Planning your retirement planning: what does a good CRP look like?

The UK is getting older; the Office for National Statistics estimates that by 2066 one in four of the UK population will be aged 65 or over, while five million will be 85 or over (up from 1.6 million in 2016). This is creating a huge planning task for financial advisers, particularly as the number of retirees with final salary pensions is shrinking fast.

Understandably, the Financial Conduct Authority (FCA) is very interested in how this market operates. To ensure that good outcomes are being delivered, the FCA flagged interest in the 2019 Sector Review paper:

“Some adviser firms have not yet updated their investment strategies for decumulation clients. In addition, they may not have adequately considered decumulation risks”.

They have recently built upon this with the announcement of ‘Assessing Suitability Review 2’. The wide-ranging review will focus on initial and ongoing advice to consumers on taking an income in retirement.

The key areas that the FCA suggested advisers need to be aware of includes:

• Ensuring advice you provide is suitable, costs and charges are disclosed clearly, and you act in the best interests of your clients.
• Conflicts of interest must be identified and where they cannot be prevented, disclosed and managed.
• Inadequate fact finding creates a high risk that your advice will be unsuitable.

Concerns

The FCA is clear that accumulation (saving up for retirement) and decumulation (drawing down in retirement) are different and have different associated risks e.g. sequence of return risk.

That may not necessarily mean using different portfolios but will most likely involve different investment strategies: not what the investment components are, more how they are used.

Some key areas that advisers will need to consider are:

• How are you assessing and managing a sustainable withdrawal rate for clients? If you are using a cash flow modelling tool, what assumptions are being used?
• If you are relying on “natural income”, how will your client cope when income rates are low, or when income amounts fluctuate?
• How are you helping clients to manage behaviour risk (taking too much out) or coping with possible lower returns than expected?
• How have you assessed your selected platforms capability to manage, change and pay income?
• How have you considered any income guarantees (state pension & DB) versus the need for flexibility? Have you secured any later life income needed?

Post pensions freedoms, retirement fact finding will need to have been updated – it is worth checking that you are capturing both hard and soft facts.

What does a good CRP look like?

Centralised Investment Propositions (CIPs) are structured investment processes that aim to deliver a robust solution that is both repeatable and consistent for different clients.

Centralised Retirement Propositions (CRPs) recognise that there are key differences between building a fund of money before retirement and applying that money during retirement to provide an income for life.

It is not essential to develop a Centralised Retirement Proposition to manage these risks, but it makes sense to adopt a consistent, structured approach.

Every advice firm will have a different decumulation strategy, but they are likely to include a number of common elements such as information on longevity, detailed assessment of risk and ability to bear losses, detailed expenditure analysis, evidence to validate sustainable withdrawal rates and strategy to manage sequence risk.

It is vital that you have a robust evidence-based process that covers all the issues your clients face as they enter retirement and it is applied consistently across your firm.

Checklist for CRP

Below is a checklist of the areas to consider when developing a CRP or retirement planning process:

• PROD: Is it documented. Is it embedded in your DDQ?
• Cashflow Tool: Do you use one. What are the assumptions within it?
• Retirement Fact Find: Updated date. Does it include soft facts?
• Annuity Rates: Checked rates. Update frequency?
• Safe Withdrawal Rate: Rate used. Consistency. Evidence?
• Cash Buffer: Yes or No? How held (on/off platform). How much?
• Risk Profiling: ATR. C4L. Need for Return. Risk tool Due Diligence?
• Inflation Assumptions: Rate used. Evidence?
• Sequence Risk: Understanding and explaining it. Mitigation Strategy?
• Investment Philosophy: Is it documented. Evidence?
• Investment Service: Pots or Single? Small Pots. Evidence/DDQ?
• Adviser Service Offer: PROD segments. Drawdown service?
• Adviser Fees: £s or %. Small pots. Long Term. Documentation?
• Platform for Drawdown: Checklist (PROD and Service). DDQ?
• Client Understanding: Process. Simplicity. Documentation?
• Vulnerable Clients: Statement. Process. Documentation?
• Conflicts: Issues. Management strategy?
• Showing Your Value: Examples. Communication?

The value of advice

Finally, having developed your CRP, completed your research and analysis, conducted due diligence, created your investment philosophy and strategies, updated your systems and controls, paid your insurance premiums, levies and fees, don’t forget to showcase the value of yourself and your advice.

It is a simple enough question for a client to ask: “Do I have enough to money to retire?” But it is a much more complex answer. Helping clients to achieve a financially independent and stress-free lifestyle is worth a fortune.

Happy planning.

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About the Author

Before jointly founding TCF Investment a decade ago, David Norman held senior roles with asset managers, life companies and banks and was latterly CEO of Credit Suisse Asset Management (UK).

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