UK retirement advice may need to change before the market does again. Customers' needs and attitudes are shifting, and firms aren’t always shifting with them. We explore how the industry can respond.
For the last decade, the conditions in the pensions market have been favourable. The industry hasn’t done everything right, as the latest thematic review from the FCA (TR24) makes clear, but broadly everything has headed in the right direction.
As far as retirement advice goes, it’s been a grace period. Not every ship leaving port has been entirely robust. But the winds haven’t blown too hard, the waves have stayed small, and good customer outcomes have (mostly) been met.
This grace period may soon be over, if it’s not already. Insights from the FCA and industry leaders, along with EV’s own monitoring and research, suggests that good customer outcomes may not be the norm if the industry continues the way it has.
In July 2024, we hosted a roundtable discussion between:
Patrick weighed in on the state of the UK: With the UK’s floundering status as an investable market, alongside the risk of interest rates and the cost of living crisis, many customers have a different mindset than they used to.
“These days,” says Patrick, “you don’t go to a financial adviser unless you’ve discounted the idea of figuring it out yourself. These are people who aren’t sure. They’re possibly worried, sensitive, and potentially vulnerable.
“They might not be risk averse in the volatility sense, but in all other senses they might be worried about risks in life.”
This tallies up with EV’s own research, conducted through our Income Risk Questionnaire, which launched in 2017.
It’s given us seven years of data to examine, and we can see that customers are very much more risk averse when it comes to risking their income than their capital.
“Our Income Risk Questionnaire shows that actually, consumers are very, very much more risk averse when it comes to risking their income than they are their capital,” says Bruce Moss. “And you'd expect that – it's life changing if you lose your income.”
It’s possible the UK economic climate is contributing to some trepidation among customers:
The scenario in which people are left without income is more likely now than it once was. And those who aren’t in this situation will still be more aware of it than ever. But this won’t necessarily mean they know what they need.
Those retiring now have more options than before thanks to the Pensions Freedoms policy.
It was a scheme which Gareth Davis called “The perfect policy at the perfect time.”
The world, it has to be said, looks very different today.
Bruce Moss agreed with this sentiment: “Since Pension Freedoms was introduced in 2015, the market’s been at an all-time high, but it might not stay this way. We have masses of geopolitical uncertainty, so it's very likely that we're going to see a sustained fall in the market at some point.
“When things go wrong – and they will go wrong – we’re going to be in trouble if we’re measuring the wrong risk and objectives for customers.”
So what does the industry need to do?
The FCA’s thematic review made stark an issue that many in the industry have been talking about for a while: we need to think about decumulation and accumulation differently.
Those creating wealth early in their careers will (for the most part) naturally still afford to focus on amassing as much capital as they can in the time they have.
But for those approaching retirement, or for those on the edge of financial vulnerability, advisers will need to take note of the changing priorities. As we saw from our Income Risk Questionnaire, these are priorities that customers will tell you about if you ask – but many firms are not asking. At least not explicitly enough.
The FCA examined 24 firms for the TR24/1 thematic review and in section 2.23 they mention “for all 24 firms the risk profiling approach showed no clear distinction between accumulation or decumulation.”
This is an issue that all firms can address right away: standardising two separate risk profiling approaches: one for accumulation, one for decumulation.
There are other, longer term approaches firms can take to ensure their retirement advice is robust in a more fragile UK.
1. Invest in cashflow modelling.
In the latest thematic review, the FCA came as close as they have ever come to mandating cashflow modelling. Daniel of Octopus Money gave us his take on why cashflow modelling is vital going forwards:
“Being able to have a conversation with an illustration of how the markets might perform over time is helpful.
“For those on £50,000 or less. The main issue is ‘will they have enough money’ whereas other customers will never run out of money. If you do cashflow modelling and you see your customer’s going to be absolutely fine whatever happens, you have a different set of possible outcomes.”
2. Be vigilant when it comes to annual reassessments
As Patrick Ingram of Parmelion told us: “A cashflow model over 30 years is indicative, but it’s no guarantee.”
“The drumbeat has to be the annual reassessment of the financial situation of the client. You need to test their wealth against their ability to buy certainty.”
3. Be obstinate about documentation
Your annual conclusions may be that the customer is still better off taking a slightly riskier approach to investment. However, you can no longer afford to do this on a wing and a prayer.
“If you recommend more risk than the customer might have felt comfortable with,” says Bruce Moss of EV. “You need it to be really well documented, so it’s clear the customer agreed to it and it was to achieve the best outcome.”
These are only some of the steps we can take – but they will be vital on the uncertain road ahead. For more insights from industry experts, check out our download, Financial advice leaders on risk.
To see how technology can help with all we’ve discussed in this article, see how EVPro can help you fulfil the recommendations of the FCA.