The FCA recently published its final report of the Retirement Outcomes Review (MS16/1.3) and simultaneously launched a consultation paper (CP18/17) on proposed remedies.
What were the main issues?
From the interim report, we knew there were three areas of concern:
- Consumers follow path of least resistance, creating a need for more protection for less engaged clients.
- Consumers buy drawdown without advice, so may need additional protections.
- Lack of product innovation, so awaiting market driven response.
The final report keeps these areas of concern front and centre as regards client outcomes. While the focus remains the non-advised clients, the emerging trends around investment solutions, charges and technology are of significance to advisers.
What does this mean for advisers’ centralised retirement propositions?
We have spent much of the last year reviewing adviser firms’ centralised retirement propositions (CRPs) and making sure they have all bases covered.
How does the Retirement Outcome Report for non-advised clients relate to adviser-led CRPs?
We believe there are important read-throughs for adviser firms’ CRPs as regards investment objectives, use of defaults, alternatives to cash, charges and technology.
As regards investment solutions, the regulator has outlined standardised investment objectives for decumulation which reinforce how different investment objectives are in decumulation compared to accumulation.
This is consistent with our view that accumulation strategies are inappropriate for decumulation.
Furthermore, these standardised objectives all tie in with the three big questions when assessing suitability in retirement:
- What is the pot size?
- What is the time horizon?
- What is the withdrawal rate?
Use of default pathways
The regulator is also supporting the use of default decumulation “pathways” using “ready-made” investment solutions to fit a “risk or withdrawal profile”.
This is the first time the term 'withdrawal profile' has been used, to our knowledge, to differentiate risk profile in decumulation from risk profile in accumulation.
Cash is king no more
The regulator estimates that a staggering 33 per cent of consumers that do not take advice hold their whole drawdown pot in cash accounts or exclusively in “cash-like” funds, and considers that over half of these are likely to be better served by an alternative strategy.
This is consistent with our belief that cash is a safe asset only in the short run, but pernicious in the long-run owing to inflation risk.
Decumulation strategies should be multi-asset in nature to make the most of a retirement pot over time without taking undue risk.
The regulator is asking providers of non-advised drawdown to consider the 0.75 per cent on default arrangements in accumulation as a point of reference.
This necessarily drives the use of index-tracking funds within ready-made funds portfolios, as we are doing.
We construct and manage our retirement income portfolios using index-tracking exchange-traded funds (ETFs) to 1) maximise diversification; 2) access transparent targeted exposures (e.g. income targeting for equities and duration targeting for bonds; and 3) cost efficiency.
The final call to action is on technology.
The regulator is calling for a drawdown comparison tool built in conjunction with the Money Advice Service, or MAS, and the industry that enables non-advised consumers to make like-for-like comparison and a “techsprint” to promote innovative solutions for consumers to help engage with and navigate their options.