pension freedoms 2018 - standard life...2.1 pension freedoms awareness 2. summary observations &...

IN ASSOCIATION WITH:

PENSION FREEDOMS 2018

Grasping the nettle: Working together to achieve better retirement outcomes

1 Introduction .............................................................................................. 31.1 Background to the paper .................................................................... 31.2 Research underpinning the paper .................................................. 31.3 AKG’s partners for the paper .......................................................... 31.4 Contributions from key market stakeholders ......................... 3

2 Summary observations & recommendations ................. 42.1 Pension freedoms awareness ............................................................ 42.2 Confidence in retirement plans ....................................................... 42.3 Biggest concerns for customers ...................................................... 42.4 Key recommendations - Industry .................................................... 52.5 The market landscape ..................................................................... 5-6

3 The consumer scene ......................................................................... 73.1 Pension freedoms understanding ................................................... 73.2 What are your plans? ....................................................................... 7-83.3 How will you generate income in retirement from your pension savings? ........................................................................................ 83.4 Are you concerned about pension fraud and scamming? .................................................................................................... 93.5 FCA’s Retirement Outcomes Review and the new Single Financial Guidance Body – Direction of travel . 9-103.6 The new era - Acknowledging risk in retirement .............. 11

4 The adviser scene ............................................................................ 124.1 Business requirements, planning requirements, concerns .................................................................................................... 124.2 Shifting upmarket .................................................................................. 124.3 Where will 2018/19 business come from? ............................ 124.4 What happens when advisers can’t help? .............................. 134.5 What are the main planning concerns for clients? ............ 134.6 What are the biggest areas of concern for your advice/planning business? .................................................................. 144.7 MiFID II for advisers ............................................................................ 14

5 Advice and planning opportunities .................................... 155.1 Retirement planning since the changes were made ......... 155.2 Why the need for multiple tax wrappers for income? ... 165.3 Inheritance, IHT mitigation and intergenerational planning ....................................................................................................... 175.4 Later life planning and long term care ....................................... 175.5 Targeting younger clients ................................................................... 18

6 DB to DC transfers ........................................................................ 196.1 For advisers .............................................................................................. 196.2 Advising on DB transfers: the income sustainability hurdle .......................................................................................................... 206.3 For providers ............................................................................................ 21

7 The provider scene ......................................................................... 227.1 What have providers got to do to win with advisers in the pension/retirement market? ........................................................... 227.2 Which type of provider(s) will flourish? .................................. 237.3 Regulatory ‘drag’ for providers ...................................................... 23

8 The solutions scene ........................................................................ 248.1 Early product and fund development ....................................... 248.2 Changing profile of drawdown ..................................................... 248.3 Annuity market contraction and outlook ............................... 248.4 Modelling and planning tool usage ............................................. 258.5 Innovation ................................................................................................. 258.6 Innovation – on what? ........................................................................ 268.7 Areas for further development and improvement ........... 278.8 The drawdown investment story ................................................ 278.8.1 Approach to constructing drawdown portfolios ................ 278.8.2 Types of investment solution being used ................................ 288.9 Sequencing of return risk in drawdown investment portfolio ..................................................................................................... 298.10 Smoothed investment solutions ................................................... 30

8.11 Guaranteed product/fund solutions .................................. 30-31

9 The growing importance of more effective communication and better education ............................. 329.1 Educating customers on pension and retirement options ........................................................................................................ 329.2 Communication improvements .................................................... 339.3 Retirement ‘wake-up’ packs ............................................................. 339.3.1 What should be in wake-up packs? ........................................... 339.3.2 What can be done about the timing of wake-up packs? .. 34

10 Filling the ‘gap’ between advice and guidance .......... 3510.1 Who would you trust to give you guidance or advice on your retirement options? .......................................................... 3510.2 The role of the new Guidance Body and Pension Wise is vital... ............................................................................................ 3610.3 Channels for help ................................................................................. 3710.4 Propensity to pay for advice .......................................................... 3710.5 Robo-advice ............................................................................................. 3810.6 Services for employees still in accumulation ................. 38-39

11 Next generation considerations ........................................... 4011.1 Where are we with financial education in schools? ......... 4011.2 What will the next generation of savers need from the at - retirement market? ............................................................ 4111.3 Inspiring the next generation of Financial Planners ........... 42

Wrapping up ........................................................................................ 42

APPENDIX .................................................................................... 43-44

Contents

PENSION FREEDOMS: GRASPING THE NETTLE: WORKING TOGETHER TO ACHIEVE BETTER RETIREMENT OUTCOMES

1.1 BACKGROUND TO THE PAPER

1.2 RESEARCH UNDERPINNING THE PAPER

1.3 AKG’S PARTNERS FOR THE PAPER

1.4 CONTRIBUTIONS FROM KEY MARKET STAKEHOLDERS

1. IntroductionWithout exception, the pension freedom changes caught people by surprise. The changes have also coincided with a wider period of regulatory and political change and challenge. So, what we have seen initially is three years of adjustment to the new freedoms with further work to be done in 2018/19 and beyond.

As someone that carries out assessment of a broad range of companies across the financial services industry, including the monitoring of evolving business strategies, AKG has been in a great position to watch the post-pension freedoms market unfold. We have always felt that pension freedoms presented both challenge and opportunity for a broad range of market players and stakeholders.

Some of the key objectives for this AKG paper are as follows:

• We want to build on the successful framework established with our original publication in this area.

• We want to discuss the direction of travel in the market, including provider and solutions landscape.

• We want to look at challenges and opportunities, old and new, for a range of market stakeholders and participants.

• We want to illustrate through market research, the thoughts, behaviours, requirements etc. of consumers and advisers.

• We want to be practical and do some myth-busting where possible.• We want to establish a discussion platform with our partners for the paper, and with other key

market stakeholders, whereby relevant discussion and debate can be further progressed during 2018/19.

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AKG felt once again that it was crucial to underpin thinking for the paper with original market research findings.

Three separate, but complementary, pieces of research have been carried out to meet this requirement and findings from each of these studies are illustrated and discussed within the paper and will continue to inform associated debate and discussion moving forward.

They are also likely to point towards areas where further research and investigation might be required moving forward.

Qualitative research among financial planning businesses – A telephone based research exercise was carried out on behalf of AKG by Widewater Consulting. The research fieldwork, a series of 25 in-depth telephone interviews, was undertaken with firms of financial advisers over the four weeks from 12th February 2018. Quantitative research among financial advisers – An online market research exercise was carried out on AKG’s behalf by Citigate Dewe Rogerson with over 100 financial advisers. The research took place between 6th and 22nd March 2018.

Quantitative research among consumers – An online market research exercise was carried out on AKG’s behalf by Consumer Intelligence. The research was carried out on 15th March 2018 and the research sample consisted of 1,082 consumers aged 40 and above.

AKG has worked with two official partners in the production of this white paper.Both partners have been given the opportunity to provide their input and opinion on some of the key issues and themes established within the paper.

AKG has also sought the inclusion of input and opinion from other key market stakeholders in the paper:

• Pension Policy Institute (PPI);• Personal Finance Society (PFS);• The Pension Advisory Service (TPAS);• Young Enterprise (YE);• Association of British Insurers (ABI).

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2.1 PENSION FREEDOMS AWARENESS

2. SUMMARY OBSERVATIONS & RECOMMENDATIONS

Overarching awareness of the pension freedoms changes appears to be good but we need to ensure that this awareness improves further in the next few years and that understanding of the changes, their impact and the options now available to consumers is also improved.

Up front and centre it’s worth, through some high-level scene setters, reminding ourselves not to over complicate things and to underline what the financial services industry, and its various participants and stakeholders, needs to do to successfully serve its customer base from a pensions and retirement perspective.

Are you aware of the pension freedoms changes, involving greater flexibility on how you can take your retirement income, which were introduced in April 2015?

73% Yes27% No


Source: AKG pension freedoms consumer market research (online survey)

Source: AKG pension freedoms consumer market research (online survey)Survey respondents were asked to select all options from the list provided that apply

The industry needs to help to improve consumer confidence about retiring and associated retirement plans.

In order to better understand consumers and service their requirements in retirement we need to get a handle on the things that give them most cause for concern.

AKG’s consumer research found that the biggest cause for concern in retirement is running out of money. This is closely aligned to the key concerns that advisers have for their clients.

Many consumers were also concerned about care costs in older age. The impact of inflation, paying more tax than one might need to and concern about political instability/changes in the law were also flagged.

Which of the following things give you most cause for concern in retirement?

2.2 CONFIDENCE IN RETIREMENT PLANS

2.3 BIGGEST CONCERNS FOR CUSTOMERS

Running out of money - 59%

Care costs in older age - 51%

Impact of inflation - 32%

Paying more tax than you might need to - 24%

Political instability/changes in the law - 22%

The impact of performance on your retirement fund - 20%

Not being able to pass on money to dependants/relatives - 19%

The impact of charges on your retirement fund - 16%

Stock market volatility - 14%

Other - 1%

None of the above - 7%

Do you feel more or less confident about retiring and your associated retirement plans than you did 5 years ago?

29% More32% Less39% Don’t Know


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Things that the industry needs to get behind, which can help to provide crucial underpin for a successfully functioning pension/retirement market.

Key pensions infrastructure and collaborative efforts required for long-term market success:

The Money Advice Service (MAS) is in the process of merging with the other two public guidance bodies, Pension Wise and The Pensions Advisory Service. This process is due for completion after Autumn 2018. There is huge expectation and pressure on this new single guidance body to provide a core resource for the pension/retirement market in terms of supporting consumers with education, information and guidance, effectively playing the role of ‘Everest base camp’. But the industry will need to collaborate and positively interact with the new single guidance body to help this achieve its goals.

The plan behind the Pension Dashboard, which is now the responsibility of the DWP and is due to be launched in 2019, is to create the technology to enable customers to see all of their retirement pots in one place at the same time, giving them a greater awareness of their assets and how to plan for their retirement. This is another initiative with a lot riding on it and if done well could be transformational from a pensions information perspective. We are yet to see if this initiative will be underpinned with legislative requirements but coverage needs to be comprehensive to be effective and so ultimately provider buy-in and collaboration will be critical, as will interaction and integration with other key parties and systems.

Better education on money, including spending requirements and planning, pensions and investments is vital. Whether this be for school kids, early stage auto-enrolment scheme members or those approaching retirement. It’s important to consider what type of education and intervention might be required at different life stages – the same mantra applies for information and guidance – but we can’t continue to kick education into the long grass. Furthermore, with public funding strained there will need to be private sector investment and initiatives to support those already trying to make a difference here.

We need to continue to consider and develop how we best engage with technology in financial services. It should be seen as a key facilitator to creating cost efficiencies across a range of areas

2.4 KEY RECOMMENDATIONS - INDUSTRY including the delivery of products, funds and advice. With a regulator which is encouraging technological development and concept testing it will be very interesting to see what emerges from the sandbox during 2018/19 and beyond, whether this be for financial services applications and services more broadly or those which can directly benefit the pensions/retirement market.We need to continue to attract fresh talent and ideas into the financial services industry, whether this be new blood for roles in design, servicing, technology and communications. And we certainly need to encourage recruitment and development of new advisers and paraplanners to underpin the future provision of advice and thus the key delivery of solutions.

Continued improvements in communication initiatives and style/type of language used with pension/retirement market customers needs to be targeted and there are some signs of good early progress here. We also need to establish if and where regulation might be a barrier to improvements in this area. These improvements should be targeted across the market for example incorporating both DB and DC pensions.

Commitment, continuity and collaboration in policy and regulation to provide a steady base from which the pensions/retirement market can build on the progress made to date. This will help to provide all market participants and stakeholders with more confidence.

Guidance > Information > Education > Technology > Advice > Solutions > Communications

At a market level, it remains vital for participants to keep abreast of the evolution of the pensions/retirement market landscape post-freedoms. Requirements, challenges and opportunities are considered throughout the AKG paper but here we summarise some of the headline findings and themes for readers to consider from a market landscape perspective.

The Adviser Scene• Freedoms have been good for business with the majority of advisers reporting that their business

is spending more time/resource on the provision of retirement advice since the changes came into force.

• There is an expectation from most advisers that new business will come from at-retirement clients with funds of between £100k to £250k or at-retirement clients with funds of more than £250k.

• The main investment/planning concerns that advisers have for their clients, at- or post-retirement, are (top six listed in this order) – ‘Investment volatility’; ‘Running out of money’; ‘Sequencing of investment return’; ‘Longevity risk’; ‘Insistent clients’; ‘Impact of inflation’.

