Navigating retirement post-pension freedoms

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  • 37 mins 28 secs

AKG and Quilter Investors teamed up on a Retirement Planning Guide - click here to read the full report.

On the panel to discuss the report and pension freedoms more generally are:

  • Matt Ward, Communications Director, AKG
  • Jon Hogg, Lead Retirement Specialist, Old Mutual Wealth
  • Anthony Gillham, CFA, Head of Investment, Quilter Investors
  • Danny Knight, Investment Director, Quilter Investors

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Quilter Investors
PRESENTER: Hello and welcome to this Quilter Investors Roundtable. In April 2019, it’s going to mark four years of pension freedom and choice, but what’s changed in that time period, and what still needs to change? Well to discuss that I’m joined here in the studio by Matt Ward. He’s Communications Director at AKG; Jon Hogg, Lead Retirement Specialist at Old Mutual Wealth; Anthony Gillam, Head of Investment at Quilter Investors; and Danny Knight, Investment Director at Quilter Investors.

Well, Matt, you’ve just done a report around this whole issue of pension freedoms and adviser and client attitudes to them, what are your main findings?

MATT WARD: So AKG is an independent organisation which specialises in assessment and ratings. As part of that it’s crucial that we keep abreast of big industry changes and I think we could all agree that pension freedoms has been a big change. So for something like the guide that we’ve worked on with Quilter Investors, we wanted to underpin it with some fresh adviser research. So went to the market and asked some practical questions about behaviours, attitudes, things that they were doing around advising clients. So there’s some nice threads in there for people to look at.

One of the things is despite the fact we’ll be closing in on four years next year, it’s important for people to keep looking back at their proposition, to test it. Test its validity, is it roadworthy for clients? Some of the thing that cropped up within the research, even though drawdown is clearly more popular than annuities these days, there’s still a sense from advisers and customer around safety and sustainability of income. I think that’s going to be a really big issue for next year. Looking at things like asset allocation, again there was a sense that advisers, over half of advisers hadn’t changed their asset allocation for drawdown.

So we’re not here to say whether people are doing things right or wrong, but there’s a sense of in three-and-a-half years might people have looked at their asset allocation. And a slight concern in the research that drawdown has got to do a lot of different things, there’s lots of risk. So people are concerned about longevity risk, sequencing of returns is cropping up as something that is a concern for people. So it is important for advisers and planners to come back to the table and look at some of the themes, and check that things are ready to go.

PRESENTER: Well I’d like to unpick all of those themes a little bit later, but just very quickly, how many advisers did you talk to in this, how robust is the data?

MATT WARD: So we interviewed 102 advisers via an online survey in the summer of 2018, and we had 10 questions in there to get a sense of what behaviour was, what attitude was.

PRESENTER: Now, Jon, you’re out and about seeing advisers all day every day, how seismic has pension freedoms been for them?

JON HOGG: I think it’s been hugely significant. Interestingly I’ve been with this business since November 2006, so when they first had a stab at pension simplification, which I think it’s fair to say they haven’t delivered on necessarily. But in the last three-and-a-half years with the choices and flexibility that is available to individuals, it’s been well received. I think the outcomes of Matt’s piece of work with the regulator’s retirement outcomes review is interesting, given that there seems to be a huge disparity between those that choose not to or can’t afford advice and those that do choose to take advice, and the value of said advice and the outcomes, clearly better outcomes that are achieved if you go down that particular route.

PRESENTER: And Anthony is our investment manager on the panel, what’s the market backdrop that’s been out there during this period of really big change in pensions?

ANTHONY GILLAM: Yes, I mean I think when we look at the overall macroeconomic picture, it actually looks reasonably solid, but I think we do see some headwinds on the horizon. We’ve had pretty much a decade of zero interest rates, and that’s been changing in the US in particular over the last couple of years. But I think as other central banks, particularly in Europe but also in Japan, as those central banks start to take their foot off the gas a little bit in terms of interest rate policy, and quantitative easing as well, I think that’s likely to change the dynamic a little bit. A little bit of a headwind. And of course over this nearly four-year period since the pension freedoms we’ve had that decent environment, we’ve had those tailwinds, and I think that’s no longer going to be the case going forward.

PRESENTER: And Danny, has all of this been a spurt of product innovation when it comes to getting the right investment solutions for clients?

