It may be hard to believe but it’s been nine years since pension freedoms were introduced in the UK. Over this time, those aged 55 and over have had the flexibility to fully access their retirement savings to meet their bespoke needs.
It goes without saying that the demand for help has been high, with pressure increasing all the time as the UK deals with an ageing population.
The advice sector however has risen to the challenge and the FCA’s recently- published findings following its retirement income advice review backs this up.
The regulator’s report and its Dear CEO letter sent out to adviser firms at the end of March are a vote of confidence in advisers that, overall, they’re doing a good job.
The review’s results highlight the good practice being carried out across the sector although the FCA adds that it ‘saw some firms may not be meeting the needs of their clients, potentially leading to poor outcomes’. The examples of good and poor practice carefully laid out in the report are very useful as they bring the retirement income advice process to life.
By giving these examples in the report, and setting out the areas where processes could be improved in its Dear CEO letter, the FCA has published a clear set of guidelines that will allow firms to review their practices and make them more robust to meet the highest of standards.
Evidence that retirement income advice works
To support its review findings, the FCA also published a Retirement Income Advice Assessment Tool (RIAAT), along with some guidance on how cashflow modelling tools should be used to demonstrate suitability.
Not only is the RIAAT a potential tool to help advisers review their own advice files, it can help them to understand how the FCA assesses suitability, providing useful insight into the regulator’s thinking.
This support from the FCA to tighten up processes, along with its thematic review findings, is evidence that retirement income advice works.
And with the growing demand for advice, the industry now needs to help create more capacity within adviser firms so that more people approaching retirement can be helped. It is however a complicated area and the regulator’s Advice Guidance Boundary Review needs to help find a solution for consumers, at both accumulation and decumulation, to access advice so that good outcomes at retirement are available to all.
Next steps to help meet the FCA’s requirements
With the FCA’s endorsement that the vast majority of advisers are doing their job well, and giving examples of what ‘good’ looks like, firms should take the opportunity to review processes in the five key areas the regulator highlights to help ensure consistent client outcomes:- Income withdrawal strategy/methodology – This is all about income sustainability. The FCA wants to see that firms have good processes to ensure sustainable income and that clients understand the risks. This typically means using cashflow modelling or withdrawal rates although there’s an apparent preference for the former, given the regulator’s separate paper on cashflow modelling and extensive coverage of it in their tool. As part of the advice process, it’s key to have an approach for determining sustainability, personalised to the individual and clearly communicated.
- Risk profiling – Firms need to recognise the levels of risk as clients move from saving into drawdown. As above, it’s key to have clear written processes and consistent application of risk profiling. Both Attitude to Risk and Capacity for Loss are important here - some firms in the review did not examine Capacity for Loss. Firms also need to note that the approach to measuring Attitude to Risk and Capacity for Loss is likely to change when clients are approaching retirement.
- Advice suitability – Gathering relevant information via the fact find and giving good advice is at the heart of what advisers do. This section in the FCA’s findings references how many firms do this effectively and gives examples of good and poor practice. These include, for example, identifying vulnerabilities, taking into account wider financial circumstances - recognising retirement is not just about a pension – and anticipating and communicating the impact on tax and the risks of change in the future which are personal to the individual and / or how economic risks could push the client off track.
- Periodic review – Well covered in recent press activity, this area highlights the need for clients to only pay for services delivered, and that they’re receiving an annual review if they’re paying for ongoing advice.
- Control framework – This is about ensuring all clients have the same positive experience and that it can be effectively checked. It’s key to document, and quality assure, processes to ensure all parts of the advice process are covered off, and that all advisers within a firm are delivering consistent outcomes.
Applying the recommendations in the areas above will help firms to look to continually improve the outcomes they are delivering for clients. Although other findings were included in the FCA’s review, the above are the core areas it chose to highlight.
Retirement income advice remains a priority for the regulator and it will follow up on its findings with firms which took part in the review, and carry out further retirement income advice supervisory work to tackle any foreseeable harms.
A priority for the Advice Guidance Boundary Review
Nine years on from pension freedoms, the regulator’s findings from this review illustrate both the demand for advice and how well advisers are delivering to meet clients’ needs.
The Advice Guidance Boundary Review should now prioritise how to deliver a more streamlined approach to retirement income advice and to increase capacity within adviser firms to help more consumers.
With adviser firms’ retirement income advice practices working and working well, this is where the most urgent need for change is.
Read more of Alastair Black’s Insights including The pandemic, changing attitude to risk and the link to capacity for loss.
The value of investments can go down as well as up and your clients could get back less than they paid in.
The views expressed in this blog should not be regarded as financial advice.