The Great Pension Debate was an event run by Advisers for Advisers in Port Talbot this week – and we were proud to be headline sponsor. A wide range of good practice ideas were shared among the community and, as such, the event was received very well by us and all the attendees. However, the impact of inappropriate advice on the lives of those receiving it was clearly demonstrated by a live panel session with some of the British Steel workers at the heart of the recent news stories. Often emotional, this session reinforced the importance of delivering excellent service and an unwavering focus on good outcomes for clients.
Below, we have summarised the key takeaways from the event. We hope you find it useful.
The regulator’s stance remains that a transfer out of a defined benefit scheme is deemed, at outset, as likely to be unsuitable. This is unless it can be clearly demonstrated to be in the client’s best interest, having considered all other options to meet their needs and objectives. Importantly, this includes consideration of Whole of Life cover instead of transferring, should a client’s objective be to leave a legacy.
It is clear that a detailed understanding of the client’s true objectives is required and that this must all be clearly recorded on the file – within the suitability report itself. A generic, templated, objectives section in the suitability reports is simply not good enough. This is where technology can help. Not only in displaying the client’s objectives, but also the potential impact of these on the longevity of their savings...
The transfer of investment and longevity risk from the scheme to the member is, perhaps, not fully understood. It is essential that clients grasp this. Whilst CETVs are perceived to be high, the reasons behind these valuations need to be considered – and this alone is not viewed by the regulator as a valid reason to transfer. There are numerous reasons but, perhaps, the most pertinent is that gilt yields are low, resulting in high discount rates. In plainer English, the investment returns required to meet the Scheme’s obligations may be hard to come by in the current environment of lower returns, particularly from bonds. Therefore, it is essential to properly consider this. Not only that, but question whether an unsecured pension will really be able to generate the long terms returns required to sustain the client’s income needs in retirement, if the scheme itself doesn’t think it can!
Longevity is a large, and growing risk, for scheme Trustees and private client alike. For most clients seeking advice, they are likely to be wealthier than the national average. Therefore, actuarially more likely to live longer than the average. So how do Advisers deal with longevity? By using averages, they will inevitable be wrong most of the time.
By defaulting to, say, 100 years of age, they could run the risk of restricting their clients spending in the all-important early years of retirement when they have the physical and cognitive ability to enjoy their new free time. This is a serious and very difficult issue. A credible way around this is to obtain granular longevity data that takes into account not only postcode, but also social demographic. The challenge is that this kind of data is extremely difficult to come by.
There are a number of ways in which Advisers can model the potential returns from the proposed new scheme and investment. This ranges from linear, deterministic, rates of return to monte carlo models and stochastic models. Our view is that a stochastically modeled, forward looking estimation, may be the least questionable way of doing this. If it can be linked to the specific investments and asset classes being recommended, even better.
There was some debate over how to be confident the assumptions used in modelling tools are reasonable and how to record this. There was no clear consensus on this. Therefore, there is a danger that significantly different potential outcomes could be modeled by different Advisers for the same client. Using a respected third party for these modelling assumptions could be a sensible, and credible way of dealing with this.
There was a lively debate over whether there is such a thing as a “lifetime sustainable withdrawal rate”. It was clear that the 4% rule, and other heuristics, should not be relied upon. How then, can Advisers demonstrate the effects of decisions on their clients long term wealth? Most Advisers in attendance agreed that a lifetime plan is a great starting point but that regular reviews are essential. Technology which continually monitors the viability of the plan against actual invested assets can help and should deliver greater levels of composure for Adviser and client alike.
All that remains is for us is to wholeheartedly thank everyone involved in the Great Pension Debate, for such an incredibly worthwhile two days.
The above article is intended to be a topical commentary and should not be construed as financial advice from either the author or Parmenion Capital Partners LLP. If a client wishes to obtain financial advice as to whether an investment is suitable for their needs, they should consult an authorised Financial Adviser. Past performance is not an indicator of future returns.”
Any news and/or views expressed within this document are intended as general information only and should not be viewed as a form of personal recommendation. All investment carries risk and it is important you understand this. If you are in any doubt about whether an investment is suitable for you, please contact your financial adviser.