Against a backdrop of economic turbulence marked by inflation, surging interest rates, volatile market fluctuations, and unexpected changes to the lifetime allowance in the Budget, the landscape of defined contribution (DC) decumulation has moved into newfound complexities.
Unravelling this complexity and creating effective communication and engagement strategies for pre-retirement, transition, and post-retirement savers are now the challenges that professionals must overcome.
This was one of the topics discussed at a Corporate Adviser round table held last month where delegates debated ways of meeting the unique needs of individuals with widely differing circumstances at different. stages of the retirement journey.
C-suite buy-in
Anne Jones, director of retirement support at WTW began by highlighting the increasing focus on defined contribution (DC) plans for retirement. With more people retiring with DC plans, there is a realisation among companies that even senior members are relying on them she said.
This shift has led to more attention and discussion surrounding DC plans and retirees. Jones said that some clients are now questioning why they haven’t prepared adequately despite previous discussions while trusts and corporations are making efforts to assist retirees.
While the current conversation primarily revolves around annuity, drawdown, or cash options, Jones argues that there needs to be a broader focus on retirement income building. She said: ” We need to change the messaging to say, how can you build your retirement income?”
This involves considering various options such as minimum income from an annuity, fixed-term annuity, drawdown, and later transitioning to an annuity. The term ‘annuity’ may carry negative connotations, so emphasising the concept of a guaranteed income for life could be more effective, she argued, urging the need for this shift in messaging to occur throughout the market and involve providers, employers and advisers.
Mike Morris, director, proposition and marketing Origen said he had seen an increased focus on defined contribution (DC) retirement advice by employers. With a background in advising defined benefit (DB) members, Morris had noted a shift from the historic absence of sponsor-driven initiatives to offer advice for DC retirement in the past.
“We do a lot of work involving companies where we advise DB members at retirement. Five years ago nobody was putting us in place to advise DC retirement as well. That sponsor push didn’t exist. Now it’s very uncommon if someone’s putting us in place to advise the DB retirees that we don’t look at DC as well,” said Morris.
Late to the party
But despite the growing recognition of the need for DC advice by employers, notably those with DB, Morris noted: “It’s still very rare that people [individuals] will pay fees for DC advice.”
Part of this aversion can be attributed to individuals being engaged with too late. Morris said: “We’re presented to people as being available too late in the journey. They’ve reached retirement age. They’ve already decided what they’re going to do, rightly or wrongly, and they think, ‘well, I don’t need to pay them for advice now. I don’t need advice. I’ve decided what to do’.”
He said: “When people come to draw benefits, they either decided they’ve got a path they’re on track for or they know that when they’re 65, they are going to sit down with an adviser and go through this plan.”
Therefore, it is crucial to initiate a promotional engagement activity approximately six months before the anticipated retirement age. According to Morris, this earlier involvement is vital in generating interest and ensuring individuals recognise the value of advice and the benefits it offers.
Gavin Zaprzala-Banks, managing director of Punter Southall Aspire, further addressed the challenges associated with paying for retirement advice. Employers, it seems, are wary of the reputational risk associated with endorsing specific advisory firms or organisations.
The fear of potential backlash, if the advice provided turns out to be unsuitable or goes awry, is a significant deterrent, he said. “They don’t want to feel there’s a come back to them if that advice isn’t fit for purpose or if that goes wrong,” he said.
Overcoming this hurdle requires building trust between employers and advisers.
DC disconnect
The extent to which both employees and employers value advice also varies depending on whether the scheme is DB or DC. Zaprzala-Banks said: “Advising on the DB scheme is different because it is an employer-sponsored and very much intrinsically part of the employer relationship, whereas there is that disconnect for a DC scheme – it is a member-owned asset.”
Negative headlines regarding pension advice, which have in recent years tended to related to DB transfers, can impact the industry as a whole, he said. He also added that those in DB schemes arguably have a lesser need for advice than individuals navigating the complexities of DC schemes without the security of guaranteed, index-linked income for life.
