The Financial Conduct Authority this year raised concerns there has been little in the way of product innovation in retirement income products since pension freedoms came into force.”
Richard Bradley, associate research director at Platforum, says he is getting the same feedback from advisers.
“It’s a chicken and egg situation: advisers need the right ingredients to define their investment propositions and providers need to know the investment propositions to create the right products and services,” he says.
But, Gavin Fielding, editorial director at Fundscape, adds that what most customers are looking for is “a stable and regular income” as close to an annuity/salary as possible. “For other customers the income can vary but they want to preserve capital i.e. take a natural income.”
Parmenion and Thesis portfolios
Patrick Ingram, head of strategic partnerships at Parmenion says pensions freedoms have changed the dynamics for retirement advice. But he says: “Most advised retirements still have a meaningful element of support from defined benefit and state pension arrangements. Year by year that picture will change.”
Recent figures out of the US show defined contribution schemes have now surpassed defined benefit.
“For people born in the 1950s and leaving paid work with advice, the question is more often, how can this pot help me retire a little earlier or supplement my other secure income, rather than, what can my DC pension provide me with, as an income for life on its own?”
Alongside its core ranges, for clients running enhanced natural income strategies, Parmenion’s ten Tactical Income portfolios (launched in Feb 2014) offer progressively increasing target yields, rising to 5.25% in step with rising portfolio risk. The 10 Guardian portfolios launched in May 2016 are its most drawdown focused portfolios. According to Ingram the range has “sophisticated asset allocation and fund selection, designed to cope better under drawdown, and independently stress tested under projected drawdown conditions by consulting actuaries Hymans Robertson.”
Lawrence Cook, director at Thesis Asset Management, says its Managed Income Service migrates client money gradually from partial investment in defensive cash like assets moving assets to full investment in the appropriate growth model. “We are first in the field with this new retirement solution innovation which means that the first phase post launch is about having the discussion about decumulation, raising awareness of the challenges and ultimately winning the argument.”
Decumulation sheds light on charges
Bradley argues that the traditional accumulation advice model looks less sustainable in decumulation, especially when Mifid II sheds even more light on charges. “An adviser charging 1% on a 4% yield looks like the adviser walking off with a quarter of the client’s income. It will also compound the impact of any sequencing risk.
“Telling a client that they need to reduce their income because of declining markets will go down like a lead balloon if the adviser is still taking their full share.”
Asset allocation versus cashflow modelling
There is tension emerging between an asset allocation approach and cashflow modelling, according to Bradley. “Many advisers are using a bucketing approach, with low-risk assets for immediate income and higher risk assets used to beat inflation long-term.”
“We’re seeing some products come to market that are designed to fit within these buckets and also model portfolio solutions that aim to wrap these buckets up within a single income-oriented portfolio.”
Platforum is hearing about some interesting products in the works that sit between the guarantees of annuities and the flexibility of drawdown, which will provide some additional tools for advisers looking to build robust and flexible retirement portfolios, he says.
Two stages of retirement income
Clive Waller, managing director at CWC Research, says most “older folk” see retirement in two stages, or pots. The first five to 10 years where they hope to be active and expenditure high and the second, is longer term when health is deteriorating so there is reduced expenditure, he explains.
“The risk level for the first stage of retirement will be as low as it can,” he says. “For me, today, that is cash as there is no short bond market. Others may prefer a slightly higher risk level, but the key is that income is assured.
“The second pot can be long equity, with maximum diversification.” That would then move to the very low risk level depending on its performance and the client’s health.
“Very old people have little need to spend. An annuity should be purchased at some stage to cover the essential expenditure.”
He adds adds that vulnerability is an issue.
“Advisers who have been living comfortably on 100 bps in the early years, will not want to give advice when the pot is reduced by two thirds and the client could be suffering from dementia.”