Regular client reviews lie at the heart of a robust drawdown strategy. Yet as an increasing number of people seek drawdown advice, it raises the question of whether advisers are prepared to take on this additional workload.
At a recent Illuminate roundtable debate, our panel discussed the issue of firms' capacity to manage the needs of different types of clients as they enter drawdown and an ongoing basis.
Independent consultant Richard Parkin said: “One of the things that certainly is being talked about a lot is not just the capacity to deal with drawdown now, but how much review work is being built up for the future, and whether advisers have really got their heads around how much they’re actually taking on.”
Intelligent Pensions marketing director Andrew Pennie said in his firm's experience drawdown advice is becoming a fluid process, with relationships being formed with clients’ beneficiaries.
"Defaulting people into buckets just isn't the right way to go. This is how we got here in the first place, chucking people into annuities that probably weren't right for them. To go back to that with drawdown would just make the problem far worse than it was before.”
Intelligent Pensions carries out annual reviews for its drawdown clients, with investments tracked quarterly. Andrew estimates the firm has around 1,800 clients in drawdown.
He said: “The feedback we get from our client surveys every time is that they’ve gained an understanding of their retirement model and the cashflow modelling, that’s the bit that makes sense to them. Once they’ve seen that they can engage with it.
"The words around it might be challenging, but seeing whether they are on track or not, and whether they can afford to spend more or whether they need to cut back a bit, that’s what drives our engagement and understanding with the client.”
The Pensions Advisory Service (TPAS) chief executive Michelle Cracknell argued the adviser/ client relationship is key in managing drawdown effectively, and said advisers need to rely on the client investing time into the process as well as their money.
She said clients should understand what drawdown involves, with their adviser explaining that “unless you’re prepared to spend this amount of hours looking at your drawdown, it’s not the right product for you.”
One experience when she was an adviser typifies this point for her: “A client came in for the annual meeting and he turned to me and said: ‘Michelle, I’m done. You’re a lovely person, but I don’t want to be coming up to London every day, I want to be with the grandchildren. Sell everything and buy me an annuity.’
“That was a client who really knew what drawdown was about. I don’t think enough clients make that call that they’ve had enough of reviewing their drawdown. An adviser can’t do it by themselves, and the investments can’t work unless they adviser has got that client input.”
The role of defaults
The complex decisions that drawdown involves has led to a conversation among policymakers about whether defaults could be used to help people with those retirement decisions.
In April the Work and Pensions Committee called for default drawdown, where those who haven’t made an active choice on investing or spending their pension pot would move into a regulated default product.
In the FCA’s Retirement Outcomes Review final report, published in June, the regulator said it is considering requiring providers to offer ready-made drawdown investment solutions, what it calls ‘investment pathways’.
Panellists tended to side with the FCA on this. Nucleus product technical manager Rachel Vahey said at a surface level the Work and Pensions Committee’s proposal around defaults made sense, but she went on to question how this would fit with the advice process.
She said: “I can understand why the conversation has turned to having a default which works, and I understand why we have got to that point. I’m not entirely sure it’s the right one though because I just don’t think it works in the context of 20 to 25 years. I’m not sure that people just being defaulted into drawdown is the right response. They need to have that active conversation.”
Rachel added: “At the moment, 70 per cent of people in drawdown are advised. They have got that advice and support, so they should not be defaulted into anything because they have their adviser there to help them and pick the right investment strategy. Default drawdown seems like quite an easy answer, but we need more deep thinking around this.”
Richard agreed, though he said he could see a good argument for the FCA’s investment pathways idea, given the range of drawdown customers’ needs.
He said: “I always talk about there being three or four different types of drawdown investors: you’ve got the guys who want to get their money out quickly, and for them some sort of short-term cash investment’s going to be right.
"You’ve got those who want to leave money behind for the next generation, so they’re more growth orientated. Then in the middle you’ve got either people who are taking ad-hoc lump sums or those who are actually trying to create sustainable income, and they need a mixture of growth but also some sort of volatility management.
“You’ve still got to get people to understand what it is they want, and defaulting people into one of those buckets is just not the right way to go.”
He added: “This is how we got here in the first place, because we were just chucking people into annuities and that probably wasn’t the right thing for them, and on top of that, they weren’t always getting the best value. To go back to that with drawdown, I think, would just make the problem far worse than it was before.”
Breaking down barriers
Michelle believes more work needs to be carried out with people at an earlier stage, to get them to engage with the drawdown process.
In her experience, once customers receive their wake-up pack, or equally when they request a defined benefit transfer value, they see the headline number and have almost spent it already.