2.5 THE MARKET LANDSCAPE


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• Meanwhile, the biggest concerns that advisers have for their own businesses are (top five listed in this order) – ‘Regulatory change/challenge’; ‘Investment volatility’; ‘Political volatility’; ‘Capacity/resource’; ‘PI cover’.

Advice and Planning Opportunities• While advisers are nicely busy with retirement advice, although capacity/resource constraints are

being referenced by some, three areas were referenced as providing future service expansion opportunities.

• The whole area of inheritance tax planning encapsulates a number of different opportunities and perspectives depending on the orientation and area of specialisation for different advisers. Inheritance and estate planning, IHT mitigation and intergenerational planning are now firmly on the table for advisers. The potential for a family office style proposition in the retail wealth management space is also now real.

• Later life planning is also now recognised as a major area of opportunity by many advisers but for quite a few of these resource constraints and/or lack of long term care product development mean that the opportunity remains on the backburner.

• Some advisers are looking at opportunities to service the accumulation market rather than just focusing on at- or post-retirement clients and see huge but slowly emerging potential while immediate business priorities dictate their focus. This paradoxically, and linked to the intergenerational theme, is an opportunity that is not yet being mined to any great extent among mainstream advisers with middle market clients but is very much an area of development for Wealth Managers and CFPs who are expanding propositions into intergenerational planning.

DB to DC Transfers• A major pre-occupation for many advisers is DB transfers and views on this theme are polarised.

Some advisers have a default setting that DB transfers are dangerous and more often than not to be deterred. On the other hand, there are advisers who are embracing the new market with structured and orderly approaches to it and see a role in helping suitable clients to add their DB assets to their other assets to plan a better and more structured approach to generating retirement income. It does not appear that there is any one right answer.

• The single biggest risk raised by firms as being presented by the provision of DB transfer advice is the risk of clients coming back in future years to query the decision to transfer retrospectively and seek compensation.


The Provider Scene• The key requirements for providers to be successful with advisers in the pensions/retirement

market are (top five listed in this order) – ‘Service delivery standards’; ‘Range of product/fund solutions’; ‘Financial strength/sustainability’; ‘Digital/online capability and functionality’; ‘Technical support (tax/pensions)’.

• The provider types which will flourish in the pensions/retirement market according to advisers are (top five listed in this order) – ‘Platform operators’; ‘SIPP operators’; ‘Discretionary fund managers’; ‘Life companies’; ‘Asset managers/Fund managers’.

The Solutions Scene• Over half of advisers surveyed felt that the level of innovation and response has been satisfactory

since the introduction of pension freedoms.

• The areas where advisers would like to see further development/improvement in the market during 2018/19 are (top ten listed in this order) – ‘Drawdown products’; ‘Guaranteed capital/income solutions’; ‘Cost of products/funds/portfolios’; ‘Digital/online capability and functionality’; ‘Value of products/funds/portfolios’; ‘Long term care products’; ‘Annuity products’; ‘IHT products’; ‘Investment funds/portfolios’; ‘Platform income solutions’ / ‘Retirement planning tools’.

• There was a mixed response to adviser approaches to constructing drawdown investment portfolios for clients – 44% carried out portfolio construction in-house; 25% outsourced to third party specialists; 31% used a combination of in-house and outsourcing to third party specialists.

• There is a wide range of partner/solution types being utilised by advisers when it comes to constructing drawdown investment portfolios (top seven listed in this order) – ‘Multi-asset funds’; ‘DFMs’; ‘Managed portfolio services’; ‘Multi-manager funds’; ‘Risk-rated funds’; ‘Risk-targeted funds’; ‘Bespoke portfolio services’.

What do you understand about the pension freedoms changes, involving greater flexibility on how you can take your retirement income, which were introduced in April 2015?

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3.1 PENSION FREEDOMS UNDERSTANDING

3. THE CONSUMER SCENE

While our initial question about awareness of the changes indicated generally positive awareness among consumers at a high level, the results of this question appear to illustrate that understanding of the changes is more mixed.

In the opening section to the paper we took an initial look at some of the findings from AKG’s consumer research exercise.

Here we take a glance at some more of the areas explored in the research and consider their implications for an industry which is striving to achieve positive customer outcomes in retirement.

• Awareness of the ability to take 25% of pension fund tax-free is high (69%). •There is a potential concern that more people rush to do this at age 55, whether or not they

need to take any or all of their tax-free cash at this earliest stage.

• George Osborne’s original budget announcement – in which he declared that “no one will have to buy an annuity” – clearly still resonates with consumers.

• Behaviourally and culturally we need to ensure that the right balance is struck here in that it’s positive that consumers are engaging with pensions and taking advantage of the new freedoms but, as our research also indicates, they have an underlying concern about running out of money.

• Awareness of the availability of free guidance from the Government, via Pension Wise, is ok. • But this can and should be improved further.

• Over one-third (38%) believe that the changes enable them to do whatever they want with their pension fund.

• Further education required here to clarify this and allow people to best steer themselves away from poor outcomes as much as possible.


We also wanted to ask consumers what they were planning to do with their pension savings.

3.2 WHAT ARE YOUR PLANS?


You can take 25% of your pension fund tax-free 69%You can have free guidance from the Government 42%You no longer need to buy an annuity 42%It enables you to do whatever you want with your pension fund 38%You will need to take advice 27%You could pay more tax as a result 20%You can take all your pension fund tax-free as cash 17%You can leave your pension fund in your will 17%You will pay less tax as a result 5%

When you stop working, assuming you have a State Pension paid to you, what will you do with your other pension savings?

Save most of it to generate a retirement income 29%Save it all to generate a retirement income 17%Don’t have another pension 13%Keep a small nest egg and spend the rest 13%Use the money to invest in property through buy-to-let 2%Spend it all and rely on partner’s pension savings to support retirement 2%Spend it all and access property wealth through equity release to support retirement 1%Other 2%Don’t know 19%

Source: AKG pension freedoms consumer market research (online survey)Survey respondents were asked to select one option from the list provided

• 30% don’t know. • Hopefully, better engagement and education about retirement options will mean that consumers

have more feel for how they might generate income in retirement in future.

• 12% say that buying an annuity, generating a guaranteed income for life, is most appealing. • Reassurance for the remaining annuity providers, or others looking at this space.

• 8% say they will invest in a drawdown plan in which your fund remains invested and subject to stock market gains and losses but you draw an annual income from it.

• 6% say that they will invest in a drawdown plan in which your fund remains invested but is guaranteed, subject to an additional charge, to deliver a lower level of annual income, but can also still grow in value.

• An indication that consumers don’t necessarily recognise ‘drawdown’, perhaps an industry term rather than one which resonates with consumers.

• But the most appealing option, 29% of consumers, was using a mix of the options provided in the question set, underlining the new flexibility required in retirement. And potentially showing an appetite for propositions and strategies which can combine income delivery features.

• 19% don’t know what they will do. • The industry needs to put consumers in a better place to have a plan about what they will do

with their pension savings.• 13% of consumers confirm they don’t have another pension beyond the State Pension. • For these, we need to ensure that they understand what they are entitled to from the State and

also provide them with options to save for retirement if they have the time and the wherewithal to do so.

• 29% of consumers say that they will save most of it to generate a retirement income and 17% say that they will save it all to generate a retirement income. • Reassuring to see that despite the freedoms this saving culture and focus on retirement income

prevails for many consumers.

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3.3 HOW WILL YOU GENERATE INCOME IN RETIREMENT FROM YOUR PENSION SAVINGS?

Which of the following ways of generating an income in retirement from your pension savings seems most appealing to you?

Buy an annuity generating a guaranteed income for life 12%Invest in a drawdown plan in which your fund remains invested and subject to stock market gains and losses but you draw an annual income from it

8%

Cash in your savings in their entirety – you may have to pay extra income tax but can spend as you want

7%

Invest in a drawdown plan in which your fund remains invested but is guaranteed, subject to an additional charge, to deliver a lower level of annual income, but can also still grow in value

6%

Cash in your savings to invest in property through buy-to-let 5%Cash in your savings and use your property wealth to raise money through equity release

4%

A mix of the above 29%Don’t know 30%


While there are several regulatory initiatives and reviews underway at present which might have an impact on players across the pension/retirement market, the main body of work which has accompanied the evolving pension/retirement market post-freedoms has been the FCA’s Retirement Outcomes Review.

This is something for us all to keep an eye on as we await further emerging themes and recommendations from this FCA project.

3.5 FCA’S RETIREMENT OUTCOMES REVIEW AND THE NEW SINGLE FINANCIAL GUIDANCE BODY – DIRECTION OF TRAVEL

What impact does the recent rise in incidents of pension fraud and scamming have on your support for pension freedoms?

It has had no impact 25%I am unaware of any rise in pension fraud/scamming 22%It has made me more likely to seek independent financial advice 21%It has made me more wary about talking to pension companies 17%It has made me more likely to stick to big name companies 15%It has made me more wary of taking advantage of pension freedom 14%It has made me less likely to shop around 6%It has made me more likely to accept what I am offered by my pension provider 5%


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We also wanted to get a sense of consumer awareness and concern about pension fraud and scamming in the research.

• 25% said that it has had no impact while 22% were unaware that there had been a rise in incidents of pension fraud and scamming.

• 21% said that it had made them more likely to seek independent financial advice.

3.4 ARE YOU CONCERNED ABOUT PENSION FRAUD AND SCAMMING?

The industry needs to ensure that it continues to drive awareness of pension fraud and scamming with consumers and whistle-blowing should be encouraged where market participants spot scams.This is an area where the industry could both gain and lose trust, depending on how fraud and scamming is addressed and tackled. There are signs through some recent initiatives that early progress to combat this threat is being made but clearly more collaborative work to do here.

Here, Rob Yuille, Assistant Director, Head of Retirement Policy - Association of British Insurers (ABI), provides an overview of what might be to come in this area and gives an

indication of ABI areas of focus and recommendations.

Three years into a more flexible retirement market, the central challenge still remains: retirement decisions are complex but personal to the individual, and many customers are either not willing or not well equipped to make those decisions at the point they first want to access their pension. Given the radical changes the reforms brought about, as well as the complexity that the reforms present to customers, especially those who may be vulnerable, there has naturally been ongoing regulatory and political focus on how the retirement market is working for customers in practice.

The FCA’s Retirement Outcomes Review will be a key staging point in the evolution of this more flexible market. One key trade-off to look out for : will the FCA focus on interventions to prompt customers to engage, in order to drive competition? Or will they accept that competition is weak in this market, and call for pre-pack retirement products and extend the role of independent governance committees? The latter would follow the line of argument of the Work & Pensions Select Committee report in April, which called for default decumulation pathways to solve the problem.

We believe that the emphasis should be on promoting active consumer engagement to help customers understand and compare their retirement options, and to make investment and withdrawal decisions – whilst promoting the use of guidance and advice where customers are unable to reach a decision on their own. There need to be solutions in place for those who do not engage, but there are some choices that must be made by the customer themselves. The new Single Financial Guidance Body, due to be up and running this year, will be critical in providing this support.

The industry has an important role to play too – and we will soon be developing principles for more targeted communications about retirement that are shorter, simpler and reach people at the right time. But providers are still limited in how helpful they can be to customers. The swan song of the Financial Advice Market Review, a long list of examples added to the FCA’s Perimeter Guidance, was useful in setting out what providers can say without giving a personal recommendation. We won’t be getting much more certainty than that in the near future, so while an advice gap will remain, providers will need to find innovative ways both to communicate with their customers and to encourage them to use guidance, to give themselves the best chance of the right outcome for them.

Note: In April 2018 the ABI published a new report in this area, Interventions in the retirement market: A five point plan to engage customers with their pensions -

https://www.abi.org.uk/globalassets/files/publications/public/lts/2018/abi_retirement_interventions_final.pdf

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Vince Smith-Hughes – Director of Specialist Business Support, Distribution - Prudential, looks at the key themes to consider regarding the risks and trade-offs

in retirement.

Key drawdown risksWhilst it is encouraging to see so many people taking advantage of pension freedoms, it does bring some risks compared to buying an annuity. Advisers will no doubt be familiar with these issues, but it’s worth reinforcing that the main risks include:

• The risk of unsustainable income being taken leading to erosion of fund and future income;• Taking an income which creates an unexpected or avoidable tax bill;• Investment performance not meeting expectations;• Sequencing of return risk;• The risk of outliving your income.

So, with increased use of drawdown, what can be done to help maximise good customer outcomes?

