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Pension consultants sometimes express concerns at the prospect of scheme members moving from institutional pricing in group schemes during the accumulation phase to more expensive retail pricing in drawdown? What can providers do to address this?
All the evidence indicates that customers not taking advice are likely to stay with their provider into drawdown. So it is important they are not preyed upon as a consequence.
That is why we have introduced our price promise that guarantees no member who has been with us for at least 12 months will pay more in decumulation than in accumulation.
What does this price promise mean for members in terms of actual charges?
It can mean that for someone in a large GPP, their effective charge could be very low. They will retain that charge into drawdown, and if you factor in our profit share, the repayment we make as a mutual to our members, the actual rate will be even lower. Last year we paid a rebate of 0.18 per cent of members’ funds. So for someone in a 0.25 per cent charge GPP, their effective drawdown charge could be below 0.1 per cent.
Since pension freedoms the number of retirees accessing drawdown without advice has soared. How should a guidance process ensure good outcomes?
Our starting point is that we value advisers and the advice they give, and we’ll always direct retiring members to their advisers, or help them find one. To help advisers support their customers, we have developed a series of tools, including our Drawdown Governance Service, which is used by more than 3,000 adviser firms. Each quarter it measures how much a client has withdrawn, how their fund has performed and what their stated target income is and calculates a sustainability score that shows the percentage likelihood that they will be able to continue receiving that target income. The reality is that many people are doing drawdown without advice. So we give non-advised customers heat maps that show them the extent to which different withdrawal rates are sustainable over the long term.
How important is a provider’s service proposition in decumulation?
Service is a real differentiator between providers when it comes to decumulation because the initial decision made when benefits are taken is so complex, and, for those who choose drawdown, because there are many more touch points with the customer going forward. These engagements can be complex and must be handled with care as the potential for the non-advised customer to get things wrong in the post-pension-freedoms world is significant. That is why it is important to pick a provider with a track record of good customer service built on multi-channel communications. As well as having strong choice architecture and intuitive tools, it’s really important for customers to be able to pick up the phone and speak to a human being.
How do you strike the right balance between getting sufficient growth to make drawdown worthwhile and minimising the risk of customers running out of money?
Markets have been positive for drawdown customers ever since pension freedoms, and for defined benefit transfer customers in particular, pot sizes can appear very big. But this can give investors a false sense of security. Our balanced risk drawdown profile has risen 33 per cent over the last five years, which is great. But the cost of buying an annuity has risen by 20 per cent in that period, so their income risk has not been reduced by as much as they might think. We need to move the conversation away from wealth risk towards income risk.
What impact will the FCA’s investment pathways have on financial advice?
Studies have shown many people will stay in the same product into retirement, so it is useful for those who don’t make an active decision to be in a vehicle that can guide them towards positive outcomes. But pension freedoms have increased the value of advice across the board, including for those with more modest pots. So I do not see demand for advice diminishing – the opposite is more likely.
How should drawdown providers deal with cognitive decline and shrinking pots?
Fortunately, as people pass through their mid-seventies, a guaranteed income for life becomes increasingly compelling. Because of this, and the fact that people may find it increasingly hard to manage their investments as they get older, this is where advisers can add huge value. And as providers we can support the adviser client relationship through tools like our Drawdown Governance Service that help customers meet their retirement goals and maintain income sustainability.