Michelle said: “I would like to see some things explained before they get that pack. We should try and break down some of the barriers, and some of the preconceived ideas consumers currently have, like: ‘Annuities are bad. Drawdown is good. It all happens for me, the money doesn’t have to be invested, or advice is expensive’.
“These are the preconceived ideas that we hear, and before somebody gets their pack someone should go through it with them to say: ‘Actually, none of that’s true. This is the reality.’”
So while politicians are keen on default drawdown, our panellists largely agreed it wasn’t the way forward. Andrew argued no two drawdown plans should be the same. He said advisers, fund groups and pension providers are often guilty of “building boxes to put people in” and for drawdown that simply doesn’t work.
He said: “The big problem the pensions industry and employers have is they are the ones that have got everyone up to this point where they’re ready to take their benefits, but they just don’t know their members.
"They don’t know the people they’re engaging with, and because of that they have to communicate every single option on the table. Hence the reason wake-up packs are ridiculously big, and why people don’t get past the first few pages.”
Andrew emphasised the need for more effective engagement, and for a better connection between the workplace pension and advice.
He added: “Encouraging people to speak to TPAS, for example, or to seek independent advice, have become throwaway lines. They sit on the back page of documents that people don’t get to, and therefore it’s not taken seriously. There is no impetus to try and change the dynamic between how people access that advice. That, for me, is the missing key in all of this: advice.”
Rachel said she was also saddened to no reference to access to advice in the FCA’s Retirement Outcomes Review.
She said: “The best outcome is for people to have somebody there helping them constantly, over the next 20 to 30 years. If we can find a way of extending advice to drawdown customers then that’s what we should be striving for.”
Richard pointed out there were interesting parallels between what’s going on in the wake of the British Steel pension transfer saga, where employers are realising that if they don’t put something in place for their members those people may end up making bad decisions.
He said getting people to understand the value of advice was crucial. “There are some really interesting triage services that are coming out – short videos that explain the basics before you get into the numbers. It’s that kind of thing that we need to promote.”
But not everyone was convinced we should rule out the concept of defaults in drawdown completely.
Finalytiq director Abraham Okusanya argued that clearly in an ideal world everybody going into drawdown would receive advice, where people are informed about things like sequence of return risk, when to buy an annuity and would keep their situation under review.
He said: “But I don’t know how we get there. So in the absence of that, the question I ask is: How much worse can having a default be compared with what we have right now?
“Some of the ideas coming from the auto-enrolment world are actually very good. For example, having some sort of independent board that assesses the outcome for members and tracks that regularly. I’m not naïve enough to think that would solve all of the problems, but I get to the point where I’m thinking great is the enemy of the good in this case.”
Richard said it was time to get creative when it comes to helping people make informed decisions about investing for retirement.
He said: “It’s not a wake-up pack anymore, it’s a wake-up journey. This is a very complicated process, so it’s about using technology, probably getting people to watch video, plus using real people where you can, to build a much better journey, rather than just moving stuff around on bits of paper.”
Andrew agreed, and returned to his central point about increasing the proportion of customers in drawdown who take advice.
He said: “We see people who come to us at the point of taking benefits and they’re usually holding the wrong assets to execute that strategy. So they’re already in line for a poor outcome because of where they’ve been invested for the previous three or four years.
“When you look at the FCA’s retirement income data it’s very clear those clients that are getting advice on drawdown have better understanding, are getting better outcomes, they are in a safer place and have full regulatory protection. What’s not to like about all those things? So why isn’t the government, the regulator and the pensions industry out there shouting about that, and getting employers on board?”
Andrew added: “That’s what I would like to see happen, but we’re a long way away from that at the moment. Sadly, I think we’re going to see some nasty car crashes along the route before that happens.”
It’s clear that since the introduction of pension freedoms over three years ago, drawdown has become an increasingly popular option for those in retirement.
Data from the FCA shows twice as many pension pots have been used for drawdown than to buy an annuity.
Financial planners have traditionally catered to drawdown clients in the context of a much smaller market. If they haven’t done so already, advice firms will need to adapt their processes to reflect this increase in demand, and consider whether they have the capacity to carry out the extra review work that will be needed as a result.
Consumers need to be safeguarded in this new environment, both in terms of avoiding running out of money, but also giving people permission to live the retirement they’ve earned. Both may involve rethinking traditional approaches to retirement planning.
Default investment pathways may have a role in guiding people to better retirement outcomes. But the ultimate failsafe in getting people to make informed retirement decisions will always be advice – we need to work together to make that a reality for as many retirees as possible.
A huge thank you to all of our panellists in helping to shape an interesting and ongoing debate. Let us know if there’s any topics you’d like to see covered in future illuminate pension roundtable debates.