Most of the pensions industry can pinpoint exactly where they were when they heard then-chancellor George Osborne say those immortal words in March 2014: “Let me be clear: no one will have to buy an annuity.”
It certainly stunned the pension world, which simply had no idea it was coming.
Pension freedoms turned pensions around, breathing excitement into the possibilities of how people could use their pension pot in later years.
At the time, a few worries were raised about how people would know what to do and which option to choose, which led to the birth of the Money and Pensions Service (Maps) to provide guidance.
The Financial Conduct Authority attempted to delve further into this area in the aftermath of 2015 through its retirement outcomes review, trying to piece together a clearer idea of how people were spending their pension money. But it has taken until now for it to have a good look at what advice people receive to help them make these tough decumulation decisions.
Even the fact less than 1% of clients were recommended a blended solution – combining annuities and drawdown – didn’t seem to raise an eyebrow
The FCA’s long-awaited thematic review into retirement income advice has finally been published. The research – which was carried out in the first half of last year – comprised a survey completed by almost 1,000 adviser firms illustrating what decisions consumers took and how firms approached advice in this area. This was complimented by a deep dive into the files of 24 firms.
The report was hotly anticipated. What, we wondered, would the FCA conclude? Would it be scathing about the number of drawdown plans set up, the dramatic fall in annuities sold, or caution against high withdrawal rates?
In the end, the initial read out from the report was much more mundane. The FCA was more concerned with how the advice conclusion had been reached rather than the actual advice given, or options chosen. Even the fact that less than 1% of clients were recommended a blended solution – combining annuities and drawdown – didn’t seem to raise an eyebrow.
The review wasn’t so much a warning shot about products chosen or options taken, more a homily about good advice processes
The conclusions of the thematic review were a mixed bag. Some advisers had evolved to adapt to a post-freedoms landscape, adopting detailed processes, training and specific tools, all geared towards helping clients with decumulation questions. However, the FCA found others weren’t taking account of differing needs of customers in decumulation or hadn’t adopted a specific decumulation advice model. Simply put, they were failing to treat decumulation decisions any differently to accumulation ones.
So, the FCA wants to see improvement.
In its letter to chief executives of advice firms, it asked them to pay particular attention to certain areas. When setting income withdrawal rates, the FCA wants firms to have a more consistent approach and really consider the income needs of their clients in decumulation. Firms should be paying more attention to sustainability of income and using cashflow modelling to help determine recommendations.
A few things stood out from the FCA’s shopping list of requirements – none of which will come as any surprise
Other areas included risk profiling; some firms don’t take capacity for loss into account. The FCA wants to see complete fact-finds to back up the suitability for the advice given, considering loss of guarantees, penalties and charges.
A few things stood out from the FCA’s shopping list of requirements – none of which will come as any surprise.
Make sure to consider if clients are vulnerable and adapt your service; only charge ongoing advice charges if you are giving a service in return; keep good records to evidence decisions; and Consumer Duty needs to be the foundation of decumulation advice – think about the target customer.
In the end, the thematic review wasn’t so much a warning shot about products chosen or options taken, more a homily about good advice processes. Advisers need to pay attention, though. The FCA is clear: do what they want or else they will take further action.
And that shouldn’t come to a surprise to anyone.
Rachel Vahey is head of public policy at AJ Bell