Key role for advice‘First and most obviously it is important to state that most customers are much more likely to get a better outcome if they receive advice, and so it’s a great opportunity for advisers to prove their value to clients. Some of the nuances of the risks highlighted above are inevitably difficult to tackle in a non-advised environment.

For example, it would be very easy to roll over an investment portfolio from accumulation to decumulation, without realising that starting to take income might mean a reworking of the underlying investments is necessary.

Remembering engagement and access to moneyOne point worth noting though is that if entry barriers to drawdown that are hard to overcome are created to try and ensure good customer outcomes, then it is likely that some individuals will simply take all their fund out in one go, leading to potentially worse outcomes.

Education and access to supportClearly, one of the most important points is that of education of customers. It is up to all of us in the profession to help ensure that customers are aware of the advantages and disadvantages of their retirement choices well before retirement. With a government sponsored service able to

3.6 THE NEW ERA - ACKNOWLEDGING RISK IN RETIREMENT

help those over 50 consider their choices this doesn’t seem an unreasonable ambition, and it must be one we all work towards.

Embracing technology and toolsAnother method that will assist customers and advisers alike is increased use of technology. Clearly use of retirement modellers at the point of taking benefits is already extensive, and these can help to give clients a greater understanding of the scenarios that could play out when they are in drawdown. What if scenarios can be portrayed to the client using tools, such as the Prudential retirement modeller, which can really help to aid customer understanding.

Use of these is often extended to provide regular updates to customers as they go through the retirement journey, and further automation is always being explored to make this more accessible.

Of course, this leads us onto one of the issues of providing retirement advice – the ‘advice gap’, where, simply put, advisers cannot in many cases profitably give advice to customers looking for assistance with relatively modest funds. Here again technology could provide at least a partial solution. In Prudential’s 2017 ‘adviser barometer’ survey 69% of advisers agreed that robo advice can help close the advice gap, whilst 41% surveyed suggested that they will launch some kind of robo solution.

However, good financial advice in this space depends on more than just algorithms and it is likely that the most successful processes to help clients previously excluded from advice will offer a combination of technology and human interaction.

SummarySo, in summary, with income drawdown becoming the retirement income vehicle of choice for many what is most likely to lead to good outcomes for customers?

First of all, education, secondly wider access to advice, and as a final point I would add not just telling individuals why they should do something, but also how – how they access information on their choices, how they can access advice, how they can easily understand the potential range of outcomes on their options and how they can continue to monitor their strategy throughout retirement.

After all, to slightly misquote Voltaire, “with great freedom comes great responsibility”.

The statistics from HM Revenue & Customs show that over £17bn has been withdrawn since the introduction of pension freedoms.

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4. THE ADVISER SCENE


Some of the changes seen here reflect the direction of travel in the adviser market post-Retail Distribution Review, although these have been further fuelled by the pension freedoms.

Freedoms good for businessLet’s start with the easy bit. The pension freedoms changes have largely been good news for advisers. They are busier with the provision of retirement advice. This does bring up early consideration of adviser capacity and the potential squeeze on resource here. AKG’s qualitative market research with advisers also alighted on this capacity theme.

Predictably, finding it uneconomical to do so, advisers are unlikely to service those with retirement funds of £50,000. The sweet spots are those clients at-retirement with funds between £100,000 to £250,000 and with more than £250,000.

Over a quarter of advisers surveyed by AKG reported that their minimum investable amount/pension fund size for servicing clients is now higher. AKG’s qualitative market research with advisers also alluded to the shift upmarket for some businesses.

4.3 WHERE WILL 2018/19 BUSINESS COME FROM?

How has the amount of time spent by your business on the provision of retirement advice changed since the introduction of pension freedoms?

Have you changed your minimum investable amount/fund size for servicing clients as a result of pension freedoms?

From which client segments do you expect most new business for advisers to come from in 2018/19?

More time/resource being spent on retirement advice 77%Less time/resource being spent on retirement advice 3%No change to the amount of time/resource spent on retirement advice 20%

Minimum investable amount/pension fund size for servicing clients is now higher 27%Minimum investable amount/pension fund size for servicing clients is now lower 9%No change to minimum investable amount/pension fund size for servicing clients 64%

Pre-retirement savers 27%At-retirement clients with funds of £30,000 to £50,000 3%At-retirement clients with funds of £50,000 to £100,000 21%At-retirement clients with funds of £100,000 to £250,000 67%At-retirement clients with more than £250,000 48%Clients transferring from DB pensions pre-retirement 33%Clients transferring from DB pensions post-retirement 6%Retired clients 26%Don't know 5%Source: AKG pension freedoms adviser market research (online survey)

Source: AKG pension freedoms adviser market research (online survey)

Source: AKG pension freedoms adviser market research (online survey)Survey respondents were asked to select their top three from the list of options provided

4.1 BUSINESS REQUIREMENTS, PLANNING REQUIREMENTS, CONCERNS

4.2 SHIFTING UPMARKET

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There has been a lot of discussion about how and when it is economical for advisers to offer and deliver their planning services to clients. This will differ between businesses but AKG was keen to find out what happens when advisers can’t help.

It was encouraging to see that over a third refer to Pension Wise/TPAS. The industry needs to work towards ensuring that where an adviser business can’t help, and doesn’t refer onward to another form of advised solution, that the default path is for advisers to refer to Pension Wise/TPAS.This also implies potential scope for consideration and development of automated solutions.

AKG wanted to find out what was on advisers’ minds when it came to their biggest investment/planning concerns for clients. Two out of the top three related to investment concerns – Investment volatility and sequencing of investment return risk. Running out of money was the second biggest concern for advisers about their clients. It was the biggest concern for consumers and so represents the most obvious worry behind any retirement strategy.

4.4 WHAT HAPPENS WHEN ADVISERS CAN’T HELP?


4.5 WHAT ARE THE MAIN PLANNING CONCERNS FOR CLIENTS?

Where it is not economical for you to offer your normal retirement planning service to clients, what option(s) would you offer?

What are your main investment/planning concerns for clients at- or post-retirement?

Say we can’t help 41%Refer to Pension Wise/The Pensions Advisory Service (TPAS) 38%Pass to another adviser business 17%Refer to junior/less qualified colleague in your business 13%Pass on to automated/robo-advice proposition (third party) 9%Pass on to automated/robo-advice proposition (your own) 5%Do nothing 3%Not applicable 23%

Investment volatility 48%Running out of money 45%Sequencing of investment return risk 41%Longevity risk 36%Clients choosing to take more money against your advice 28%Impact of inflation 27%Optimising client’s taxation treatment 19%Cognitive decline/illness (client) 15%Inheritance tax planning 8%Other 3%

Source: AKG pension freedoms adviser market research (online survey)Survey respondents were asked to select all options that apply from the list provided


Concerns about MiFID II are wide-ranging covering issues from the necessity, complexity, through impact on costs and efficiency to customer benefit.

“MiFID II – if I fully understood it, I might be even more concerned – it slows business down and creates more costs we have to try to absorb.” IFA

“MiFID II is a major issue. We are struggling to get and send information, we are spending more time on annual reviews and it is all much more confusing for clients. (we are seeing things like negative charges – how do clients view those?)” IFA

“MiFID II is a massive issue. All about charges. Make sure you can accurately report charges yet sometimes the information is very hard to get hold of – and isn’t always comparable.” Network

“We have not really changed our approach – advisers are not transactional salesmen. What will change things is MiFID II which means you have to tell new clients about costs and charges. Clients need a relationship not a sale, MiFID II makes it more difficult to have a fee proposition. How do I know in advance what a client will need? It sounds to me like a regressive step back to business on a transactional basis.” CFP/WM

“I’ve calculated that the requirements of MiFID II with annual reviews, risk documentation and fees disclosure etc is adding 5-7 hours work per annum per client – a full day. It is made worse because all providers are different in what they do and how they do it. I would not have thought this was an intended consequence.” CFP/WM

“Paradoxically, big cases often need less advice time than smaller cases. Before MiFID II, it was possible that for some advisers servicing larger cases allowed an element of cross-subsidy allowing them to devote time to mid or smaller cases. With MiFID II, this is now a thing of the past, making advice less affordable for people who might need it more”. CFP/WM

“Because of MiFID II, we need to build a much more efficient advice process, maybe make use of robo-admin to maximise time in front of clients.”

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According to AKG’s qualitative market research, the biggest regulatory issue since 2015 - one mentioned by almost all advisers - is MiFID II which they see as making the advice process more cumbersome, time-consuming and expensive. One adviser quantified the effect as adding almost a full day per year to each client advised - and the on-going nature of requirements mean this is a recurring cost.

4.7 MIFID II FOR ADVISERS

What are the biggest areas of concern for your advice/planning business in 2018/19?

Regulatory change/challenge 77%Investment volatility 59%Political volatility 47%Capacity/resource for your business 28%Professional Indemnity cover 18%Recruiting new paraplanners/advisers 12%Insistent clients 11%Vulnerable clients 7%Competition for your business from other sources 7%Developing new paraplanners/advisers 6%Capital for the development of your business 2%Other 4%


The top three concerns are all environmental with one and three relating to regulatory change/challenge and political volatility. Investment volatility, given the popularity of drawdown, is a clear concern for adviser businesses.

It is also interesting to see some concerns around capacity and resource for their business, professional indemnity cover and recruiting new paraplanners/advisers.

4.6 WHAT ARE THE BIGGEST AREAS OF CONCERN FOR YOUR ADVICE/PLANNING BUSINESS?

5. ADVICE & PLANNING OPPORTUNITIES

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5.1 RETIREMENT PLANNING SINCE THE CHANGES WERE MADE

When asked which things give them most cause for concern in retirement, one-quarter (24%) of the consumer research respondents said paying more tax than they might need to. This provides a good example of an area where advisers can help clients and demonstrate value in their services.

For a non-advised customers this would be an area where education and information can hopefully help to improve their understanding of tax considerations in retirement.

In AKG’s qualitative adviser research interviews, a big change in the process has been identified as the ‘sequencing’ in advice. Prior to the pension freedoms, the pension pot was typically utilised for income before other assets. Now, because of the tax benefits, pensions seem to have become the main weapon in conservation of assets and protection of client estates.

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5.2 WHY THE NEED FOR MULTIPLE TAX WRAPPERS FOR INCOME?

Alastair Black, Head of Financial Planning Propositions, Adviser & Wealth Management Propositions – Standard Life, looks at how an adviser might best organise a client’s

retirement and taxation affairs when utilising a platform and its associated wrappers, tools and functionality. This considers the planning strategy but also takes into account

the creation of process efficiencies.

Why savings aren’t only for Christmas Since pension freedoms everyone I speak to about their pension has become excited about what they’ll do in retirement and how they’ll spend their pension fund more flexibly. And whilst it’s great that more people are engaging in their pension, many still don’t think of it as being part of their broader savings: they have been so used to compartmentalising that they see their pension as the only source of their regular retirement income, whilst their other savings remain ring-fenced to pay for the larger expenses of life such as holidays, Christmas, a new car or simply to be kept aside in case of that ‘rainy day’.

But one of the huge advantages of pension freedoms is that it unshackles this traditional thinking. Gone are the old rules and restrictions limiting how much you can withdraw from a pension, and instead pensions have pretty much equal footing in terms of accessibility from retirement age as with the other savings you’ve built-up. For advisers the great news is that because each type of saving has different tax treatments governing withdrawals or investment returns, this creates advice opportunities that demonstrate real value to clients, by making use of the different allowances to optimise tax efficiency in income paid to clients. The AKG research calls out that advisers have really engaged with this (although there is still sometimes a challenge in persuading clients the world has been turned on its head).

Such financial planning advice can lead to £1000s of tax savings a year. For example, let’s imagine a client aged 60 is retiring, needing £25,000 per year income and has a £500,000 pension, a £150,000 ISA and £50,000 in a bank savings account. The traditional solution would be to take £125,000 tax free cash, which they’d probably save - in a taxable savings account, whilst making this liable to Inheritance Tax too as part of their estate. Drawing a regular income from their pension will lead to tax. They don’t need to pay this. By drawing income across all of their savings they can avoid paying any tax at all. This simply involves keeping Tax Free Cash within the product and using that for income along with drawing regular income from other non-pension products. Doing this can save £1000s in tax demonstrating the value of advice.

So how can advisers make this practical? First, they will need to get an efficient way of managing investments consistently across multiple tax wrappers and coordinating income from lots of different products and providers. Platforms

can help to do this. While they were originally designed for investment efficiency, the range of tax-wrappers allows this efficiency to be extended across other functions such as ongoing reporting and withdrawal functionality.

