Firms should start by cross-checking that their documented CRP captures the firm’s central approach across all relevant aspects of the advice process, including how this is tailored specifically for retirement income clients.
Some priority areas to consider and document, if you have not already:
- how different retirement income solutions (annuity, drawdown etc) should be used to meet client objectives;
- the firm’s approach to ensuring sustainability of income withdrawals;
- risk-profiling processes, including attitude to risk and capacity for loss;
- investment strategies used for meeting income objectives;
- tax efficiency of recommended solutions;
- delivery of ongoing reviews;
- vulnerable client policy.
Some of these points are covered in more detail below.
4. Services and charges
It should be clear from documentation such as procedures, marketing materials and client agreements, who your firm’s retirement income proposition is aimed at, the services or options included and the costs to clients.
Services should also be tailored appropriately to the needs of clients in decumulation.
Some areas to consider:
- which clients the firm will and will not work with, including how it deals with clients outside its target market, such as referring them to MoneyHelper or another firm;
- the role of cashflow modelling for retirement income clients to support decision-making by illustrating the financial plan, ‘what if’ scenarios and stress-testing;
- how services might need to be adapted to meet vulnerabilities amongst clients approaching or in retirement;
- the type of advice offered (transactional or ongoing);
- frequency of meetings and reviews, what is included and how they are delivered; and
- how charges are explained and illustrated to ensure clients understand the costs involved, the options available and when a different service level might be more appropriate.
5. Ongoing reviews
Ongoing reviews were a key area for improvement highlighted by the FCA.
It is essential to have clear, documented procedures in place to ensure that clients are not paying for services that are not delivered, and that all relevant areas are considered as part of an ongoing review, including changes to a client’s: circumstances, particularly health conditions; objectives, including income needs; and risk profile.
The FCA recognises that in some cases reviews might not go ahead due to lack of client engagement.
Even in these cases, firms are expected to proactively address missed reviews including by:
- tracking and monitoring when review meetings are due;
- identifying where reviews are missed; and
- ensuring clients are not charged for services that have not been delivered.
6. Know your client information
Aside from the basic fact-finding points, certain areas are particularly important for retirement income clients, including:
- income requirements both now and in the future, including a thorough expenditure analysis to identify levels of essential and discretionary spending, plus any likely future changes in needs, lifestyle and circumstances, anticipated future capital or income streams and potential expenditure;
- accurate and complete details of existing pension provision, including any safeguarded benefits, guarantees and options and other non-pension assets that could be used to provide an income; and
- knowledge and experience, attitude to risk and capacity for loss, considered in the context of retirement income planning.
7. Risk profiling
One of the FCA’s main concerns centred around firms not revisiting the risk assessment when a client moves into decumulation or not tailoring it to an income-focused objective.
The discussion around attitude to risk and capacity for loss needs to be reframed for retirement income clients in the context of the impact of fluctuating or poor investment returns on income levels, and the impact of reduced or changing income levels on the client.
This does not mean that firms need to have different accumulation and decumulation risk questionnaires, but where a single approach is used, the language and areas considered need to be appropriate to the client objective and advice need.
8. Approach to sustainable income
Your CRP should set out how your firm ensures recommended income withdrawals are sustainable and the factors considered, including:
- approach to taking a natural income yield or a specified withdrawal rate;
- meeting short-term income needs;
- timing of encashments and the impact of falling markets;
- whether/how cash flow modelling is incorporated;
- justification of any assumptions used in calculations; and
- the basis for selecting a particular cash flow tool or withdrawal rate.
It is also important to clarify where or how any centralised approach should be adapted to ensure any calculations are properly tailored to individual client scenarios.
9. Products and solutions
A core part of any CRP will be the products, investments and solutions used to deliver the financial plan.
The solutions used to deliver an accumulation recommendation might not be appropriate for meeting an income objective.
Also, the FCA’s review was not limited only to pension products.
