‘Perfect storm’ for retirement planning should bring advisers back to the table on CRP development, urges AKG in latest industry research publication

by | Oct 26, 2022

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  • Rising inflation and ongoing volatility are driving evolution in adviser firms’ retirement processes and propositions amid fears issues emerging now may get worse before they get better
  • Firms say advising clients in retirement and drawdown is more risky and more expensive than advising clients in accumulation with risks exacerbated once clients start to take income
  • Centralised retirement advice and planning processes will be key to supporting consistency and targeting positive client outcomes

The perfect storm of rising inflation and ongoing volatility is driving an evolution in adviser firms’ retirement processes and propositions amid fears that issues emerging now may get worse before they get better, a new industry research briefing from independent consultants AKG says.

Published today ‘Coming back to the table on CRPs’ highlights concerns that advising clients in retirement is more risky and expensive than in accumulation with the risks rising once clients start to take income.

This briefing, sponsored by Investec Wealth & Investment, and available to download at www.investec.com/akg, is drawn from comprehensive independent research with 200 advisers and a series of in-depth interviews with 17 representatives from a range of adviser firm types.

Key insights include:

CRP adoption – Around three-quarters (73%) of advisers surveyed said their firm had already launched a separate/distinct CRP. Meanwhile, one-fifth (19%) said their firm hadn’t yet launched a CRP but were planning to do so in the next 12 months showing there is work in progress for some firms.

In-house vs. outsourced investment – Given the investment focus of drawdown strategies for retirement planning there has been a glut of investment solutions from a range of players launched in the market to dovetail with CIPs and CRPs. And given the obvious challenges for adviser firms in servicing clients, do they want to facilitate and manage their CRP in-house or via an outsourced solution from a third party?

Just over three-fifths (63%) of advisers responding to this question in the survey said their firm’s CRP is outsourced to a discretionary wealth manager, with the remainder saying their firm has discretionary permissions and manages its CRP in-house.

CRP composition – The highest proportion (64%) of advisers responding to this question said their firm’s CRP includes a withdrawal policy. More than half (55%) said the CRP includes an investment policy which reflects the risks associated with drawdown and 53% said their firm’s CRP included consideration of guaranteed income. 47% of advisers responding to this question in the survey said their firm’s CRP includes a taxation policy. Finally, 34% of advisers responding to this survey question said their firm includes consideration of discretionary/essential income requirements in its CRP.

The comprehensiveness required to formulate a compelling retirement planning service should not be underestimated. Where firms do not have a policy on some of these items they might need to consider whether they are missing any vital component parts of their retirement planning services. Such services need to continue to evolve given the obviously challenging backdrop for clients.

Addressing essential income requirements – With all of the focus on the investment ‘sizzle,’ it is crucial that the provision of secure/sustainable income is not overlooked for clients who may be more cautious in their outlook or might still require an element of underpin to cover necessities in retirement.

Around a third (34%) of advisers said their firm’s CRP addresses clients’ essential income requirements by investing in lower volatility assets. Around 39% do so by purchasing an annuity or retaining DB pension benefits where available, whilst 27% say they achieve this via a combination of the two methods.

This feels like an area which will continue to command attention and it is also an area where the market has been potentially slow to provide associated solutions to facilitate such essential income requirements.

Drawdown a growing part of firms’ business – The research shows just under two-thirds of advisers said that between 25% and 50% of their firm’s advisory business relates to clients in drawdown while 17% said that clients in drawdown represented a higher proportion of their advisory business of between 50% and 75%. Furthermore, nearly two out of three (64%) envisage increased client demand for drawdown in the next five years.

Education and advice gaps cause growing concern – There is a great requirement for education on pension and retirement planning risks – to be improved across all ages groups and this will be essential to the successful long-term future of the pensions/retirement market. Advisers foresee serious issues around the scarcity of advice at a time when advice needs are already proliferating, especially as DC pensions are becoming the dominant form of pension saving.

Future retirement market – The market for solutions to support the proposition delivery element is extremely competitive with multiple players targeting AUM, but it is felt that there is still room for development of more decumulation and retirement income specific solutions.

Matt Ward, Communications Director at AKG, commented:Whilst the adviser survey indicates widespread CRP adoption, there are potentially contrasting views from the adviser firm interviews with some suggesting that CRPs are only emerging, and that development has typically taken the form of structured/mandated processes rather than mandated products/propositions. Either way, the driver is the need for compliance, consistency, and efficiency.

A key concern for some firms is that a CRP might compromise independence if there is too close a tie to a specific product or provider. Perhaps (in CRP) it is more a case of ‘P’ for processes for adviser firms and ‘P’ for proposition in the minds of providers, platforms, DFMs and asset managers.

Simon Taylor, Head of Strategic Partnerships & Platforms at Investec Wealth & Investment, said: The research clearly illustrates that in current market conditions, none of us can act independently. The new approach of combining the certainty of a guaranteed annuity with the flexibility of drawdown needs to be explored.

“As far as we can see, the biggest challenge for advisers is managing the behavioural and business risks that serve to make CRPs a compelling solution for the future. Indeed, the bucketing approach is becoming central to solving dilemmas which are exacerbated by the current market conditions.

All of this needs to be developed across the industry to ensure the best possible outcomes are delivered for all clients in their retirement years.”

Ronelle Hutchinson, Senior Investment Director at Investec Wealth & Investment, added: “Decumulation, which is vastly different from accumulation, focuses our minds on several combined risks that have been inadequately explored up until this point – this includes sequencing risk, longevity, inflation and market risk. This is particularly evident given the current economic climate.

“It is vital that we ensure investment portfolios evolve to mitigate these risks in the future. We are working with our partners to look at ways to combine the certainties of a guaranteed annuity with the flexibility of a drawdown portfolio.”

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