Next, they will need a scalable and repeatable way of calculating the tax, to find the optimum combination specific to each client, based on their available saving pots and individual income needs and circumstances. Once again platforms often help with tax calculations.

Standard Life provides an Income Withdrawal Optimiser tool which performs the key tax calculations, such as income tax and capital gains tax at the touch of a button. This stores the tax-allowances such as nil-rate income tax band, savings rate allowance and dividend allowance, so that advisers can quickly and easily test out different combinations of which tax wrappers to target for income, before making a recommendation to their client. By doing this, the adviser can also calculate what tax would have been paid, had the client chosen to solely target their pension for income, and show the tax saved by using a multi-wrapper income solution: which in turn translates into a £-value benefit of advice to the client.

So, in conclusion: • Consumers need to be encouraged to think outside the box and view their pension alongside

their other savings when thinking about drawing income in retirement • Advisers can demonstrate real value of advice by facilitating multi-wrapper withdrawal strategies

that optimise tax-efficiency of income • Using a platform will help the adviser deliver more efficient and effective customer outcomes

where multiple tax-wrappers are being used to generate income in retirement

Standard Life Savings Limited, provider of the Wrap Platform, is registered in Scotland (SC180203) at Standard Life House, 30 Lothian Road, Edinburgh EH1 2DH.

Standard Life Savings Limited is authorised and regulated by the Financial Conduct Authority.

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5.3 INHERITANCE, IHT MITIGATION AND INTERGENERATIONAL PLANNING

As advisers consider how they might broaden their proposition and appeal/value to clients, what about connectivity between retirement life stages? The term ‘holistic’ is often proffered in wealth management circles but how are we getting on with consideration of inheritance, IHT mitigation and intergenerational planning?

AKG’s qualitative market research interviews with advisers revealed that the whole area of inheritance planning encapsulates a number of different opportunities and perspectives depending on the orientation and area of specialisation for different advisers.

Some comments/quotes from participants in these interviews provide further context:

“Now use other assets before pension assets for IHT reasons; this allows us to develop a programme for intergenerational planning.” CFP/WM

“I expect the market to evolve only slowly. DB transfers are a major opportunity in the area of IHT planning, releasing benefits for children - if it is managed properly.” Network

“Family office is a good example of one of the opportunities out there – involve the children in the decision process especially around death benefits.” Retirement specialist IFA

“Interesting, with the focus on inheritance, I think the whole concept of the ‘family office’ is a real opportunity.” Network

“Many are doing it for IHT purposes rather than income flexibility.” Pension specialist IFA“Heritability – enabling you to build a family asset – you realise assets in a different order”. CFP/WM

“The big opportunity is in succession planning. The next generation automatically become your clients – a bit like old-fashioned bankers.” IFA

“What used to be called the private client market is interesting- we are developing introducers in accountancy and legal firms especially for intergenerational business – build a secure investment proposition targeted at the right sorts of clients extended to familial groups.” IFA (corporate and individual)

It certainly feels as though the potential for the creation of family office propositions, but lower down the value chain than has previously been known will be an area of ongoing development for intermediary businesses.

Continuing the theme of adding value to client’s throughout retirement life stages, and if we are busy telling people about longevity and the fact that they might stand to live, where are we with later life planning, long term care etc.?

AKG’s qualitative market research interviews with advisers also revealed that later life planning is recognised as a major area of opportunity by many advisers but for quite a few, resource constraints (and lack of product development) mean the opportunity remains on the backburner.And so, for some, depending on their market niche, they can see potential in later-life business but do not have the scope to build a specific proposition.

Some comments/quotes from participants in these interviews provide further context:

“More interest in later life, driven by general market changes but have not noticed much increase in inquiries.” IFA

“Yes, later life, there is very much more awareness these days people think about retirement planning for IHT – the pension is very much the go to place now.” CFP/WM

“We are maintaining a watching brief on later life advice opportunities – we have more than enough on a day-to-day basis to keep us occupied. Even so I’m surprised equity release has not become more of a mainstream product yet.” CFP/WM

“Later life is developing rapidly within our network equity release, care funding. The demographics of the customer base are driving this.” Network

“Later life is starting to look an interesting development area, there is not much demand yet but it is there somewhere. The problem from our point of view is that we are too busy focusing on current business to focus on new areas like this.” IFA

“We haven’t really moved on providing a more holistic advice proposition yet – we have too much to do with our current proposition.” IFA/EBC

Clearly future policy and framework will have a big bearing on what emerges here but it continues to feel like an area of opportunity for advisers and providers. From an adviser perspective, SOLLA continues to do good work here around awareness, education and qualifications relating to later life planning.

5.4 LATER LIFE PLANNING AND LONG TERM CARE


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5.5 TARGETING YOUNGER CLIENTS

While the wave of baby-boomers coming through retirement will keep advisers busy for a while yet, it’s interesting to note that one-quarter of those advisers surveyed by AKG (27%) are targeting pre-retirement savers.

Some of the participants in AKG’s qualitative research with intermediary businesses also recognised that there is scope to move down the age spectrum and explore the potential for business with clients who are still in accumulation. However, this is seen as very long term and immediate business priorities get in the way of developing this line.Furthermore, and paradoxically, that this is perhaps an opportunity that is not been mined to any great extent among mainstream advisers with middle market clients, but is very much an area of development for wealth managers/CFPs who have been able to expand their propositions into intergenerational business.

“In the future, the value of DC pots will grow and grow. There will be a bulge of the population of ABC1s with 20-25 years of contributions into DC. I feel very positive but need to be careful to understand regulatory issues and need to get client communications right.” IFA

“Long term, the weight of money is going to be in workplace pensions but that will be a very long time coming. For now, it is about SIPPs, consolidation and drawdown.” Retirement specialist IFA

“People still in accumulation are gradually becoming more aware of retirement planning but it is still early days and a lot needs to happen to turn awareness into action.” CFP/WM

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6.1 FOR ADVISERS

6. DB to DC transfersUnsurprisingly, AKG’s qualitative adviser research revealed that a major current preoccupation for many advisers is DB transfers and views are polarised on this business.

Some advisers have a default setting that DB transfers are dangerous and more often than not to be deterred. On the other hand, there are advisers who are embracing the new market with structured and orderly approaches to it and see a role in helping suitable clients to add their DB assets to their other assets to plan a better and more structured approach to generating retirement income.

It does not appear that there is any one right answer.

AKG also sought to tackle this theme in the quantitative market research with advisers.

While one-quarter of respondents stated that they do not give advice on DB transfers, the biggest risk, selected by 29% of respondents, was that of the client coming back in the future to query decision retrospectively and seek compensation. 10% selected the risk of a client’s family coming back in the future to query decision retrospectively and seek compensation.

16% of respondents were concerned about the risk of a change in view by the FCA. The market research exercise was carried out shortly prior to the introduction of new messaging from the FCA on DB to DC transfer practice.

Keith Richards, Chief Executive of the Personal Finance Society:Freedom to make informed decisions

The introduction of pensions freedom and choice coupled with historically high transfer values has resulted in a sharp increase in defined benefit (DB) pensions transfer requests. DB transfers have always been highly complex and consumers clearly need enhanced guidance to fully understand their options to make informed decisions. This has now been recognised by the Regulator with Policy Statement 18/6 (Advising on Pension Transfers).

Pensions schemes and product providers must now play their part of a united profession in providing clear, timely and consistent information to arm consumers with the information to help them make appropriate risk weighted decisions.

Financial advisers need to ensure they manage conflicts of interest with clients; advisers should not be party to unsuitable advice for ‘insistent clients’ and should make sure that charging structures for advice clearly separate the cost of review and recommendation from transaction. If a consumer is not prepared to pay a separate fee for a professional review and personal recommendation of suitability, a professional adviser should disengage for the ultimate good of all parties.

Note: In May 2018 the PFS issued an update version of its Good Practice Guide, A practical guide to Pension Transfers from defined benefit to defined contribution - http://www.thepfs.org/media/9223970/good-practice-guide-pension-transfers.pdf


What do you think is the single biggest risk to your firm of DB transfer advice?


Risk of client coming back in the future to query decision retrospectively and seek compensation

29%

We do not give advice on DB transfers 24%Risk of change in view by FCA 16%Risk of client’s family coming back in the future to query decision retrospectively and seek compensation

10%

Mis-selling by minority affected my future FSCS levy 7%Lack of PI insurance 4%Client has made up his/her mind on decision before they see me 3%Other 6%

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Alastair Black, Head of Financial Planning Propositions, Adviser & Wealth Management Propositions

- Standard Life

There’s no doubt that pension freedoms has changed the retirement landscape, reigniting public interest in pensions and fuelling a wholesale move away from annuities to drawdown. The appeal of flexible, easy access to pension savings has also been a key driver behind the surge in demand for advice on DB transfers.

At a fundamental level, the ‘DB or DC?’ and ‘annuity or drawdown?’ dilemmas have similarities. They’re both about comparing the peace of mind afforded by a guaranteed income for life with the lifestyle freedom a modern flexible drawdown plan can deliver. It comes down to what the client needs and their willingness, and ability, to take risk.

The key difference, that takes the advice requirements to a different level, is that a client with a DB pension is starting from a position of guaranteed income security and considering giving it up. And they may not be entering the conversation with an open mind. The latest FCA guidance tackles this head on.

What the Regulator expects The Regulator recognises that pension freedoms has changed the advice equation, but still firmly believes that sticking with DB is likely to be the right outcome for the vast majority. So, they’re really challenging advisers to ensure clients properly understand the real value of their DB pension - and what it could mean to their lifestyle if they give it up and plans go off track.

This involves focussing on 3 key areas, within the context of the client’s needs and wider circumstances:

1. Income sustainability: would a transfer away from the security of DB mean the client risks running out of money in retirement?

2. Value for money: is the transfer value offered by the DB scheme good value for the client?

3. Death benefits: how do the potential death benefits under DB and DC compare?

Of these it’s clear that robustly stress-testing, and properly articulating, the likely sustainability of the client’s retirement income relative to their needs is the Regulator’s primary expectation.

AKG’s research calls out that advisers’ biggest concern around DB transfers is the risk that clients retrospectively challenge their advice, and seek compensation, if plans don’t work out. This is most likely to arise if they start to run out of money so, again, hinges on income sustainability. So how best to manage this risk?

Where investment advice is concerned, assessing a client’s risk appetite and capacity for loss are second nature. For potential DB transfers, the Regulator also expects advisers to assess a client’s attitude to income (un)certainty in retirement and (not) being dependant on markets. This will help establish the client’s ability to take investment risk. Any income sustainability assessment needs to reflect this investment framework, and the pension vehicle and charges likely to be put in place, if the transfer proceeds.

Is cashflow modelling the answer? Multi-scenario cashflow modelling can be a powerful tool to deliver against the Regulator’s expectations. It helps translate a client’s risk appetite into reality, demonstrating sustainability risk in a transparent way clients will struggle to challenge in the future.

Running a series of cashflow projections, reflecting the client’s:

• intended income pattern (and a Plan B with lower income which the client must be comfortable with),

• the likely charges and tax payable, and • a range of potential investment outcomes (from best estimate,

through prudent to resilience testing) helps paint a clear picture for the client of what they’re getting into.

Ensuring the client properly understands their income isn’t guaranteed if they transfer, and the potential downsides, helps keep you safer too. Negotiating this sustainability hurdle means your transfer advice is built on solid foundations.

Standard Life Assurance Limited is registered in Scotland (SC286833) at Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH. Standard Life Assurance Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. ©2018 Standard Life Aberdeen, images reproduced under licence. All rights reserved.

6.2 ADVISING ON DB TRANSFERS: THE INCOME SUSTAINABILITY HURDLE


Pg. 21


DB to DC transfers are also a big deal for providers.

While exacerbated by pension freedoms, for a while now the focus in the retail investment/pension market has been on the consolidation of client assets in the approach to retirement and so effectively money has been recycled between providers. While this might have constituted new money to the receiving provider, this has not necessarily represented new money to this part of the market.

Providers have therefore long been aware of the opportunity that might be provided by the movement of money from DB to DC and the pension freedoms changes have acted as a catalyst for such transfer business to become a reality.

A number of providers across AKG’s assessment sectors are now reporting significant increased flows from incoming DB to DC transfers when providing the market with business performance updates.

But this is not without risk as, as well as scrutiny on advisers and the DB to DC advice process, providers also have a responsibility to closely monitor behaviour and the volumes of business that are being received in this area.