Lessons from Down Under
Sam Underhill, principal and actuary, Barnett Waddingham, who has previously worked in and recently returned from a factfinding mission to Australia, observed that regulators Down Under had already implemented a retirement income covenant on superannuation funds, which requires them to have strategies in place to address investment risk, inflation risk, and longevity risk. In contrast, such measures are lacking in the UK.
He highlighted that the advice industry in Australia faced a shortage of trained advisers. He said: “They’ve got the same kind of advice industry that we do, but they’ve only got 15,000 trained advisers and they’ve got millions of people coming through in DC.”
As a result, there was a consensus that a middle-level concierge-style service was needed to provide guidance and supplemental information to support individuals in their retirement planning.
To address these challenges, the focus in Australia is on improving guidance, simplifying language, and developing user-friendly tools that allow individuals to engage in their own planning before seeking advice at a lower cost, he said. The aim is to create sustainable tools and products that go beyond providing one-off advice, ensuring long-term support and adaptability.
But a significant challenge lies in the fact that while advisers will glean comprehensive knowledge about various aspects, including home equity, additional assets, and employment considerations, pensions data is not enough to give full advice. Consequently, he said, there is a pressing demand for a comprehensive tool or product capable of integrating state benefits, pension, and other assets. But the complexity arises from the fragmented nature of these elements, as no single entity controls all the necessary information, and no element can give a holistic solution – without financial advice.
In the absence of financial advice, that leaves a quest for improved financial guidance. Underhill highlighted the need to simplify language and empower individuals to engage with planning tools. He said: “We need better guidance to change the language so that people understand things more easily, can play around with these tools and do some of their own planning.”
New models
He emphasised that the goal is to establish a seamless process where people can explore their options, conduct personal planning, and then seek lower-cost advisory services for validation.
Steven Cameron public affairs director at Aegon noted the need to align the value for money framework and the consumer duty from a regulatory perspective. While there are some parallels, Cameron pointed out that there is not a neat alignment between the outcomes of these two initiatives.
Considering the significant number of members in DC pension schemes who may not be able to make decisions on their own or pay for advice, he argued there should be an obligation to provide more support.
Information and guidance have been discussed as essential components, but Cameron emphasised the importance of the Treasury and the FCA working together to establish more personalised guidance, now that the UK is no longer bound by EU regulations such as MiFID.
He said: ”We’re really keen on the Treasury and the FCA working together… now that we no longer need to be driven by MiFID and the advice definitions. We’re really keen that we get some form of more personalised guidance.”
He suggested that the workplace environment should actively support the drive for personalised guidance. He suggested making access to personalised guidance compulsory as part of delivering value for money. While acknowledging that demanding mandatory advice for all individuals may not be feasible, Cameron advocated for a range of appropriate and better support mechanisms.
Martin Trenchard, director, consultant and adviser relationships at Aegon highlighted the potential impact of the dashboard and Big Data on the financial landscape. With the dashboard allowing individuals to access and consolidate their data in one place, he hoped for a reduction in costs associated with advice services. Whether robo-advice would flourish, however, was another question.
Trust in tech
Morris emphasised the importance of the personal touch, indicating that people are not yet fully prepared to depend solely on machines for financial advice. But he acknowledged that as technology advances in various aspects of life, such as medical tech, there is potential for increased trust
in computer-based financial planning in the future.
He said: “Technology could massively speed up the production of advice by pulling together open banking, doing analysis, running models and making it a lot quicker for advisers to do delivery. But I still think for the short to medium term, there’s going to be a person doing the delivery and talking to the client.”
Morris said the key challenge lies in striking a balance between leveraging technology and maintaining personalised delivery. He expressed that existing digital robo-models have not adequately addressed the need for human connection on a broader scale.
This highlights the ongoing effort required to bridge the gap between technology-driven solutions and the human touch in financial advice.
