The Retirement Planning Landscape


I was recently interviewed by Nucleus Illuminate’s Jun Merret on the retirement planning landscape. Here were her top questions.

Nucleus Illuminate: Why is everyone talking about pensions?

The pensions freedoms have transformed the pension landscape. According to HMRC figures, more than 770,000 over-55s have taken on average £11,000 out of their pension pots. Between April and June this year, 159,000 people withdrew £1.8 billion, accelerating the trend since their introduction and bringing the total withdrawals to £6.1 billion. We are now in a situation where people are drawing out more from their pensions then being put in to pensions.

From an industry perspective, this creates increased commercial opportunities to widen product range, deliver innovative advisory solutions, deepen relationships with clients and enhance revenue streams.

With the recent Brexit vote, cash equivalent transfer values are at an all time high and we can expect further discussions between advisers and clients on the merits of transfer.

Nucleus Illuminate: Concerns have been raised by a number of people. What are they?

The so-called pension freedoms turn retirement planning on its head. Advice will change from decisions about managing income requirements, preservation of capital and the optimal time to annuitise, to whether a pension should even be used to provide a retirement income. These are legitimate discussions with clients who have a right to an evaluation of and advice on their options.

My view, however, is that this will conflict with the FCA’s stance on pensions. I think they will see pensions primarily as a vehicle to provide retirement income and that people should not put their retirement income at risk if this could lead to hardship when they are no longer working.

There is also the ‘Lamborghini effect’ – where people will choose to access their pension pot to make one-off purchases such as cruises or cars to the detriment of their future retirement income and welfare. This is an example of a person focusing on their immediate cash needs without considering the longer-term implications.

These risks are further amplified by demographic changes. Retirement is no longer a one-off event, with phased retirement becoming increasingly common. The retirement life cycle is changing as we live longer and so it is becoming much more uncertain and unpredictable. Our income requirements are likely to be higher in the earlier, active years but diminish in the later years with lump sum capital required to pay for long-term care or infirmary costs.

So there are a confluence of factors that create complexity and trade-offs when providing advice because of:

Changing income requirements;
Undefined capital needs; and
Uncertain longevity.

Additionally, we are seeing so-called ‘third way’ products designed to manage these uncertainties. The paradox is that, with the proliferation of products, this leads to greater complexity, especially if it is difficult to compare product features, such as charges and guarantees.

As an industry, we need to be very careful that we do not sow the seeds of the next mis-selling scandal.


Nucleus Illuminate: What do you think the FCA will be concerned about?

The FCA will be primarily concerned with consumer protection and, in particular:

The welfare impact of consumers running out of money in retirement; and
Consumers failing to maximise their retirement income due to poor advice and retirement solutions.
If you speak to most investment professionals, they favour an income drawdown or investment solution as a retirement solution. This is because they believe annuities offer poor value for money. However, in a paper titled “The value for money of annuities and other retirement income strategies in the UK”, the FCA concluded that:

‘For people with average-sized pension pots and low risk appetite, the right annuity purchased on the open market offers good value for money relative to alternative drawdown strategies’

This is based on a measure called ‘money’s worth’. This metric analyses the return of capital from an annuity, taking into account a particular discount rate and certain assumptions on mortality.

Whether or not the FCA’s analysis is correct, we can see that its view is that a pension is primarily to provide retirement income, and annuities should not be overlooked.


Nucleus Illuminate: You talk about the ‘Lamborghini effect’. Why would consumers take decisions that are not in their longer-term interests?

Consumers suffer from behavioural biases that inhibit rational decision making. Most consumers would strongly object to making a one-off decision to secure a pension through an annuity, especially at the earlier phase of retirement. There is a lot of emotion attached to working for a lifetime to accumulate a fund, only to potentially lose the money on death or not be able to leave it to loved ones.

Other biases include bounded rationality, which is the inability to make decisions if there is too much complexity. The ‘Lamborghini effect’ is an example of present bias, where a disproportionate focus is placed on higher levels of consumption today without considering the impact on future welfare. These all have implications for how you engage and transact with consumers.

So consumer biases need to be taken into account when designing the proposition and advice processes.

Nucleus Illuminate: What sort of discussions are you having with clients?

On a commercial level, the new legislation potentially makes a pension fund an ultra-long term asset with a possible duration of sixty or seventy years – possibly longer if bequeathed to the next generation. This raises three critical issues.

The first is ensuring that firms create a brand that is universally appealing across generations. There are clear differences in how baby boomers and millennials perceive brands and their respective buying behaviour. This requires ambidexterity; firms that are not embracing digital modes of delivery, for example, will struggle to remain relevant.

The second issue is particularly important for owner-managed firms. With the potential for an ultra-long inter-generational relationship, these firms need to convince clients that they will still be in business in fifty or sixty years time. After all, if you were a client, would you want to instruct a firm that may disappear with the principal? The key is a coherent investment philosophy, underpinned by consistent and repeatable investment processes but also ensuring there is a pipeline of future talent and succession planning.

The third issue is that an ultra-long investment horizon requires a re-assessment of the asset allocation and investment portfolio planning process. It may now be entirely appropriate to operate across a wider range of asset classes, including those that are more illiquid and esoteric. With wider asset class coverage, I would suggest a re-think on how to structure existing research capabilities and processes to ensure sufficient depth of expertise and asset class coverage.


From an advisory perspective, when assessing the right retirement strategy for each client, there really needs to be a clear rationale for discounting the annuity. Even if annuities are poor value for money, they offer a guarantee of income for the client. This should be used as a reference point to assess all potential options available for the client.

A pragmatic approach might be to use the annuity as a risk-free rate of return and a reference point for any deviation from its use. Although not perfect, this will allow all potential benefits, limitations and trade-offs to be identified as part of the assessment of the right solution.