The market is developing all the time.

For example, in recent weeks and following the latest announcements on DB to DC transfers by the FCA, a number of providers have taken the step of withdrawing their transfer value analysis tools from the market. These had been developed in order to support advisers with transfer considerations and planning but the FCA have now raised concerns these could now be deemed an incentive under tighter MiFID II inducement rules.

The debate and discussion around DB to DC transfers, advice processes, the role of the provider etc. is set to continue during 2018/19.

6.3 FOR PROVIDERS

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7.1 WHAT HAVE PROVIDERS GOT TO DO TO WIN WITH ADVISERS IN THE PENSION/RETIREMENT MARKET?

7. THE PROVIDER SCENE

There is an obvious top five here and these cover core business disciplines and deliverables. Service delivery standards will continue to be crucial to provider success in the pension/retirement market.While we seem to have moved away from the concept of ‘waterfront’ providers in more recent times, with comprehensive and wide-reaching product ranges, it is interesting that advisers are flagging range of product/fund solutions as a key requirement.

The importance of provider financial strength and sustainability, AKG’s core area of assessment focus, is also underlined here.

In more recent times, and set to continue, will be requirement to have market leading digital/online capability and functionality. While all moving at different paces AKG has seen providers across our assessment sectors investing in improvements to digital/online capability and functionality.

The provision of technical support in relation to tax and pensions is interesting to see and there has been a re-emergence of technical teams within providers to meet this adviser requirement.

Without wishing to scaremonger, AKG would anticipate that the cyber/data security theme will grow in importance during 2018/19 and it will be important for providers to be able to illustrate their defences in this regard.

Inevitably, given the popularity of drawdown since the changes came into force, companies of all types want a piece of the drawdown action – to be involved in wrapper provision and/or administration and/or to service drawdown investments – including life companies, SIPP operators, platform operators, asset managers and DFMs.

Essentially there are three ways to get paid (flat fees or %) out of drawdown: product wrapper fee; investment fee; advice fee. There is increasing mission creep here with more parties targeting more parts of the value chain including vertically integrated businesses who want to get a slice of the fees across all three disciplines highlighted above. Cue huge competition across the market for drawdown business.


What are the key requirements for providers to be successful with advisers in the pensions/retirement market following the introduction of pension freedoms?


Discipline/Capability

Service delivery standards 58%Range of product/fund solutions 54%Financial strength/sustainability 48%Digital/online capability and functionality 45%Technical support (tax/pensions) 33%Range of retirement planning tools 14%Sales support 11%Innovation 10%Brand 6%Cyber/data security 6%Assistance with tools/information where a client is potentially moving from a defined benefit scheme

4%

Field salesforce 3%Scale 0%Other 2%

Provider Type

Platform operators 81%SIPP operators 52%Discretionary fund managers 30%Life companies 29%Asset managers/Fund managers 25%Specialist tax product providers (BPR/EIS/VCT) 18%Technology players 15%Friendly societies/Mutual insurers 5%Banks/Building societies 4%Robo-advisers 4%New market entrants 4%Other 4%

Pg. 23


AKG has seen at close hand the preparation that has been undertaken by a number of platform operators, life companies and DFMs for MiFID II.

As has been the case with previously undertaken preparatory work for regulatory/legislative change that we have seen in the past, most notably for the Retail Distribution Review and Solvency II, the resource cost in terms of both time, systems and money has been high. Furthermore, work doesn’t stop on implementation date but continues as providers and the market adapts to the new initiative being in place and being interpreted by different audiences and stakeholders.

As well as MiFID II, GDPR and SM&CR are also proving to be both focus and resource heavy. While providers focus on these priority areas there is always the potential for proposition development to be hampered or slowed.

While it had been hoped that the focus on Brexit would mean less regulatory considerations for 2018/19 there are still a number of areas being explored including ongoing asset management, retirement and platform market reviews.

Firstly, the length of the list underlines the range of provider types vying for business opportunities in the pension/retirement market. It is also worth noting that there is quite a lot of overlap between provider types, particularly where a Group might have different businesses within it, e.g. a platform operator, life company and asset manager.

It looks like there is some positivity from advisers towards platform operators which could provide a well-needed shot in the arm. This will be welcome news and provide an uplift from the resource drain of regulatory challenge and re-platforming projects for many in this sector.

AKG’s qualitative adviser research also suggested that platforms have been seen to have responded pretty well and are improving all the time, following the initial shock of the changes. They are increasingly getting to grips with reporting and addressing taxation changes for clients.

Drawdown had long been seen as the preserve of SIPP products and so no surprise to see SIPP operators also featuring strongly here. SIPP operators need to be able to showcase that they have emerged positively from a period of FCA scrutiny – in terms of capital adequacy and non-standard asset exposure/governance.

DFMs and asset managers/fund managers are those who are targeting AuM via the investment management opportunities offered by drawdown.

Opportunities for specialist tax product providers, i.e. BPR/EIS/VCT, are also worthy of note and in line with findings from AKG’s qualitative adviser research findings which reference opportunities relating to inheritance tax planning.

7.2 WHICH TYPE OF PROVIDER(S) WILL FLOURISH?

7.3 REGULATORY ‘DRAG’ FOR PROVIDERS

Which type of providers do you believe will flourish in the pensions/retirement market?


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8. THE SOLUTIONS SCENEAccording to participants in AKG’s qualitative adviser research exercise, most advisers foresaw the decline of the pension annuity market and the inexorable rise of drawdown. These expectations have been fully met.

And so, what has happened and is likely to happen with solutions in this space during 2018/19 and beyond?

It had been thought in some quarters that the market would be awash with new product and fund solutions on introduction of the freedoms, but the reality has been somewhat different.

Given that the two core options, in the form of annuities and drawdown, were already available and can be used in combination to meet customer requirements, this is perhaps less of a surprise.

Providers with drawdown already in their retirement toolkit quickly sought to update products to ensure that they could facilitate flexible drawdown; others to add it with an own brand drawdown product or via a white-label offering.

Some hybrid products have been launched which seek to twin annuity and drawdown capability within the same wrapper but we are at the early stages of ascertaining market traction for these and awaiting any further launches to provide comparison and competition in this hybrid space.

From an investment fund/portfolio perspective, initial work would appear to have been focused on the ‘re-badging’ of multi-asset and/or income solutions.

Market data clearly demonstrates that the sale of annuities has been impacted by pension freedoms. The introduction of Solvency II, and a move towards more capital light offerings, has also meant that Life Companies have given additional consideration to potential capital constraints and consumption. These combined forces have led to strategic reviews of annuity market positioning and some companies have decided to exit the market, leading to a contraction in the number of lifetime annuity suppliers.

But it’s worth noting that, as flagged in AKG’s qualitative market research with advisers, the decline of the annuity market has not been universally welcomed by advisers. Many still see a strong role as a full or partial solution for many clients.

And with AKG’s consumer research showing that running out of money (59%) is the key concern for consumers there will still be a place for annuities moving forward.

Drawdown is the early winner in terms of product solutions with sales dominating those of annuities. A reversal of fortunes from historical market stats.

Historically, drawdown business was conducted solely through intermediaries and with typical minimum product entrance requirements of c.£250,000. ABI data now points towards an average drawdown fund of under £70,000. We are also seeing the emergence of direct channel non-advised drawdown business. This is also an emerging area of concern for the regulator and an area of continued consideration for other market participants and stakeholders during 2018/19.

Now, without the GAD framework in place for withdrawals, it will be interesting to continue to monitor exactly how drawdown is being utilised by customers.

For example, has it been picked just because it is perceived to be more flexible than annuities? Is it being used to strip out cash, in a tax efficient manner, over the short-to mid-term? Is it being used for the provision of income over the longer term, to be underpinned by an investment portfolio? Or a combination of these factors?

8.1 EARLY PRODUCT AND FUND DEVELOPMENT 8.3 ANNUITY MARKET CONTRACTION AND OUTLOOK8.2 CHANGING PROFILE OF DRAWDOWN

With product development quite low key to date there has been as much - or more - focus on the development of tools to support retirement decision making and drawdown management.

Financial planners are making greater use of budgeting and cashflow modelling tools and providers and technology companies are also making calculators and tools available to support retirement considerations and decisions in both the intermediated and direct channels.

AKG’s qualitative research with advisers underlined that Cash Flow Modelling has become a key tool but for many it is seen as a double-edged sword, in the sense that it is not a ‘once and done’ exercise and necessarily adds cost and time (and to an extent, the potential to cause client irritation with repeated iterations). Unless it is used on this ongoing basis, however, it is not a good tool.

8.4 MODELLING AND PLANNING TOOL USAGE

Pg. 25


Over half (58%) of the respondents stated that they were satisfied with the level of innovation and response from the market.

For those that weren’t happy with the level of innovation and response from the market, the key question remains, “What innovation is required?”

How happy are you with the level of innovation and response from the market in response to pension freedoms?

The suggestion from AKG’s qualitative research interviews was that some advisers expected providers to create new solutions blending flexibility and certainty. These expectations have not been met. Attempts by product providers to meet this need have sometimes been thwarted by higher cost products. It is also fair to say that, with hindsight, some advisers have realised that similar results can be achieved with an appropriate blend of drawdown and annuity type products or suitable risk-rated portfolios.

8.5 INNOVATION

I am not at all happy with the level of innovation and response - 3%

I am moderately unhappy with the level of innovation and response - 19%

I think that the level of innovation and response has been satisfactory - 58%

I am moderately impressed with the level of innovation and response - 16%

I am extremely impressed with the level of innovation and response - 3%

Don’t know - 1%

All unhappy - 22%

All happy - 18%Source: AKG pension freedoms adviser market research (online survey)

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Alastair Black, Head of Financial Planning Propositions, Adviser & Wealth Management Propositions at Standard

Life, looks at the theme of innovation and discusses whether it might be a case of evolving products,

platforms and toolkits to support advisers rather than a requirement for wholesale changes.

Pension freedoms took us all by surprise and a lack of innovation seems to come up as a regular theme. But let’s take a step back - what are clients really looking for?

Is it the ability to take what you want, when you want it simply and easily? Is it the ability to apply a consistent investment and withdrawal strategy across all your savings? Is it an investment solution that gives growth but provides a guaranteed income simply and cheaply? Or is it tools that allow advisers to help the client understand what might happen and to plan for the future?

The first two were arguably already done before pensions freedoms was announced. A good Drawdown product allows the client to take their money how they want when they want it and Platforms have always provided the ability to manage withdrawals and investment consistently across multiple tax wrappers.

An investment solution with guarantees and growth is a challenge. A worthwhile challenge. But a number of providers have recently pulled out of the market so it’s certainly not obvious this can be delivered cost effectively.

What do clients really want? Perhaps: 1. A clear plan that gives them confidence they can live the

Retirement life they want to 2. Confidence they won’t run out of money 3. Cost effectively and at minimum fuss and effort

This is exactly the service an Adviser provides. The real issue with pension freedoms is that retirement planning can be

complex and people need help. The AKG customer research certainly calls out the need for confidence on not running out of money. So I can’t imagine anyone would argue that clients want the first two points above. The challenge is in delivering this with “minimum fuss and effort”. In the AKG adviser research they refer to an increase in use of tools like cashflow modellers but a worry about adding cost and time.

So the innovation we need is to provide advisers with tools and services that make their job easier, freeing up capacity to help meet the ever growing advice gap, whilst increasing the confidence of clients to live their life in retirement without worry. The key is the tools need to save time – not add to it.

Let’s look at one example that can make a real difference to clients in understanding how long money can last – giving them permission to spend with more confidence they won’t run out of money.

Cashflow modelling tools were a real Marmite moment for the industry. Some advisers loved them whilst others hated them. The key challenge from those that didn’t like them is the one already called out – they took too long to complete, then they became out-of-date the next day because inevitably either something changed or more information came to light during the client meeting.

However, market innovation to deliver simpler cashflow tools is effectively driving greater adoption. By viewing it as just a quote with some nice graphics to show the client when they may run out of money, advisers can have more engaging conversations and update the results in seconds to produce “what if?” scenarios to demonstrate how much risk the client is taking should markets fall. This can then lead to discussion about what the client might do, for example creating some simple rules they and the adviser would follow about how income might increase or reduce in the future.

Innovation doesn’t have to be grand gestures or big launches: it can just be taking existing good ideas and redesigning them to make them simpler and more practical.

