature, it is true that few solutions are available on the market. 

“I have attended many conferences in the past year where advisers have asked for evidence of new and innovative solutions, but often they have been left disappointed,” he says. 

“Not all advisers feel this way yet, but I suspect this will change as understanding of accumulation and decumulation improves.”

Investors should have a more defined strategy than just investing in a handful of multi-asset funds, Mr Cook adds. He says to do otherwise is problematic, as the client is at the behest of the fund manager selling across all assets in order to produce the income. 

“Clients, over time, should be rotated out of less-risky assets, such as cash and cash-like assets and into equities, which will provide a portfolio with long-term sustainability,” he argues.

“It is important to use cash and bonds first and leave equities untouched – this will ride out any volatility over the short term and mitigate the risk of pound cost ravaging. A fund simply cannot do this, and using a traditional multi-asset model portfolio service where all assets are sold down proportionately each time for a withdrawal suffers the same problems.”

Intermediaries, however, still see multi-asset as a key cog in the wheel. Cicero’s ‘Retirement income experience study’, published in March 2018, found 96 per cent of advisers expect multi-asset funds to form at least a portion of a client’s portfolio.

Bring on volatility

Perhaps the biggest concern for retirees using equities to draw income is a downturn in markets.

Anthony Gillham, head of investment at Quilter Investors, says: “From a market perspective, apart from a couple of wobbles, things have been pretty benign since pension freedoms. It hasn’t been so apparent that a different solution has been needed for decumulation; the rising tide has lifted all boats.”

But markets have taken a turn over the past six months. The FTSE 100 index, having edged towards the 8,000 point mark in May 2018, had dropped to below 6,600 points by the end of December. It has since recovered fractionally, but the depth of fall would certainly have impacted those using equities for retirement income.