DANNY KNIGHT: I think from a solution perspective we’ve got plenty of good ideas. And I think around this table we’re probably all in agreement that there are different needs, and clients expecting different things from their investment portfolio once they enter retirement or into drawdown. I think the challenge that we have is the market’s been particularly kind for the last 10 years, and something that Anthony picked up on, what I’m really seeing is that a lot of advisers haven’t understood what they need to do differently. I think from a marketplace perspective, whether that’s tools, whether that’s your attitude to which processes, it’s all predicated on an accumulation process. And I think that’s probably the biggest challenge we’ve got is getting people away from the process they’re really comfortable with and acknowledging they need to do something different for probably all the reasons we’ll cover today.

PRESENTER: Pension freedoms create opportunities, but also responsibilities and risks. So let’s have a look at the main ones. Well, Matt, there’s a lot of talk there obviously about the risks and responsibilities when it comes to pension freedoms, what’s the FCA’s view on all of this?

MATT WARD: We had a fresh paper from the FCA in the summer of 2018 for advisers to read if they haven’t had a chance to. While there’s a lot of emphasis on non-advised drawdown in the paper, there’s also clear read across for advisers and their businesses. One really good positive is that it shows the value that advice can offer, if there is concern around non-advised and the things that aren’t happening for them, so a great chance for advisers to add value. But there’s certainly some things in there about addressing risk, and the earlier that people can talk to customers about risk the better, so the things that we’ve discussed in the research around longevity risk, sequencing of returns. The earlier you can bring that discussion forward the better prepared people can be.

Also a lot around communications, and again a great place for advisers to not only advise on day one of retirement decisions, but this needs to be progressive and repeated, reviews of people’s work. The FCA wants people to be engaged with their investment decisions. Where people aren’t engaged we might build, the industry might build defaults. But where they’re in the advice process the adviser needs to keep coming back to the table, keep checking that risk is where it needs to be and that people are prepared to take the risk they might need to.

PRESENTER: And, Jon, much in there on value for money?

JON HOGG: I think there is, and clearly the challenge that lots of individuals face today vis-à-vis freedom and choice is that lots of old style legacy products haven’t adopted those freedoms. So clearly if they’re minded to take advantage of some of the new flexibilities, there’s a consideration needs to be given to where they’re currently invested, whether they could be invested in a better solution. Cost will play into that space as to value for money. And I think the thing that’s often overlooked is ‘what is their definition of retirement?’ and ‘what are they seeking to do with their money?’ So the subjects that I talk about on a daily basis aren’t necessarily around the investment solution. It’s about the income solution, it’s the capital solution, and clearly they’re all joined up.

But as I say what is a client’s definition of retirement? Is it as simple as taking their PCLS, their tax free cash, or is it about starting to draw a level of income in the most tax efficient manner? I think that’s where advisers add value in looking at what the client’s objectives are, and then introducing solutions that best meet those needs.

PRESENTER: And, Dan, is there much concern by the FCA about just the levels of cash that investors in drawdown are holding?

DANNY KNIGHT: I think the FCA have come out with a couple of points around whether it’s cash, and that probably plays into the non-advised clients which do inevitably tend to sit on large cash pots. I was at a dinner a year or so ago when Andrew Bailey was relatively scathing on our industry for lacking innovation. So I think that’s probably the thing that we have to take responsibility for as investment managers is actually taking that responsibility to a degree on from the state and making sure that we’ve got appropriate solutions. And I think one of the key things there really is that there isn’t one answer for all clients.

So what we need to have is a plethora of solutions that work for different client demographics, and give the adviser the ability to adjust over time, and that’s going to be the key thing. But I think the frustration that we will all have is where we have to acknowledge creating new products, not relying on what we’ve already got on the shelf. And that’s something that we’ve, we’ve taken that mantle and we’ve launched new strategies, and I think we will continue to do so.

PRESENTER: Anthony, just really quickly on this one. As a professional investment manager, what do you think the role of cash is in a portfolio?

ANTHONY GILLAM: Well I think cash can do any number of different things for a portfolio. It can be a diversifier. It can be a source of I guess dry powder if you like, so somewhere to temporarily park assets if you think there’s going to be a better opportunity at some point in the future. But I think particularly when it comes to retirement cash can also be quite a dangerous thing. We’ve spoken around the table about people not doing anything differently. I think what I’ve been surprised about in terms of the lack of innovation in the industry is not thinking about what the actual client outcome, what the actual client requirement is. And I think a lot of that involves focusing on what risks those customers face. And I think one of those key risks that you face in retirement is inflation risk.

Now if you put that alongside, sometimes what we see, which is more elevated cash holdings, that really isn’t compatible necessarily, certainly isn’t on a long-term view with customers who need to preserve the purchasing power of their capital, i.e. they need it to do something after inflation. And so for me cash is something to be used. It’s a tool that we can use in the investment process, but we’ve got to be very careful about the after inflation returns, and of course you don’t necessarily get that with cash.

