For pension nerds such as myself, dinner party conversation starters include the question, 'Where were you when George Osborne announced pension freedoms?'
I was watching the Budget at work when, in the words of one of my colleagues, the then-chancellor "changed flipping everything". His expression was more colourful, but I will leave that to your imagination.
I remember being struck not just by how revolutionary the changes were but by the power of the language Osborne used. No doubt he was trying to emphasise the importance of his announcement and the benefits of the new flexibilities.
However, the things he said that day have arguably had a profound effect on how successful the policy has been in practice, and still present challenges today.
“No one will have to buy an annuity” was seemingly interpreted by many as 'no one should buy an annuity'. Annuity sales plummeted, even though consumer surveys consistently reported that what many people wanted in retirement was a secure lifetime income.
After what has been a relatively benign environment for retirement advice, we are now facing challenges on all fronts.Even today, with rates looking far more attractive, annuities still have a poor perception.
“People… should be trusted with their own finances” – this feels instinctively right, but that then raised a real problem for the financial services industry and its regulators.
If people were to be trusted with their own finances, then how far should the industry go to direct them from pursuing a path that many of us would say is not in their best interests?
There was also a guarantee that everyone "will be offered free, impartial, face-to-face advice". We were offered PensionWise, now MoneyHelper, which is a great service but is a long way from the personalised advice that we have seen is needed.
In this context, what do we define as a 'good retirement outcome'? The client being able to buy the sports car they have always dreamt of or having a reliable lifetime income?
And what does it mean for those giving retirement advice? Are they to help clients pursue their financial goals or to save them from themselves? The reality is that, despite the rhetoric, advisers are expected to point clients towards sound retirement decisions, not just implement their wishes.
Pension freedoms has undeniably helped the advice industry. But after what has been a relatively benign environment for retirement advice, we are now facing challenges on all fronts.
Markets remain volatile and, in our opinion, are now entering a new inflationary cycle characterised by de-globalisation and decarbonisation.
Returns will be harder to come by and risk is everywhere. The increased cost of living will mean retirees will need more from their retirement savings while their children are facing even greater pressure from increased housing costs.
Higher interest rates are leading some to turn away from investing. Frozen personal allowances, reducing tax thresholds and the changes to pension allowances increase the opportunity for effective tax planning, but there is huge uncertainty around future policy, increasing the risk for clients and their advisers.
On top of all this we have the Financial Conduct Authority's thematic review of retirement income advice.
I am confident that the FCA will find that advice in this area has generally been appropriate. But with the environment for retirement income advice going through such change there is a risk that the decisions of the past are reviewed in the context of today.
So how might retirement advice need to develop from here?
We believe that retirement income clients are very different from those accumulating wealth in several ways.
Retirement income clients are likely to have more specific objectives in terms of income and legacy needs. They are also likely to be less resilient – that is, they have fewer options if markets go against them and therefore tend to focus on not losing money than further growing their wealth.
This presents an opportunity to think about risk in the context of achieving the client’s objectives rather than focusing just on investment volatility. The two are closely linked but are not the same.
The consequence of this is that investment strategies will need to focus more on balancing risk and reward rather than aiming to maximise return for a given level of risk.
Inevitably, the increase in interest rates will lead to greater use of secure income and annuity sales are already surging. But let’s not forget that low rates were not the only reason that annuities were unpopular.
With a couple of notable exceptions, products remain relatively inflexible. With state pensions increasing and client income needs declining with age, it is not clear that locking into a fixed income early in retirement makes sense.
There are other ways of capturing higher interest rates to provide security without sacrificing flexibility.
Finally, the FCA has said that it will use the review to assess how firms are implementing consumer duty in relation to retirement income advice.
While I hope that the regulator recognises the need and value of ongoing advice in retirement, there will no doubt be focus on the substance and cost of the service provided.
It will be important that it recognises the value that comes from ongoing financial coaching. Just because an annual review does not result in action being taken does not mean it is not necessary or valuable.
Good advice is often as much about stopping clients from making poor decisions as it is helping them make good ones.
We are entering a new phase for retirement income advice. Helping clients realise the aspirations Osborne set in that Budget nearly a decade ago remain front and centre for advisers.
However, the market, economic and regulatory environment are all set to be more difficult.
This new phase will be more challenging for advisers, but one in which their advice is likely to be more valuable than ever.
Richard Parkin is head of retirement at BNY Mellon Investment Management
