A centralised retirement proposition is no longer a new concept. We’ve all been talking about the importance of this for some time now and that’s clearly reflected in the most recent benchmarking report published by Ascentric, in partnership with NextWealth, which gives a real insight as to how this market is developing.
Of the advice firms surveyed, 50% said they already have a centrally agreed approach to retirement planning in place. Many plans were put on hold last year as a result of the pandemic but the report shows that a further 20% of firms plan to introduce a centralised retirement proposition in the next 12 months.
So why are firms choosing to centralise? Well, it’s hard to look beyond the fact that accumulating funds and decumulating funds will often have very different objectives.
What’s right for a client still saving and not yet considering retirement may well be inappropriate for a customer’s drawdown journey. Perhaps worth noting that although I refer to drawdown, equally the process needs to be considered for other investment types. It’s not uncommon for advisers to consider drawing income from ISAs and/or other tax wrappers ahead of pensions due to the tax advantages and death benefit flexibility available.
The whole objective of a centralised retirement proposition is to put a framework in place, ensuring a robust and systematic process is followed by the firm for all retirement clients.
Yes, investment strategy needs to be considered but really – it’s about ensuring the client understands the risks associated with income withdrawal and the impact this could have on their income sustainability – and indeed their lifestyle.
It should therefore come as no surprise to see that cashflow modelling is front and centre for many firms when advising retirement clients. The report found that 78% of firms use this in their retirement planning generally and 54% have it embedded within their centralised retirement proposition.
Even more importantly 77% of firms using a one said they included a consistent approach to assess the sustainability of withdrawals (the backbone of any retirement proposition) with a fixed rate or modelling tools continuing to be the most common approaches in assessing this.
Determining clients’ tolerance for risk in retirement is also attracting a centralised approach: over half (59%) of firms include a specific attitude-to-risk questionnaire for retirement clients, while 46% include a tool to assess capacity for loss. If you consider the regulator’s definition of capacity for loss – the customer’s ability to absorb falls in the value of their investment before it has a material impact on their standard of living. For me, this is a numbers-based analysis and a fundamental part of adopting a centralised retirement proposition.
Just over a third apply a consistent approach to handling sequencing risk – the risk that the timing of withdrawals will harm the investor’s overall rate of return, especially if portfolio valuations are falling. Tools to assess life expectancy and tax optimisation are also commonly used.
There are clearly some real benefits in adopting tools within a centralised proposition with around a third (31%) of firms citing benefit to the client as the main reason for this. This was also reflected in research undertaken by intelliflo with two-thirds of advisers saying cashflow modelling helped to reduce client worry during the pandemic and almost all (92%) saying it helped clients understand the effect of market movements on their pot.
A fifth of firms think it improves business efficiency, 18% said it helped to meet regulatory requirements and a further 11% think that centralising retirement planning offers an opportunity to improve their business processes.
The ultimate test – how is it working?
To quote President Eisenhower: “In preparing for battle I have always found that plans are useless, but planning is indispensable.” I translate this to ‘hope for the best but train for the worst’.
When looking at investment returns it doesn’t get a lot worse than the onset of the Covid-19 pandemic, and the significant market falls we saw a year ago; not to mention of course the wider consequences the virus had on so many families.
In order to assess how a comprehensive centralised retirement proposition could have helped over the last twelve months, I thought it would be interesting to look at two fictitious retiree scenarios, where one retiree is non-advised and reacts in a short term ‘knee jerk’ manner, while the other retiree is an advised client where a robust centralised retirement proposition is being used, with cashflow modelling and stress testing.
The unadvised client
Andrew doesn’t believe in paying for advice and felt he has always done pretty well with his own investment choices. He, therefore, decides to stick with the funds he has accumulated when he goes into drawdown at the start of 2020.
Andrew’s position as at 1 January 2020
| Pension fund | £500,000 |
| Cash ISA | £50,000 |
| Required income | 5% of pension fund (£2,083 per month) |
Let’s assume investment returns as per the ABI 40-85 sector for simplicity.
Come the end of March, Andrew is horrified to discover that his fund has fallen to £422,889 after only three months of withdrawals. Somewhat panicked, and without the benefit of advice, Andrew moves his entire fund to cash and continues to take withdrawals at the same level. Assuming any negligible return on cash likely to be achieved is eaten up in charges, Andrew’s position at the end of the year is as follows:
| Pension | £404,142 |
| Cash ISA | £50,000 |
| Total | £454,142 |
This represents a fall of almost 10% in Andrew’s overall fund, and could seriously affect the long term sustainability of his income.
The advised client
Susan has exactly the same assets as Andrew but goes to see her financial adviser about her own situation. Her adviser explains they have a tried and tested advice process which includes cashflow modelling and stress testing various scenarios.
Susan invests in the same manner as Andrew.
Fast forward to the end of March and Susan is of course also concerned about her fund. However, her adviser gently reminds her that one of the stress tests they did on her cashflow modelling alerted her to the possibility of a drop in value early on. If that happens, the plan was to take income temporarily from the cash ISA, allowing time for the fund to recover.
With the help of her adviser and following the ‘emergency’ plan agreed at outset, Susan leaves her pension fund invested. Instead, she stops taking income withdrawals from her pension and instead takes these from her ISA. Of course, Susan won’t pay any tax on income withdrawals from her ISA but, for simplicity, we’ll assume the withdrawal remains the same.
At the end of 2020, and aided by the market recovery, Susan’s position is as follows:
| Pension Fund | £516,988 |
| Cash ISA (assumed no return) | £ 31,253 |
| Total | £548,241 |
So, Susan has just under £2,000 less than her starting point, with income paid throughout. Susan could of course choose to rebuild some of her cash ISA. She and her adviser now feel the fund has recovered sufficiently to recommence income from her pension fund.
It may seem this case study is using the benefit of hindsight, however, many advisers will have been encouraging clients to ‘stay in the markets’ last year and reminding them of the conversations that are likely to have taken place at outset, and enacting the strategies needed to cope with one-off situations that can arise. While not all scenarios can be foreseen, a good centralised retirement proposition can anticipate many of them and have a coping mechanism in place ready to be used.
I think what is also important to note the 31% of firms who said they have no plans to introduce one. The main reason given for this is the perceived incompatibility between having a robust repeatable process and the desire to provide bespoke, individual advice.
A centralised retirement proposition should not detract from the individual, client-specific advice being given. At the end of the day it’s an advisers job to help the client identify their needs, the associated risks of going into drawdown (in this case) and how those needs can be met.
Therefore every solution SHOULD be specific to the client. A centralised retirement proposition ensures a framework is put in place, at firm level, and the same process is followed for all clients approaching and entering into retirement.
Even if they are never needed, the additional peace of mind afforded to the client by a sound centralised retirement proposition based suitability process can prove to be invaluable.
Kirsty Anderson is business development manager at Prudential UK