If the retirement strategy is geared towards preservation of the pension, it may make sense for clients to run down directly held assets. A critical factor will, therefore, be the optimisation of tax-efficiency in how non-pension assets are realised. This will necessitate greater integration of financial planning skills and investment management, creating even more opportunities to deepen client relationships. My prediction is that we will move from the all encompassing one adviser-servicing model to teams of specialists surrounding the client to deliver these solutions.

A real concern across the industry is the suitability risk. One of the ways to manage this complexity is client segmentation. Segmentation can help identify associated client segments and solutions. For example, clients with substantial defined benefit pensions or buy-to-let properties will have different attitudes and needs from those who are more reliant on money-purchase scheme pots. So the advisory model and potential range of solutions are different. Proper client segmentation allows the design of effective and scalable propositions to suit particular segments.

With all this in mind, one consumer bias to be aware of is ‘framing’. This is influencing a client’s choices through the way information is presented. Studies have shown that framing the retirement decision as a decision about securing current and future consumption rather than accumulating or preserving wealth results in a preference for annuities. Understanding this concept is particularly important where a firm’s business model revolves around growing assets under supervision.

Originally published on 13th September 2016 at https://illuminate.nucleusfinancial.com

Oct 02, 2016

As the Brexit Dust Begins to Settle…



The EU referendum was a historic moment for the United Kingdom (“UK”), heralding a new relationship with the European Union (“EU”). Questions remain as to what the mantra ‘Brexit means Brexit’ actually means. Ultimately, it will boil down to a question of trade-offs between control on immigration and access to the single market.

Whilst this plays out at the political level, what are the implications and potential impacts for UK financial services firms in the event of a Brexit entailing no access to the single market?

Cross-border matters

The loss of the passport has received the most media attention. In my own experience, the passporting system is far from perfect but its removal will impair cross-border business. With Brexit, the UK will become a third member state and firms wishing to undertake cross-border business will need to establish separately capitalised and authorised legal entities within another EU State. This will introduce further costs and create additional complexity.

UCIT funds will also be impacted. The UCITs Directive currently permits fund managers and fund administrators to be located in a different EEA state to where the fund is domiciled. If this arrangement ceased, UCITs funds with UK managers and administrators would need to be restructured and / or re-domiciled. This would reduce the scale economies from operating on a pan-European basis and will feed through into costs, profitability and fund charges.

EU-domiciled UCITs funds would also lose their right to be distributed in the UK and, therefore, be re-classified as unregulated or alternative funds. Current regulations prohibit sale and marketing of these funds unless an exemption applies. In reality, one would expect the FCA to introduce some form of recognition and / or grandfathering to ensure continuity for investment advisers and clients.


Squaring the cross-border circle

Regulatory equivalence has been mooted as a potential solution for UK firms wishing to operate on a cross-border basis. Regulatory equivalence would permit the UK to access the single market if it can demonstrate equivalent regulatory standards with the EU. As the UK has been operating to these standards already, this should be entirely feasible.

However, in practice, this may be onerous because requests for equivalence require vetting by the relevant European Regulatory Authorities and subsequently by the European Commission.

One of the key problems is that there is no time-scale for this process to be completed. Equivalence also has an uncertain tenor because it could easily be revoked if, for example, the UK’s regulatory framework begins to diverge from the EU’s in the future. A decision to dilute the remuneration code, for example, could trigger such a move.

A corporate structure called a Societas Europae (“SE”) could be the solution. A SE is a company registered in accordance with the law and corporate governance standards of the EU. It enables the transfer of registered offices across member states. With the UK currently a member of the EU, conversion to a SE would allow transfer of the company to a new EU state. However, this is still not a simple task as full authorisation would be required in the new EU state. Additionally, sales and back-office staff will also need to migrate to avoid tripping the EU regulatory perimeter, adding a human capital dimension to the issue.


Conduct of Business and Consumer Protection

With a full withdrawal from the single market, could this open up opportunities to reduce the regulatory burden and simplify the conduct of business rules?

The FCA’s conduct of business rules are predominantly derived from its consumer protection objective. The rules are designed to encourage good business practice, promote good governance and improve the ability of consumers to make buying decisions. It is difficult to envisage the FCA concluding that withdrawal from the EU means that consumers now need less protection. At the 2016 FCA annual public meeting, Andrew Bailey stated, “We don’t expect to be distracted from our regulatory obligations, our objectives will not change and, as such, no one should expect a bonfire of regulation”.

One of the factors hampering simplification is the interplay between EU law and regulation and our own. EU directives are transposed into UK law whereas EU regulations are implemented without transposition. With Brexit, EU directives will remain in place whilst EU regulations will fall away. Consequently, there will need to be substantive reviews of the existing regulatory framework to minimise disruption and ensure continuity as highlighted with the example of UCITs. This is a substantial undertaking unlikely to confer any net new benefits to either the FCA’s consumer protection objective or firms.


What next?

Until we know what “Brexit means Brexit” actually means, it is still too early to predict the precise impact for firms and it is important to note that there will be a reciprocal impact on EU firms passporting into the UK.

For those operating on a cross-border basis, the uncertainty will be too great and they will re-locate or change existing business models. For other firms without this impetus, they should start evaluating different operating models and explore EU states to operate from – an analysis that will need to consider a much broader set of factors such as labour laws and tax regimes.

For domestically-focused firms, the regulatory framework remains the same. Current and future EU regulations must be adhered to and, in the event of Brexit-driven changes, one would expect a transitional period before the new framework comes into force.

Whatever the outcome of the negotiations and whoever are the winners and losers from Brexit, we can see the path ahead will be littered with both uncertainty and challenging decisions.



Written by Esrar Moitra


Sep 24, 2016
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