“The narrative needs to change.” From our recent Edinburgh drawdown roundtable event, this comment succinctly depicts the current situation within the existing income drawdown landscape. Read more to find out the things as an industry we need to address.
Throughout both roundtable events, the other held in London, and our 32-page white paper: Drawdown: The Mirror Image of Accumulation, we’ve sought to raise awareness of the issues concerning retirement income, specifically that some of the tools and processes used to assess customers’ income needs aren’t fit for purpose.
A 5-point action plan for change
The white paper identified five actions the industry needs to take to correct the systemic failings within the current framework. Drawdown is the mirror image of accumulation in so many ways, and treating it as anything other than that is potentially hugely damaging to retirees’ financial well-being. The events aimed to stress-test the failings on a handpicked selection of some of the industry’s finest experts.
To recap, our 5-point action plan for the industry, the starting point to fixing drawdown are:
Tailor risk questionnaires to the needs of those drawing an income.
Explain risk in terms of the impact on a sustainable income. Investment volatility should not be the focus.
Risk rate funds and portfolios are used for income drawdown in terms of income sustainability. Capital at risk should not be the primary focus.
Ensure retirees have income reviews annually and at times of severe market dislocation.
Recognise that the FCA’s illustration rates are entirely unsuitable for determining drawdown income levels. This is because the rates are reviewed too infrequently to reflect current investment conditions and were not intended to be used for this purpose.
The starting point for change
We appreciate that while the fixes are straightforward, the situation won’t be resolved overnight. However, the discussion needs to start somewhere. Our recent activity has been pivotal in encouraging the industry to open up about what needs to change. There is an inherent danger that people will make poor decisions with their retirement provision without immediate and concerted action, putting them at risk of draining funds too soon. Gathering some of the industry’s leading experts and trade bodies around the table has put us closer to making the drawdown landscape a safer and more functional space for consumers to interact with.
Following our event held in London, we once again assembled a panel of experts from the retirement and personal finance community around the table to gather their views on the actions required to fix income drawdown.
Presided over by Otto Thoreson, serving chairman of NEST, our Edinburgh event tackled the areas causing the most potential harm to customers in retirement. The key takeaway was that the narrative needs a shake-up, starting with our language; terms like ‘at-retirement and ‘pensions’ no longer accurately describe consumer behaviour. In addition, the shift from annuities to drawdown means people now make decisions throughout their retirement. So we must talk to customers about their future income’.
The experts identified four clear areas where things need to change, all consistent with our findings in the white paper:
There’s much work to do to help those transitioning from work to retirement. For example, people looking for income have contrasting objectives to those seeking growth. Yet, it’s common practice for the same risk profile questionnaire to be used for both objectives. We need to start applying the right science and engineering to the tools and solutions to support retirement income customers.
Action must be taken immediately. As time goes on, more and more people will be opting for flexible drawdown; the industry needs to develop a regime to ensure people make the right choices with their retirement funds and ultimately avoid running out of cash.
Non-advised customers need the most help - the current level of knowledge and understanding is very low. More innovation within the product chain is required. There are too many instances of people choosing their retirement strategy based on emotion rather than reasoning, selecting drawdown over annuities because it is possible to draw a higher income. However, in many cases, the income levels being drawn are unsustainable.
The Financial Conduct Authority should extend its annual statement to require drawdown customers to receive an annual review. For the non-advised, we must develop online cashflow models to identify whether their provision is on track to continue providing the required income level.
We must stress that our activity so far is just starting. We will continue banging the drum for action on these issues until the necessary solutions are in place. So keep your peels for more from us over the coming months.
So what next?
The Drawdown: The Mirror Image of Accumulation white paper is available to download now and covers a plan that reaches across financial advisers, fund and asset managers, and pension providers.
Please click here to download the retirement drawdown white paper and learn more about producing suitable and sustainable outcomes for consumers.