By way of example, Standard Life has worked with Focus Solutions to take their full Cashflow tool and simplify it down to a level that an adviser can complete a tailored projection with varying income and what if scenarios in 5 minutes. Yes, the projected path will change as client circumstances evolve, but a tool can illustrate to the client how: • income can vary to meet different needs over time (like taking

higher income until State Pension starts), and, • the impact of adverse investment market conditions and

lead to a discussion on how they will manage that risk – e.g. by having a plan to reduce income to protect long-term sustainability (but knowing they can live with that reduction).

This not only helps advisers give better client outcomes but also reduces risk in their business by helping to ensure their clients understand the sustainability challenges faced by remaining invested through retirement, rather than the alternative of buying a guaranteed annuity income.

So in summary, since pension freedoms we may have seen little real innovation in products, features or investments – but do we need this?

There has been innovation in the tools available to advisers. This has helped them deliver improved tailoring of client outcomes, whilst simultaneously giving clients greater confidence through understanding their plan and reducing risk in the advisers’ business. The future is likely to see more of this as the market finds new ways to reconstitute the fixed building-blocks (product & investment) to drive an unprecedented level of individualisation in advice in a scalable, efficient way.

8.6 INNOVATION – ON WHAT?

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As we look ahead to the remainder of 2018 and 2019 AKG was keen to explore with advisers where they would like to see further development or improvement in the pensions/retirement market.

Despite the early dominance of drawdown post-freedoms it would appear that advisers want to see further development here. It is also interesting to see potential appetite for development or improvement in guaranteed capital/income solutions. It is unsurprising to see a focus on cost and value of products/funds/portfolios given the regulatory focus on value for money. We will continue to see pressure on cost across the value chain, especially on the wrapper and investment management components of drawdown.

Improved digital/online capability and functionality is flagged here, as well as in the findings about adviser expectations from providers, and so businesses simply cannot afford to underestimate this requirement to invest and progress capability in this area.

Some level of interest also for further development or improvement in long term care products, annuity products and inheritance tax products.

8.7 AREAS FOR FURTHER DEVELOPMENT AND IMPROVEMENT

“Income drawdown can be fraught with danger - £ cost ravaging. A lot of clients are not using correct decumulation strategies; too many are still basically using accumulation strategies.” Wealth manager

Post-RDR there has been much discussion about adviser approaches to investment, including the development of Centralised Investment Propositions and consideration of outsourced investment solutions and providers. The investment element will provide the ‘sizzle’ but we are in the early days of seeing what will/won’t work here.

8.8.1 Approach to constructing drawdown portfoliosAKG therefore wanted to get a sense of investment approach to constructing drawdown investment portfolios in our quantitative adviser research exercise. 44% stated that portfolio construction/management is carried out in-house, 25% stated that it is outsourced to third-party specialist(s) and 31% state that they use a combination of in-house and third-party specialist.

Discipline/Capability

Drawdown products 46%Guaranteed capital/income solutions 31%Cost of products/funds/portfolios 29%Digital/online capability and functionality 25%Value of products/funds/portfolios 24%Long term care products 20%Annuity products 18%Inheritance tax products 16%Investment funds/portfolios 15%Platform income solutions 14%Retirement planning tools 14%Transparency of terms and conditions 11%Regulation 8%Equity release products 7%Robo-advice solutions 3%New market entrants 1%Other 2%

Portfolio construction/management is carried out in-house 44%Portfolio construction/management is outsourced to third-party specialist(s) 25%A combination of in-house and third-party specialist(s) is utilised for portfolio construction/management

31%

In which areas would you most like to see further development or improvement in the pensions/retirement market during 2018/19?

What is your approach to constructing drawdown investment portfolios for clients?



8.8 THE DRAWDOWN INVESTMENT STORY

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8.8.2 Types of investment solution being usedThe list of solution types and the percentage usage of each provides a very quick and easy view of the sheer competition for assets under management in the drawdown investment space. There is also a wide range of entities offering these investment solutions to the intermediary market.

Managed investment solutions ranging from multi-asset funds to managed portfolio services seem to be in vogue but do they need to be configured more specifically for drawdown requirements, including sustainability? How will they perform against the rigours of the market?

As ever with investments, the proof will be in the pudding when it comes to judging the effectiveness of solutions in the drawdown market. And the proof points will come by judging against set customer outcomes and risk profiles.

Multi-asset funds 53%Discretionary fund managers 42%Managed portfolio services 37%Multi-manager funds 35%Risk rated funds 32%Risk targeted funds 31%Bespoke Portfolio services 23%Fund research/rating houses 16%Asset/fund managers 11%Investment consultants 3%Other 4%

What is your approach to constructing drawdown investment portfolios for clients? Where you outsource some or all investment duties/services to third parties, which type of partners/solutions do you utilise?

Source: AKG pension freedoms adviser market research (online survey)Survey respondents were asked to select all options that apply from the list provided

The figures in Figure 2 show the amount of capital (as a percentage of the original amount) that would remain after six years, assuming a withdrawal of 5% (from the original capital amount) has been made each year. The figures do not relate to a fund or a person and are purely an example for illustrative purposes.

When taking a loss means the gain has to be so much better!

The reasons why Examples A and C are better than B is fundamentally down to the sequence of returns, which is vital when taking withdrawals from an investment. If losses occur early, the fund has to work harder to make up ground.

For example, a 20% loss in year one, requires a 25% gain to make the loss back. Taking withdrawals compounds the loss even further and the bigger the loss and withdrawals, the bigger the gain required to make the loss back. In summary, the order in which the returns occur, is potentially just as important as the average return over a period of time. And, all this can be even trickier to explain when you have to add in fees on top of a poor first year’s performance.

So that’s the problem, but what can an adviser do to manage the risk?

There are several options, none of which need to be mutually exclusive:• Leave the investment in different funds holding specific asset types. Take the annual income in

arrears at the end of the year from the best performing fund• Hold a permanent amount in cash so that this can be used to pay income• Take natural income from a portfolio• Use a smoothed fund

None of these solutions is perfect. For example, taking income from the best performing fund may limit future performance, whilst cash rates have been low for some time. Natural income may not meet the client’s income requirements whilst smoothed funds aren’t widely available, and will only provide so much protection from market falls.

One thing is certain though, advisers need to be taking this important factor into account when advising clients and considering what plan is in place to counter this risk.

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Vince Smith-Hughes - Director of Specialist Business Support, Distribution – Prudential, looks at this key investment consideration.

In my earlier article I discussed the various risks of drawdown. One of the risks mentioned was that of sequencing of returns. This quite simply put, is the risk of taking income once a fund has been depleted by volatility, and effectively crystallising a loss.

Let’s now look at a hypothetical example to see why sequencing of returns risk is critical. The examples below show three potential capital returns with no income being taken, with varying returns:

• Example A starts with a great performance but ends with a poor performance.• Example B starts with a poor performance but ends well.• Example C is a mix of positive and negative performances.

Mathematically, it doesn’t matter which option you pick, they all produce exactly the same total return of 1.75%. These figures do not relate to a fund or person, they are for illustrative purposes only.

Now, let’s see what happens when we look at the same investments, but taking an income.

The amount left of the original investment after six years as a percentage of the original investment, becomes very interesting:

41% of advisers surveyed by AKG nominated sequencing of investment return risk as their main investment/planning concern for clients at- or post-retirement.“Sequencing risk is a real potential problem.” Pension specialist IFA

8.9 SEQUENCING OF RETURN RISK IN DRAWDOWN INVESTMENT PORTFOLIO

Example A Example B Example CYear Potential capital return Year Potential capital return Year Potential capital return1 25% 1 -5% 1 25%2 5% 2 -20% 2 -5%3 20% 3 -15% 3 5%4 -15% 4 20% 4 -20%5 -20% 5 5% 5 20%6 -5% 6 25% 6 -15%

Option A Option B Option C77.02% 64.01% 74.96%

Figure 1 – Source: Prudential

Figure 2 – Source: Prudential


AKG also wanted to gauge adviser appetite for guaranteed product/fund solutions.

8.11 GUARANTEED PRODUCT/FUND SOLUTIONS

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Around a half of advisers surveyed, 49%, said that they can potentially see a way forward for solutions in this space but, for most of these, products would need to improve/simplify further before we would consider (40%).

For a period in the UK market there had been three providers - AXA Life Europe Limited (trading as AXA Life Invest), Metlife UK and Aegon - competing for what was termed as unit linked guaranteed product business but this sector of the market has, for the time being, been effectively wiped out by the market withdrawals of these providers (Prudential does currently offer access to a capital guarantee and a minimum income guarantee, available on some of its PruFund range via the Prudential Retirement Account).

These withdrawal decisions had been made following strategic review processes and providers referenced the fact that ongoing low interest rates had driven the cost of providing guarantees to uneconomic levels.

And so, we effectively remain in limbo here for the time being. We work in a market at the moment where providers need cast iron business cases to bring new products/funds to market. We also have the new MiFID II product governance requirements in place and it feels as though this will set a new benchmark for initial and ongoing product/fund governance.


Given some of the concerns flagged by advisers about investment market volatility, AKG wanted to gauge adviser appetite for smoothed product/fund solutions. The research showed that 17% are already utilising these solutions for clients while 32% sometimes advise on these solutions.

A further 35% say that they would potentially use smoothed product/fund solutions with the caveat that such solutions need to improve/simplify further beforehand.

Historically, Prudential has been one of the main providers of smoothed investment propositions in the mainstream UK market. Aviva has recently launched an investment fund to compete with Prudential in this area of the market.

Many DFMs and asset managers are also talking about volatility dampening techniques and espousing the benefits spreading risk and achieving diversity via a multi-asset approach to investing.

8.10 SMOOTHED INVESTMENT SOLUTIONS


Yes, and we regularly advise on these solutions 17%Yes, and we sometimes advise on these solutions 32%Maybe, but solutions need to improve/simplify further before we would advise 35%Maybe, but economic/market conditions need to change before we would consider 6%No, we do not consider these solutions, as too costly 6%No, we do not consider these solutions as clients don’t understand they can still fall in value

4%

All yes 49%All no 10%

Yes, and we regularly advise on these solutions 5%Yes, and we sometimes advise on these solutions 18%Maybe, but products need to improve/simplify further before we would consider 40%Maybe, but economic/market conditions need to change before we would consider 9%No, we do not consider these solutions, as too costly 13%No, we do not consider these solutions as clients don’t understand them 0%We would like to see more solutions which seek to blend non-guaranteed/guaranteed components

14%

All yes 23%All no 13%

Do you see a future for ‘smoothed’ (not guaranteed, but seeking to ‘smooth’ market peaks/troughs) product/fund solutions in the retirement market?

Do you see a future for guaranteed product/fund solutions in the retirement market?


Pg. 31

Using the AKG research as an indicator there remain as many questions as answers about the future for guaranteed products. Those considering opportunities here will need to give due consideration to the adviser feedback that products would need to improve/simplify further before being considered.

Providers also have the challenge of capital requirements for the provision of guarantees and the ability to bring guarantees to market in as simple a form as possible and at appealing price points.

A chink of light remains in the fact that customers do not want to run out of money in retirement and hence at the most basic level it feels like there should be a requirement for guarantees.

AKG feels that there might be an interesting opportunity to develop tranches of guaranteed products/funds on platforms. Something for the market to ponder further.


9. THE GROWING IMPORTANCE OF MORE EFFECTIVE COMMUNICATION AND BETTER EDUCATION

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9.1 EDUCATING CUSTOMERS ON PENSION AND RETIREMENT OPTIONS

Vince Smith-Hughes - Director of Specialist Business Support, Distribution - Prudential

The launch of pension freedoms appears to have had a halo effect on pensions generally and has encouraged people to really engage with their retirement plans. In addition, over £17bn has been withdrawn since freedoms began, showing what a popular change the then chancellor George Osborne made.

However, there is still wide scale lack of understanding amongst customers. This is further backed up by AKG’s research with consumers which shows a mixed understanding of how consumers can take their retirement income.

So, what should customers be considering when looking at their pensions? It’s a question with almost limitless answers but concentrating on set points until expected retirement date could be a useful starting point.

For example, regular pension forecasts perhaps every five years, and annually from ten years before retirement, reminders to trace old pensions and of course increasingly more detailed information of the retirement options that people have.

Included within this should be a reasonable assessment of what the anticipated level and start date of the state pension is. Research has shown there is a significant majority relying almost exclusively on the state pension, and for many the reality is this will produce little more than a subsidence level of existence.

