This article provides examples of good practice and potential areas for improvement for firms providing retirement income advice.
1. Initial summary
This article provides examples of good practice and potential areas for improvement for firms providing retirement income advice.
2. Who this applies to
This will be of interest to firms providing retirement income advice (RIA) to new and existing clients in, or nearing, decumulation, compliance consultancies, trade bodies for regulated firms and consumer groups.
3. Why we did this work
Following on from our Thematic Review[1], we wanted to provide a short ‘bite-sized’ article to help financial advisers provide good outcomes for their clients and avoid foreseeable harm. This is in line with our Strategy’s objectives of helping consumers and supporting firms to grow sustainably.
4. How we did this work
We reviewed a sample of 28 firms. This included a desk-based review of firms’ advice models and governance as well as sampling advice files using the Retirement Income Advice Assessment Tool[2] (RIAAT).
5. What we found
Our findings pointed to three areas which we see as fundamental to the provision of good outcomes for clients in decumulation:
- the quality of firms’ information collection and record-keeping
- the appropriateness of client risk profiling
- the sustainability of clients’ income withdrawals
5.1. Information collection and record keeping by Firms
The quality of firms’ record keeping, fact finding and knowing your client processes is essential.
Firms must get the necessary information to assess suitability before making a personal recommendation. This includes knowledge and experience, financial situation, and investment objectives.
Most firms were able to demonstrate understanding of their clients’ objectives and circumstances. However, we found that some firms did not adequately record or collect this within the files we assessed. We found the main drivers of this were:
- Financial situation – contradictory or insufficient information on file about clients’ liabilities and income in retirement.
- Expenditure – insufficient consideration and detailing of clients’ planned spending and how this might change in retirement.
- Risk Profile – firms not revisiting clients’ attitude to risk or adequately assessing capacity for loss as they move into decumulation.
We found the following examples of good practice as well as areas where there is room for improvement.
Examples of good practice
- Firms collecting detailed information on all their client and partner’s assets and the expected income they would use to support themselves in retirement.
- Detailed objectives collected, showing how client plans would develop throughout retirement.
- One firm’s decumulation advice register recorded all new or additional solutions/withdrawals including attitude to risk, age, vulnerability, provider/platform mix, type of withdrawal solution, ceding scheme and details of any safe-guarded benefits.
Examples of areas for improvement
- A firm not obtaining information about the client’s financial situation, including their assets, intended retirement date or their proposed expenditure in retirement.
- A firm not gathering necessary information, including the assets to be invested in, the potential charges and whether the client was able to accept the risks involved.
5.2. Risk profiling
The risk tolerance of a client in decumulation can be inherently different from when they are in accumulation. Firms should assess capacity for loss (CFL) and attitude to risk (ATR) consistently to help identify suitable solutions for their clients.
Examples of good practice
- Some firms reviewed their approach to risk profiling for clients in decumulation following publication of our Review. We welcomed examples of firms introducing bespoke retirement-focused questionnaires/fact-find supplements to assist their risk profiling.
- Most firms recognised the need for a review of the assumptions underpinning their risk profiling tools either as part of a target market review or separately.
- Other firms simulated market falls to see the impact on their clients and the risk of running out of money later in retirement.
- Another firm monitored the outcomes from the risk profiling tool after initial client meetings to see if it varied from what was discussed at the meeting regarding the client’s propensity for risk and return.
Examples of areas for improvement
- A client sought advice on accessing a Pension Commencement Lump Sum. It was a reasonable step for the firm to fully assess the client’s CFL considering their retirement objectives and provisions available before making this recommendation. But this was not done.
- A client’s ATR had not been assessed in 3 years. In that time, they had retired, and their personal circumstances had significantly changed.
5.3. Managing sustainability of income withdrawals
When making a personal recommendation, we expect firms to consider clients’ current and future income needs in retirement. The sustainability of income withdrawals is key to this.
We do not mandate how this is done. However, where firms choose to use cashflow modelling (CFM) or a withdrawal guide rate, they should adopt a reasonable approach that is tailored to the client’s circumstances and objectives. We published[3] findings on how firms can improve the quality of CFM.
Examples of good practice
- When a retired client asked to increase their withdrawals to meet increased discretionary spending, the firm ran new CFM projections. They considered all the client’s assets and recommended that increases be taken only from non-pension assets. This reduced the client’s potential IHT liability, based on the tax regime at that time.
- A firm used an external market provider for its CFM and sense-checked the output using their own internal system. This mitigated the risk of errors made in the original cash flow and avoided causing the client foreseeable harm.
- Another firm investigated and trialled a variety of cash flow modellers before deciding on its CFM provider. The firm updated the assumptions used in the CFM tool on an annual basis to make sure that the outcomes for clients remain reasoned and reasonable.
Examples of areas for improvement
- A firm was unable to document the rationale for and the evidence underpinning its CFM tool’s underlying assumptions. We had concerns about whether this use of CFM would lead to consistently good outcomes for clients with different needs and objectives.
- Another firm projected that income withdrawals would lead a client to run out of money at age 76. No stress testing was completed to assess the impact on the client, nor was it clear whether their income requirement was solely the client’s or whether this was joint. If the client’s sole requirement, the firm appeared to have recommended withdrawals at a level they knew was unsustainable despite this being evidenced through their CFM.
- We observed some modelling which was only carried out to clients’ average life expectancy – thereby risking foreseeable harm.
6. Next steps
All firms involved have been given individual feedback. We sought corrective actions including the provision of potential redress where appropriate.
We encourage all firms providing RIA to clients in, or nearing decumulation to read this in conjunction with the Review[4] and our article[3] on CFM and take any relevant action. We intend to issue further ‘bite-sized’ articles on other key issues impacting the financial advice and wealth management sectors and will share these at interactive events across the country.