Thoughts on the FCA’s Retirement Income Review
Gareth Davies, Pension Specialist at Scottish Widows, considers the key findings of the FCA’s Retirement Income Review and outlines the next steps that advice firms should be considering.
Pension freedom reforms have changed the way consumers access their retirement savings. Given the wide range of retirement options available, it is vital that consumers get good advice when they first access their pension savings and, where relevant, on an ongoing basis.
Decisions for consumers approaching or in retirement have become more complex with the potential for more risk. The size of the retirement income market is significant and growing, and this is set against the backdrop of an ageing population, increased investment market volatility and relatively high current interest rates and inflation. Advisers have an opportunity to provide valuable services to help consumers make good decisions about meeting their income needs in retirement. However, the harm caused by poor advice may have a particularly detrimental impact on consumers.
For added context of the scale of the change in the retirement income market since 2015, The FCA Retirement Income Market Data (which covers FCA-authorised firms) shows that only 10% of pension pots accessed for the first time in 2021/22 were used to purchase an annuity. Before pension freedoms, over 90% of pots were moved into annuities. Where investment-based Flexi Access drawdown solutions are used to meet retirement income needs, investment and longevity risk is borne directly by consumers rather than annuity providers.
The obvious potential issue that the FCA identify from the above change is that firms could have potential conflicts of interest in this area which need careful management. This is because solutions where the consumer’s pension remains invested give firms the opportunity to provide and charge for ongoing retirement income advice, whereas annuities do not.
The FCA state that their review of advice models revealed a mixed picture across the firms they reviewed. Some firms had evolved their approaches and adapted to the post-freedoms landscape. They had clearly detailed processes, specific training on decumulation and used a range of tools to help illustrate complex information for customers. They found some examples of good practice where the advice and services delivered were clearly designed to meet the needs of customers in decumulation.
However, in several areas it was apparent that not all firms were taking account of the differing needs of their customers in decumulation, as opposed to accumulation. They saw some examples of poor practice where some firms had not shown they had considered the needs of their customers or set out their advice model in a way likely to lead to good and consistent outcomes. They also found instances where some firms had not provided the right information to support their customers to make informed decisions.
The following headlines highlight just a few of the areas of regulatory scrutiny, and the full report includes examples of both good and poor practice and gives a comprehensive picture of all of the key retirement income advice thematic review findings.
Cashflow modelling
The FCA believes that cashflow modelling (CFM) has a significant role to play in helping to illustrate how much income could be drawn in a sustainable manner for the duration of the customer’s lifetime, taking into account their circumstances and the size of their pension savings.
While the use of CFM tools may lead to better outcomes for customers, firms should ensure they use reasonable and justifiable underlying assumptions otherwise customers risk withdrawing too much or too little income.
There are no specific requirements for firms to use CFM. However, the FCA have previously set out expectations on CFM for DB pension transfer advice (See Finalised Guidance FG21/3). Firms may find this information helpful when using CFM.
Given the wide range of retirement options available, it is vital that consumers get good advice when they first access their pension savings and, where relevant, on an ongoing basis.
Risk profiling and capacity for loss
Investment-based income solutions such as drawdown expose consumers to ongoing investment risk. So, it is vital that firms ensure solutions are properly aligned to customers’ risk profiles. Robust risk profiling helps firms to make recommendations which consider their customer’s risk appetite. Attitude to risk (ATR) represents an individual’s mindset or willingness to accept risk, whereas capacity for loss (CFL) considers their ability to absorb losses. ATR and CFL are both key elements of risk profiling.
The FCA have clear requirements for risk profiling which firms must follow. Firms are required to obtain such information as is necessary to ensure the transaction recommended is one the customer is able financially to bear the risk of, and that is consistent with their investment objectives. The FCA have also published final guidance (FG11/05) on how to establish the risk a customer is willing and able to take in making a suitable investment selection.
Periodic reviews of suitability
Where customers are paying for ongoing advice, it is important that firms set out clearly what services are included, how this is to be delivered and how frequently. It is important that firms have a plan to ensure services are proactively delivered as agreed. There is a higher likelihood that decumulation customers have characteristics of vulnerability.
Failure to review factors such as income needs, change in circumstances, objectives, risk profile and health conditions, and to put in place appropriate systems and controls to support those customers who are vulnerable, risks such customers not being treated fairly.
The FCA rules state that firms must not use an adviser charge unless the adviser charge is in respect of an ongoing service for the provision of personal recommendations or related services. They do not expect customers to be charged for services that are not delivered.
More broadly, they expect firms to track and monitor when review meetings are due and identify whether any are missed. Where firms do not measure key information or are not able to access this easily, they may find it more difficult to demonstrate the delivery of good customer outcomes.
Platform Selection
Platforms help firms administer customer assets. Firms may use these to manage investment portfolios, buy and sell investments for their customers and make use of any investment research that platforms may provide. Some platforms also provide tools that firms’ advisers or customers can use to help support financial planning.
Customers in decumulation will have different needs and objectives to those in accumulation. Whether firms use their own, a white labelled or a third-party platform, they should be able to show they have considered whether the features and services platforms provide reflect the needs of customers in decumulation.
Conclusion
Retirement income advice remains a clear focus for the FCA. They will be following up on these findings with firms involved in the retirement income advice market. They will also be carrying out further supervisory work in this area to explore the scale of the issues identified and tackle any harms.
As the FCA say, advisers have a key role in this market. IFAs have an opportunity to demonstrate the value of their advice and services to help consumers make good decisions about meeting their income needs sustainably in decumulation. However, the harm caused by poor advice may have a particularly detrimental impact on consumers. Firms must ensure their advice process complies with FCA requirements and expectations on information collection, suitability and disclosures. Firms must also ensure they have the requisite systems and controls to oversee their advice process and monitor customer outcomes.
It is therefore clear that the regulatory spotlight will remain firmly on this important area of advice for the foreseeable future and advisers should therefore ensure that all areas of their retirement income advice proposition are reviewed and, where necessary, updated in consideration of these findings.