The successful creation and operation of a pension dashboard could of course greatly assist with this. If there is an adviser helping then they will assist with many of these aspects, producing regular updates, information and hopefully making individuals they deal with as well prepared as they can be. Of course, the advice gap – those who cannot afford or feel unable to receive advice means this is not practically achievable for everyone.

One thing that may help with the whole education piece is the forthcoming creation of the single financial guidance body.

Broadly speaking the objectives of the body are as follows:• to improve the ability of members of the public to make informed financial decisions;• to support the provision of information, guidance and advice in areas where it is lacking;• to ensure that information, guidance and advice is provided to members of the public in the

clearest and most cost-effective way (including having regard to information provided by other organisations);

• to ensure that information, guidance and advice is available to those most in need of it (and to allocate its resources accordingly);

• to work closely with the devolved authorities regarding the provision of information, guidance and advice to members of the public in Scotland, Wales and Northern Ireland.

The intention is that the guidance will be expanded out to all stages of people’s lives rather than the restrictions that apply at present. Crucially this will include the younger generations and the self-employed.

It is also incumbent on the government to ensure this is widely promoted and people really understand where they can seek out unbiased information. However, the financial services profession getting behind this body and positively promoting the government funded service is essential if we are to improve the current position.

Given the urgent need for increased financial awareness amongst the public we really must all put our shoulder behind this crucial initiative. After all, a better educated public will surely help people to understand and appreciate the value of advice.

9.2 COMMUNICATION IMPROVEMENTS

9.3 RETIREMENT ‘WAKE-UP’ PACKS

9.3.1 What should be in wake-up packs?AKG therefore wanted to tackle this particular theme in our consumer market research exercise, firstly asking respondents to confirm what type of information they would like to receive.

82% wanted to see their state pension entitlement. The availability of the new online State Pension checker (https://www.gov.uk/check-state-pension) should be flagged to them, but it might also be useful if this could be accommodated in their wake-up pack moving forward.

Clearly, consumers also want to see the valuation of their pension fund/product with the servicing provider, something which is already accommodated.

We also asked about valuation of their fund/product with this provider, alluding to other holdings with the same provider and one-third of respondents would like this to be included. This will no doubt depend on provider admin/servicing systems as to whether valuations can be included. This should be an easier win for platforms who can one assumes provide a picture of other holdings in addition to the pension.

A next step, following developments with the Pension Dashboard might be for a wake-up pack to include pension valuations from servicing and other providers.

There is also appetite from consumers to be served up with information about their retirement options, at a higher level and at a product type level. Again, something that might already be included but can potentially be explored further by those designing such packs. The key will be to make these as digestible and engaging as possible.

While much of this focuses on the providers, advisers may also want to consider how they go about developing wake-up packs for clients. While still reliant on feeds of information and valuations from servicing provider(s), they can put their own stamp on these.

The retirement ‘wake-up’ pack has long being seen as a key source of communication for providers of pension products where the customer is approaching their (nominated) retirement age. Advisers may also have their own take on this type of communication package for clients.

While it cannot solve all of the challenges faced by providers and customers single-handedly, it is core reference/staging point and pretty much all market stakeholders are likely to agree that ‘wake-up’ packs could be improved in future as part of a range of targeted enhancements to pension/retirement related communications.

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Michelle Cracknell, Chief Executive, The Pensions Advisory Service

What improvements would you like to see from the wider industry to support the education and communication of pension choices to consumers?

A complete root & branch review of the statutory and non-statutory communications that take place. There is too much material being sent to consumers so the good stuff that is being produced is lost in a sea of too much paper. For example, I would stop SMPIs and reduce the content of the annual benefit statement. I would introduce communication at life events.

State pension entitlement 82%Information about your retirement options, i.e. the way in which you can withdraw money from your pension fund(s) 61%Valuation of your pension fund/product with this provider 60%Information about the type of retirement funds/products which you might use to withdraw money from your pension fund(s)

47%

Valuation of your fund/product with this provider 38%Other 1%

What type of information would you like to receive in your retirement ‘wake-up’ pack?



Pg. 34

9.3.2 What can be done about the timing of wake-up packs?Secondly, we wanted to look in more detail at the potential timing of the delivery of the ‘wake up’ packs.

It’s encouraging to see that consumers show an appetite for receiving information well in advance of retirement, with 18% stating that they would like to be contacted by their product provider or financial adviser five years before retirement, and 21% stating more than five years before retirement.

1 year before retirement 28%2 years before retirement 18%3 years before retirement 13%4 years before retirement 2%5 years before retirement 18%More than 5 years before retirement 21%

How long before retirement would you like to be contacted by your product provider or financial adviser about your retirement planning options?



Pg. 35


10. FILLING THE ‘GAP’ BETWEEN ADVICE & GUIDANCEOne of the key recommendations of the AKG paper is that the industry needs to continue to do more to ‘help’ people when it comes to pension/retirement related considerations. This could and should involve the provision of information, education, guidance and advice.

10.1 WHO WOULD YOU TRUST TO GIVE YOU GUIDANCE OR ADVICE ON YOUR RETIREMENT OPTIONS?

Let’s start by looking at who consumers would trust to give them advice or guidance.

It’s reassuring to see that 27% of those surveyed would trust financial advisers. TPAS, Citizens Advice Bureau and Pension Wise all feature quite strongly which is good and these facilities/services need to continue to be advanced. Pension providers were recognised and it feels somewhat inevitable that there will be a role for them beyond the provision of solutions to the market, i.e. products, funds, tools etc, and they should be further encouraged to develop professional financial planning capability.


How does the industry take positive steps forward to filling the advice gap during 2018/19?

There is no “advice gap” if the definition is customers who are seeking regulated advice but there is no capacity in the market. There is an issue that people need help but do not realise that they do or do not readily see the benefit of getting help. There is a misconception that need translates to demand. It does not.

The initiatives that are needed so that people do seek help are:• creating interventions such as the MOT or default guidance to

build a new social norm for the future

• working more collaboratively so that customers can move from advice through the guidance and vice versa easily and that providers/advisers and the public service encourage this behaviour

• reviewing the regulation to ensure that there are solutions for the current market failures e.g. getting commercially viable regulated advice for a DB transfer of £50,000.

The Pensions Advisory Service 45%Friends/family 30%Citizens Advice Bureau 28%Financial adviser/planner 27%Pension Wise 26%Existing pension provider 23%Government 19%Employer 6%Accountant 6%Solicitor 5%Bank/building society 5%Wealth manager 3%Lawyer 1%Press/media 1%Other 3%

Who would you trust to give you guidance or advice on your retirement options?


Pg. 36

Pension Wise must continue to be established as the ‘base-camp’ for customer access into support and guidance relating to pensions and retirement. It is vital that momentum is not lost during this period where the existing agencies are being merged into one entity.

• 28% of consumers said that they would take advantage of the Pension wise guidance guarantee• 29% of consumers said that they didn’t know whether they would engage with Pension Wise• 31% of consumers said that they had not heard of Pension Wise• 44% of consumer said that they would feel confident to make their own decisions with guidance on how to take an income at

retirement

The Government should continue to fund awareness campaigns for Pension Wise and it is reassuring to see and hear reference to it being made on our TV and radio channels.

Product/fund providers of all types must be encouraged to flag Pension Wise in customer-facing material and resources.

Although we are still in the formative stages of its development there should also be a link forged between the Pensions Dashboard and Pension Wise in future.

10.2 THE ROLE OF THE NEW GUIDANCE BODY AND PENSION WISE IS VITAL


How will the role/responsibilities of TPAS and the new unified guidance body evolve during 2018/19 to support consumers?

It will be up to the new Chief Executive of the Single Financial Guidance Body. The existing services are continuing to evolve their services and these will be transferred across to the new body on Day 1. The areas that TPAS are focussing on are:

• Awareness – making customers more aware that they need help by supporting interventions, improving hits on to our website, building partnerships with a wide range of organisations

• Scale – developing our services for the number of customers that we aspire to attract through optimising our engagement time with customers, automating our quality assurance and looking at digital assisted solutions

Will you take advantage of the Government’s Pension Wise guidance guarantee of a free 45-60 minute consultation available to everyone aged 50-plus either on the phone or face-to-face?

Pension Wise guidance presents an overview of your options and key considerations on retirement income, but cannot make a personal recommendation, and is available for 45 to 60 minutes. Do you feel confident to make your own decisions with guidance on how to take an income at retirement?Yes 28%

No 12%Not heard of it 31%Don't know 29%

Yes 44%No 19%Don't know 36%

Source: AKG pension freedoms consumer market research (online survey)Source: AKG pension freedoms consumer market research (online survey)


10.3 CHANNELS FOR HELP

Appetite for face-to-face support is clear. If that’s to be advice it will cost and we are back to the issue of affordability and/or adviser propensity to deal with certain customer segments/types.

Appetite for online is also clear and this will inevitably be a core channel for delivery of information and guidance now and in the future. It also gives initial backing to the robo-advice concept.

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Ok. This one is a bit of an eye-opener. 10% say that they won’t seek advice while 45% say that they would not be willing to pay. While they can access guidance for free they will need to pay for advice. There is no real enthusiasm for the advice price-points referenced with 12% saying that they would pay up to £100. It’s going to be very difficult for anything meaningful to be provided to consumers at this level. We only explored flat fee tolerance rather than percentage of fund.

10.4 PROPENSITY TO PAY FOR ADVICE

How would you prefer to receive guidance or advice on your options at retirement?

Face-to-face 38%Online 34%On the phone 5%Skype/Facetime 1%A mix of the above options 21%Other 2%


I already have a financial adviser 12%I would not be willing to pay 45%Up to £100 12%£100 to £200 5%£200 to £500 3%£500 to £750 1%£750 to £1,000 0%£1,000 plus 1%I would be willing to negotiate a price for ongoing advice 11%I won’t seek advice 10%

How much would you be willing to pay for advice on taking an income at retirement?



Pg. 38


10.5 INNOVATION

Which brings us neatly onto the subject of robo-advice.

The fact that 34% of consumers surveyed by AKG stated that they would prefer to receive guidance or advice on their options at retirement online gives legs to the discussion and provides a source of optimism for those targeting opportunities with online propositions.

From a price-point perspective these solutions are going to need to be quite keen.

While there has been a number of proposition launches in this area in recent times, most of the automated advice services launched to date are targeting ISA monies. And so, the big question here is, will they evolve further to cover drawdown solutions and associated retirement planning support? There is early evidence that drawdown capability will be added to these propositions.

There may also be an opportunity for ‘hybrid’ advice services which combine an element of automation online with human interaction.

In AKG’s adviser qualitative research there was a mixed bag of comments about robo-advice but very few advisers dismiss the concept out of hand. Most see some sort of role for it, albeit mainly as a front end or administration aid rather than a full-service solution. Few advisers believe retirement income advice can be satisfactorily delivered without some face to face interaction.

Furthermore, robo-advice has yet to have any impact on this market but many advisers see it either as a useful front-end filter to the full advice process or an adjunct that may help clients who currently fall outside the full advice regime. Most are awaiting developments.

“Robo-advice may yet save the day but so far none of the systems is truly fit for this sort of purpose. Advisers won’t want to spend a lot of £ millions developing their own system – they are more likely to be interested in white-labelling an acceptable solution.” CFP/WM

“Robo-advice, when it works effectively, is likely to lead to an upward trickle in full advice business.” CFP/WM

“Robo-advice – I expect to see it take off, there is some decent stuff beginning to emerge.” EBC

“Robo – I’d love to find one with a good retirement capability. I don’t really see it as providing the final piece of the advice jigsaw. It is mechanical and may be good for filtering.” IFA (corporate and individual)

“Robo-advice will affect everyone eventually but I’m not concerned, clients may try it out but many will

come back. Now robo-admin might be a different matter. If something like that could come into the mainstream, maintaining client records and information and accessing products, it could transform the advice process. People – especially younger ones, want digital solutions. It may help fill the advice gap but most clients will ultimately need to talk to a person.” CFP/WM

“Robo is being touted by some as a solution but it is not yet sufficiently developed for this market. The banks are potentially more interesting given the nature of the customer base that currently need or refuse to take advice.” CFP/WM

The sample for AKG’s qualitative market research with intermediary businesses contained a number of advisers with corporate and individual business as well as a couple of EBCs and their thoughts are focused on delivering services to employers and employees throughout the accumulation phase and into retirement planning.

