When George Osborne introduced pension freedoms in 2014, he radically transformed the pensions industry, and since then the market has seen some impressive product innovation.
Not only did the reforms impact the way financial advisers supported clients in meeting their retirement objectives, but they also opened up the sector to increased regulatory risk and scrutiny.
Every CPD event following the introduction of the pension reforms discussed sequencing risk and how best to manage it.
With that, providers saw a greater requirement for cash flow modelling, which inevitably led to a flood of new tools launched to fulfil this need.
From easy-to-use, relatively straightforward ‘what if’ scenarios, to more complex life-stage planning tools, this influx of innovation was welcomed at the time.
Now with the Financial Conduct Authority announcing a retirement income advice thematic review, is there a risk of more disruption and difficulties for pension advisers?
One particular ongoing problem for the industry since 2014 has been the plethora of approaches from providers, making it difficult for advisers to manage and for clients to keep up with what’s going on with their pension pot.
Providers often manage and facilitate crystallised and uncrystallised pension pots, with some choosing to create a new plan for the crystallised pot, giving the client two pension products, and others keeping everything in just one plan.
From a two-pot perspective, it is easier to adopt two different investment strategies – one for accumulation purposes and the other for decumulation.
Alternatively, if there is only one pot, and depending on the limitations of the product wrapper, it can be difficult to manage different investment strategies.
In the early days, we typically saw the adoption of a three-pot strategy:
- Pot one: held in cash to pay for short-term income requirements;
- Pot two: to continue to grow the pension fund;
- Pot three: typically in fixed interest to protect future income requirements.
This strategy necessitated ongoing maintenance and rebalancing, and of course required clients to seek ongoing financial advice.
The industry had also been inundated with fund managers launching new monthly income funds or polishing older funds and repurposing them.
The reason for this is that monthly income was previously seen as a suitable investment strategy in light of clients’ needing regular, stable income throughout their retirement.
However, in reality the income stream fluctuated, and of course wasn’t guaranteed, therefore failing to provide financial security and peace of mind for retirees.
A centralised retirement proposition, as implemented by some advisers, can definitely go some way to addressing the requirements of the FCA’s new consumer duty rules, especially in terms of defining target markets and ensuring consistently good customer outcomes.
However, a ‘one-size-fits-all’ approach will not work, so it is vital that advisers assess the needs of their client base, and providers supply products that meet the needs of their target markets and that these products offer fair value.
