Decumulation digression 


In June 2018, the FCA published MS16/1.3, its 'Retirement Outcomes Review'.  This is the product of a survey of consumers who did not take advice when choosing to access their pension pots, via some kind of decumulation product.   On the face of it, you might wonder about the value of reviewing the outcomes relating to people who choose not to access the kind of service that we provide as IFAs, but actually that's the main point of the exercise.  For those 'consumers' (FCA-speak, but you cannot really call them 'customers'), what kind of experience does pensions access involve?

MS16/1.3 makes interesting, albeit frustrating reading.  As you review some of the examples of financial idiocy that fill the pages, this is like watching a train-wreck in slow motion.  You just know, right at the outset, the kind of disaster which is going to ensue, and the very first trigger-point in the sequence of events, is the decision by an individual not to seek advice in an area where he or she knows precisely zero, and has even less interest in the technical issues.  Here are a few examples of some of the revelations regarding these DIY clients:

  • more than 60% of all those surveyed either had no idea or only the most general idea of where their money was invested
  • 33% of all consumers surveyed were wholly in cash
  • of the kinds of decumulation products used by non-advised clients, annual charges varied between 0.4% to 1.6%
  • the vast bulk of all consumers used drawdown arrangements in order to access their tax-free lump sum, but in most cases did not have a better use for that money, sticking it in taxable deposit accounts, earning a derisory rate of interest
  • only a tiny proportion of total respondents were moving into drawdown in order to facilitate a regular income
If you are an amateur psychologist and wanted empirical proof that human beings function in a predominantly non-rational way, this paper supplies you with evidence in spades.  There are direct quotations from consumers who, having had a less than ideal experience of pension-provision throughout their accumulation phase, then set out to absolutely shoot themselves in the foot during the decumulation phase.  There's one particular individual who, in reacting to the gung-ho, speculative activities of his drinking buddy, elects to put everything into cash.  Because, as you know, nothing like a spectrum of risk exists.  One is left wondering if we even have a secondary education system, or if it does exist, whether it ever taught these people how to make decisions in ways that were methodical or proportionate.  This is a document to make you despair about the very idea of progress.  Indeed, the decline in personal engagement and responsibility which MS16/1.3 charts is possible only in a world underpinned by a regulatory culture where nobody is allowed to fail.

Along the way, there are some interesting, incidental nuggets of information.  Apparently, in July 2017, there were still seven providers offering traditional annuities.  As of April 2018, that number has shrunk to five.  The FCA responds to this trend by signalling the need for innovation in the marketplace - it cites the Australian market which has operated a drawdown system since 1993, and where some 94% of all retirement assets are held in what it terms "simple drawdown products" (rather than annuities, blended or hybrid products).  It goes on to say that the "Australian Government has acknowledged that this has produced potential consumer harms".  There are a number of comments one can make on this:
  • I am really not sure of this idea of "simple drawdown products" - because, in practice, any decumulation vehicle presents a complex interplay between the cashflow model, volatility risk and the returns available from a given asset universe;
  • Secondly, if there are concerns about simple drawdown products, I am not entirely persuaded that the answer might be more complex products, given providers' innate tendency to be too clever for their own good, and given the inability (or unwillingness) of consumers to engage with the issue at even a basic level;
  • That word 'innovation' needs a cautious welcome - it's clear (from the paper) that the FCA defines this as either (a) more complex hybrid products, or (b) robo-advice solutions.  The first of these are invariably more opaque to scrutiny (IFAs find it a challenge, which is why we have ValidPathDD) and that increases the risk of less acceptable outcomes.  And, on the second, the jury is definitely out:  there is growing evidence that robo-advice solutions deliver decent results only insofar as a professional (human) adviser is on hand to influence the process - and that brings us right round to the unsustainability of the non-advised decumulation marketplace.
MS16/1.3 is helpful in demonstrating the real value that financial-planners bring to the table when it comes to clients moving into decumulation.  It should give us confidence to get that kind of message across, but equally well it should reinforce upon us the need for robust methodologies underpinning our advice.  ValidPath Members have access to the UK's leading cashflow modelling system (without which no decumulation advice should be given), as well as an extremely effective resource for measuring risk and mapping that through onto the most effective investment solutions.

Kevin Moss, 13/07/2018