“What the market needs is straightforward less advisory input. Trust-based schemes have a bit of a quandary, there is often little or no support for individuals. Decisions are crucial for the individual but providers don’t want to get too closely involved. They do not want the on-going responsibility. They are interested in providing better guidance with pre-selected options without incurring high transaction charges.” EBC

“We work with a lot of employer schemes and the general approach is to have good communications and guidance. We aim to provide advice for employees who want it. We are organised for it, we have very good capacity. We offer different things for different populations and are convinced this is the way forward for those approaching retirement but still in accumulation.” IFA/EBC

“The right sort of solution for mass market consumers going into retirement would be low cost, have good functionality, be flexible and responsive to changes in circumstances, be light on administration and have good investment options.” IFA/EBC

“There is anecdotal evidence that consumers want help. There are high volumes of calls into guidance and retirement help lines. Some schemes are offering more structured support in the form of seminars and individual guidance.” EBC

10.6 SERVICES FOR EMPLOYEES STILL IN ACCUMULATION

“The knowledge gap – a big issue but potentially also a major opportunity for the right sort of adviser.” IFA (corporate and individual)

“GPP providers work hard especially with employers but providing for retiring employees is not their day job. The blocking point is the bridge between insurance companies and employees. We don’t have any contact with Pensionwise. There is a gap to be filled and in an area like this, it is difficult to see any alternative but face-to-face. We need to get more people into the industry.” IFA

“Big opportunity in the small corporate market for a holistic proposition for employers and scheme trustees and their employees/scheme members with advisers providing support, communications and, for the right employees, advice.” IFA (corporate and individual)

Just in these observations from advisers many of the key themes established elsewhere in this AKG paper come to light here for key considerations in the corporate pensions market including the requirement for better education, information and communication. Roles and responsibilities need to be established here but despite some good initiatives seen in recent times there is clearly still work to be done with employers and trustees and opportunities for a range of companies to service these requirements.

And it certainly feels like there may be a role for automated online advice, and guidance, solutions in the corporate pensions arena. Something to consider for schemes, trustees, EBCs etc.

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While the main focus of this AKG paper has been on the impact of the pension freedom changes on the pension/retirement market, but we also feel that it’s important to give ourselves the opportunity to consider some of the key issues for the future as well.

Here, we look ahead give some initial thought to financial education in schools, the potential profile and requirements of the next generation of pension savers and inspiring the next generation of financial planners. These are all items which will warrant further discussion during 2018/19 and beyond.

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11. NEXT GENERATION CONSIDERATIONS

Russell Winnard, Head of Educator Facing Programmes and Services, Young Enterprise

In 2014 the educational charity pfeg, working alongside a range of key stakeholders, achieved the successful introduction of financial education onto the English National Curriculum for secondary schools. Within the same year the charity merged into another national charity, Young Enterprise and established a new brand name for all financial education work – Young Money.

Young Money is the secretariat for the All Party Parliamentary Group for Financial Education in Schools, and the last inquiry, conducted in 2016, into the impact of the National Curriculum change highlighted there were still significant numbers of secondary school not delivering financial education. Further to this the report strongly recommended the government introduce financial education within the primary curriculum. A significant opportunity to progress financial education in both primary and secondary schools has been presented by the Department for Education through a recent consultation on whether Personal, Social, Health and Economic education should be made statutory for all schools. The outcome of this will be announced later in 2018, but has the potential to be a really positive step forward for financial education.

The focus of the charity has always been on supporting teachers to develop the knowledge, skills and confidence in order that they can develop and deliver a planned and coherent programme of financial education which meets the needs of their students. This ensures a sustainable approach to financial education which schools can take ownership of. Young Money supports this in a range of ways, from training teachers, to providing teaching resources and running in-school support programmes, such as our Centre of Excellence programme.

Most recently we have announced that Young Money is developing a financial education textbook, supported by Martin Lewis OBE, which will be delivered to all secondary schools in England during the 18/19 academic year. This will be the very first student facing textbook for financial education and will support teachers to guide students through key financial topics.

Educating young people in money management and finance is increasingly important. With a rising life expectancy, a broadening range of financial products and development of a cashless society, learning such crucial skills around money are imperative. In September 2020, we will see the first cohort of young people who will have access to their Child Trust Fund. Every child automatically received this over the seven years of the fund, and many parents have made additional contributions. For the first time ever, every child will have access to a windfall upon reaching 18. We must make sure these young people understand how to manage this money effectively, the choices they have, and the potential consequences of not managing it wisely. Financial education is critical in ensuring all young people develop these essential skills and develop the ability to make informed financial decisions.

11.1 WHERE ARE WE WITH FINANCIAL EDUCATION IN SCHOOLS?


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Chris Curry, Director, Pensions Policy Institute

The type of assets that individuals have to help fund their retirement is likely to change considerably in the coming years, with assets from Defined Contribution (DC) schemes becoming increasingly important.

For those currently coming up to retirement, if they have a private pension it is likely to be a Defined Benefit (DB) pension providing a guaranteed income, rather than a DC pension where they have choice over how to use the assets. For many of those who do have DC assets, they are a supplement to a DB pension and relatively small.

This is likely to have been influencing recent trends in how DC assets are accessed, with a large proportion taking lump sums from DC pensions, and a significant fall in the use of DC to provide an income.

However, we know that future generations are likely to receive much lower amounts from DB pensions – the DWP estimates that the peak of income receipt from DB pensions was reached in 2012.

And since the introduction of automatic enrolment in 2012, DC pensions are becoming more important for a growing number of people, at all income levels. Recent PPI analysis for Standard Life suggested that someone entering the labour market at 18 this year, earning at the median for their age and contributing at the minimum level of contributions through automatic enrolment, would have a 50% chance of building up a pension pot of £108,000 in today’s earnings terms by the time they reach State Pension age at 68.

Those who are lucky enough to be in good employer pension schemes, or who earn more, or who can make their own

individual contributions above the minimum, can expect significantly more.

Add to this the fact that the UK state pension is relatively low at just over £8,000 a year and uncertainty remains as to how much this will grow relative to earnings in the future, and you can see that future generations are likely to enter retirement more asset rich but income poorer than the current generation of retirees.

So in future the decisions made by individuals around DC assets are likely to be more important. Although individuals who have spent more time in the AE system might be more engaged as they approach retirement, they are still likely to need extensive guidance at least, and more likely advice, to help with the complex decisions that they face. They are also more likely to be looking to provide income from their DC assets – be that guaranteed or flexible.

It is not likely that we will return to the days of annuitisation of 75% of the fund, but providing enough income to supplement the state pension while still leaving enough assets to fund future uncertainty and to enjoy retirement will be a challenge facing many DC pot holders.

11.2 WHAT WILL THE NEXT GENERATION OF SAVERS NEED FROM THE AT - RETIREMENT MARKET?

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11.3 INSPIRING THE NEXT GENERATION OF FINANCIAL PLANNERS

Keith Richards, Chief Executive of the Personal Finance Society

Government and Regulators now recognise the value that professional financial advice gives those consumers that take an active role in securing their long-term financial security. As a profession, we recognise the need to inspire the next generation of financial planners as well as welcoming technology solutions that both meet the demands of future generations of consumers but also help increase access to advice in its broadest sense (information, guidance through to regulated advice).

Lots of good work is ongoing to raise awareness of careers in the personal finance sector; these include apprenticeships and pro bono initiatives for those in the sector. The advent of Chartered status has also given our sector an opportunity to compete with more established professions.

Whilst we have more to do to inspire and attract future professionals, we have every reason to be proud of the personal finance profession we represent and the vital role it plays in society – after all, the UK Government made professional advice mandatory through legislation for safeguarded benefit pensions over £30k…a significant endorsement.


Wrapping up…In a market where the focus in recent times has been very much on immediate and short term issues we felt that it was crucial for AKG to also look ahead in this paper. So it was great to end on this future themes note. Many thanks for reading this AKG paper. We hope that you will agree that we have tried to cover a broad range of themes and perspectives. And hopefully you will see that, for a variety of reasons, the pensions/retirement market has become and will remain a fascinating place over the coming years. Opportunity will knock for market participants and other stakeholders for several years to come. But we are only three years into the post-pension freedoms environment and there is more experience to be gained. The number of ‘baby boomers’ approaching retirement is well documented, many of whom are yet to make their retirement decisions. Companies across the market must therefore continue to learn quickly from those customers experiencing the initial stages of pension freedoms, and adapt their propositions accordingly, to better target future business opportunities and to help people achieve positive outcomes. In the three years since the introduction of pension freedoms we have already seen that it won’t all be one-way traffic in terms of opportunities realised, and that there will be challenges and casualties along the way. The key to successful manufacturing and distribution will be intrinsically linked to the key retirement planning considerations for customers. Companies must therefore take heed of the concerns and requirements of their prime audiences – financial advisers and the end customer. To pull many of these strands together we would finally encourage you to (re)visit Section 2 of the AKG paper to view our Summary Observations and Recommendations, which includes our Key recommendations for the industry. Matt Ward, Communications Director, AKG

APPENDIXThe following list of questions was posed to respondents:

Q1 - How happy are you with the level of innovation and response from the market in response to pension freedoms?

Q2 - What are the key requirements for providers to be successful with advisers in the pensions/retirement market following the introduction of pension freedoms? (Select your top three from the

list of options provided)

Q3 - In which areas would you most like to see further development or improvement in the pensions/retirement market during 2018/19? (Select your top three from the list of options provided)

Q4 - Which type of providers do you believe will flourish in the pensions/retirement market? (Select your top three from the list of options provided)

Q5 - How has the amount of time spent by your business on the provision of retirement advice changed since the introduction of pension freedoms?

Q6 - Have you changed your minimum investable amount/fund size for servicing clients as a result of pension freedoms?

Q7 - Where it is not economical for you to offer your normal retirement planning service to clients, what option(s) would you offer? (Select all options from the list provided that apply)

Q8 - From which client segments do you expect most new business for advisers to come from in 2018/19? (Select your top three from the list of options provided)

Q9 - What is your approach to constructing drawdown investment portfolios for clients?

Q10 - What is your approach to constructing drawdown investment portfolios for clients? Where you outsource some or all investment duties/services to third parties, which type of partners/

solutions do you utilise? (Select all options from the list provided that apply)

Q11 - Do you see a future for guaranteed product/fund solutions in the retirement market?

Q12 - Do you see a future for ‘smoothed’ (not guaranteed, but seeking to ‘smooth’ market peaks/troughs) product/fund solutions in the retirement market?

Q13 - What do you think is the single biggest risk to your firm of DB transfer advice?

Q14 - What are your main investment/planning concerns for clients at- or post-retirement? (Select your top three from the list of options provided)

Q15 - What are the biggest areas of concern for your advice/planning business in 2018/19? (Select your top three from the list of options provided)

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ADVISER QUANTITATIVE MARKET RESEARCH QUESTIONS

The following list of questions was posed to respondents:

Q1 - Are you aware of the pension freedoms changes, involving greater flexibility on how you can take your retirement income, which were introduced in April 2015?

Q2 - What do you understand about the pension freedoms changes, involving greater flexibility on how you can take your retirement income, which were introduced in April 2015? (Select all

options from the list provided that apply)

Q3 - Do you feel more or less confident about retiring and your associated retirement plans than you did 5 years ago?

Q4 - When you stop working, assuming you have a State Pension paid to you, what will you do with your other pension savings? (Select one option from the list provided)

Q5 - Which of the following ways of generating an income in retirement from your pension savings seems most appealing to you? (Select one option from the list provided)

Q6 - What impact does the recent rise in incidents of pension fraud and scamming have on your support for pension freedoms? (Select all options from the list provided that apply)

Q7 - Which of the following things give you most cause for concern in retirement? (Select all options from the list provided that apply)

Q8 - How long before retirement would you like to be contacted by your product provider or financial adviser about your retirement planning options?

Q9 - What type of information would you like to receive in your retirement ‘wake-up’ pack? (Select all options from the list provided that apply)

Q10 - Will you take advantage of the Government’s Pension Wise guidance guarantee of a free 45-60 minute consultation available to everyone aged 50-plus either on the phone or face-to-face?

Q11 - Pension Wise guidance presents an overview of your options and key considerations on retirement income, but cannot make a personal recommendation, and is available for 45 to 60 minutes.

Do you feel confident to make your own decisions with guidance on how to take an income at retirement?

Q12 - How would you prefer to receive guidance or advice on your options at retirement? (Select one option from the list provided)

Q13 - Who would you trust to give you guidance or advice on your retirement options? (Select all options from the list provided that apply)

Q14 - How much would you be willing to pay for advice on taking an income at retirement? (Select one option from the list provided)

CONSUMER QUANTITATIVE MARKET RESEARCH QUESTIONS

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