Getting the best pension outcomes for clients

Jon Young, financial planner at WealthFlow, says that a client-focused approach is key: “The most important and fundamental way of dealing with investment risk is by getting to know your client.

"Everyone is unique and so is everyone’s idea of what they want to do in retirement, so having conversations as early as possible about the lifestyle clients want should determine the investment strategy, not the other way around.

“Once that has been established and stress tested with a regular look at the client’s capacity for loss in retirement, then setting the minimum level of investment risk needed to meet these goals is the way forward, and the absolute best outcome for the client.”  

Catriona McCarron, wealth manager at Ascot Wealth Management, comments: "I believe the starting point has to be expectation management with regard to investment risk in pension planning. 

“We’ve had a rollercoaster of financial markets in the past five years, but I do fear the post-April 2020 recovery being so quick has given some false hope to less experienced investors. 

“Of course, advisers should complete annual risk and suitability procedures with clients to ensure they are taking a comfortable amount of investment risk within their pensions, but I think advisers can do more to help educate clients on why their investments are moving in a cyclical fashion during ongoing review meetings. Given the time horizon for investors staying in the markets for defined contributions (assuming drawdown) this is an important conversation topic.”

She adds: “In getting the best outcomes for clients, advisers should ensure they are continuously testing and meeting their client’s objectives, and should continue to take a critical view of their investment portfolios.”

Investment risk, outcomes and advice 

Looking at the main investment risks associated with pensions and the impact that these can have, Keith Churchouse, director and chartered financial planner at Chapters Financial, says: “In principle, pensions only require two things: money and time. If time is short (where the client is close to retirement), then the impact on effective future returns may be limited.”

He adds: “The other main investment risks for pensions include plan charges, which reduce real returns through erosion of plan values; inflation risk, which reduces real returns; investment volatility, ie drawing benefits at a time when market volatility may be effectively working against an investor; and unsuitable investments."

To get the best outcomes, he says: “Simply put, advisers should undertake financial/pension planning to help a client understand their objectives and the overall risks that may work against a client’s overall plan.

"Reviewing any existing planning is also important, not only to take into account a client’s own individual needs, but also to take account of the evolution of the pensions world and the opportunities this may offer, such as reduced charges and increased flexibility.”

Fiona Tait, technical director at Intelligent Pensions, says: “In terms of investment, the ‘best outcome’ for a client is the one that is close to the one which is expected, not necessarily the one which provides the highest return possible, and this is particularly true of a pension where a client is likely to be relying on a specific level of income to meet ongoing expenses.

“Advisers obviously cannot promise that investments will perform as expected, but they do have experience and access to research, which allows them to make reasonable assumptions and identify whether the client’s initial objectives are in fact realistic before any action is taken. 

“Once the client’s income requirements have been agreed, advisers can calculate the risk parameters within which the client’s investments must operate, including strategies that mitigate or insure against the impact of poor investment returns. 

“Doing all of this significantly increases the chances of the client meeting their objectives without guaranteeing it.” 

Jonathan Cooper, head of paraplanning at Drewberry, says: “Clients' goals for invested money should be clear and defined. A robust framework for investment strategy selection needs to be followed. Given the risks of drawdown, and decumulation generally, there should be alternative frameworks for this that differ to those goals where accumulation and growth are required."

Gavin Jobson-Wood, specialist business development manager at Scottish Widows, says: "Advisers need to balance the requirement of ensuring their client is exposed to sufficient investment risk in order to achieve their retirement objectives while considering the client’s own views on investing (for example, attitude to risk). The adviser has a responsibility to educate their client in this regard, highlighting the risks of taking too little risk as well as of taking too much risk."

Ryan Medlock, senior investment development and technical manager at Royal London, adds: “Adopting a broad diversification strategy is an effective way to mitigate the impact of investment risk for clients. Proper diversification will mean you are always going to be holding at least one asset that is underperforming, but I’d argue that this is very much a success of the design and not a failure.

"As the turbulence over 2020-21 has shown us, that design can not only be an effective path to maximising risk-adjusted returns, but can also serve as a defence against rising inflation through exposure to different investments, particularly commodities. 

“Many pensions clients will have an investment horizon of years, if not decades. It's a simple statement, but one that can be forgotten during periods of sharp volatility. We would all deny that we are susceptible to allowing heightened emotions to dictate our investment decisions, but we saw it in 2020 when feelings of panic, agony and depression resulted in a rush out of quality diversified assets.

"It’s important to stay diversified, be rational and remain disciplined.”  

Fiona Nicolson is a freelance journalist