PRESENTER: Jon, how big a concern is it for you, this issue of inflation, because we’re talking about people whose life expectancy could be 20-30 years in retirement?

JON HOGG: Completely, and that’s one of the key fundamental changes, is that it wasn’t that long ago that you had forced annuitisation at age 75. That glide path from 60 to 65 that introduced life-styling type solutions. If you look at a 55-year-old today, and we look at even just ONS statistics for a 65-year-old male, 85 something like that, you’ve got the best part of a 40-year investment horizon. And clearly cash does not play into that space. As Anthony said you can use it tactically I guess, but it’s not a fundamental cornerstone to retirement planning. And a lot of the individuals that I talk about with advisers, it’s not necessarily about income for them in their lifetime; it’s the asset that they’re going to pass on to the next generation. So it’s the 30, 35, 40-year timeline, not a five or 10-year timeline.

PRESENTER: And, Matt, you were talking a little earlier about some of the FCA’s concerns, but when you’ve done your research, have those concerns chimed with what advisers and their clients have been telling you?

MATT WARD: Certainly yes, so two cuts of this. So we did some consumer research earlier in the year, and again one of their top concerns was running out of money in retirement, and looking further forward into retirement the potential costs of care, which tends to be something that we all potentially put forward into the future, but we’ve got to give more consideration to. For the guide that we’ve done here, the retirement planning guide, top aims for decumulation investment strategies were providing a lifetime level of income. So we do have this potential quandary in that we know that drawdown is now more popular for the moment since freedoms than annuities, and yet both customers and advisers are talking to the story of sustainable provision of income. It’s another thing for us all to consider as to how solutions can help deliver that.

PRESENTER: And how important is it that all of this is done as tax efficiently as possible, because we’re living in a world now not just of pensions but ISAs, people like to use their house as part of their retirement pot. It’s all getting a bit more complicated.

MATT WARD: Yes, I mean there’s much talk of holistic planning. And I think if people keep bringing that to the discussion, people have got to do their best at that. And that is the pension as part of that, often the biggest asset, but ISA savings, property. I think advisers can do a fantastic job of helping people at that stage. But if they want to be comprehensive then they need to take these factors into account and on the tax issue certainly. Post-RDR advisers have been encouraged to describe better the value they add to customers, and it’s one of the few pounds and pence places where you can say I have saved you this much tax, I have helped you take advantage of this allowance. So the tax planning side of things, either the adviser themselves or through a professional partnership, is another place they can add some value.

PRESENTER: Anthony, one of the stats that really stuck out for me was that 43.6% of those IFAs who got questioned had issues or concerns about sequence risk. I mean essentially do you put your client in at the wrong time in the market? Could you talk us through why that’s so important, and how worried should we be about volatility of markets generally because again 34.7% were concerned about volatility of investment returns?

ANTHONY GILLAM: Yes sure. I mean sequence risk really gets to the heart of why you need to take a different approach when investing in retirement. If you’re an accumulation investor, i.e. you are still adding to your pot, you’re accumulating your wealth, you’ve got time on your side; you’re contributing to your pension pot. And to an extent you can actually take advantage of market volatility. Probably doesn’t feel like it at the time, but actually those market dips, those periods when volatility spikes can actually be some of the best opportunities to add to your portfolio. And with pound cost averaging, that function of buying low, essentially, and then enjoying better compound growth from our investments is something that you’ve got on your side when investing in accumulation.

Now flip that over to decumulation, so investing for retirement, you haven’t got that same luxury. You’re no longer necessarily contributing to your investment portfolio. And so you haven’t got that same advantage of being able to buy those dips. And in fact actually you might have the opposite problem. You might have to sell some of those dips, and so as a result as an investment manager you’ve really got to be focused on that sequence of return risk. You’ve really got to smooth out that investment journey for customers to make sure that these periods of volatility don’t overly impact the investment pot. Because potentially you could be asking customers not to have to buy the dip, but potentially the risk is you’ve got to be asking them to sell the dip, and that really from a longevity perspective is actually quite dangerous indeed.

PRESENTER: And, Danny, what evidence is there for all of this that we’ve been talking about, that this is beginning to impact on adviser business models, how they structure their time, how they spend it talking to clients?

DANNY KNIGHT: I think we’re seeing more and more interest in this space, and inevitably we’re here today talking about this subject. I think the industry has spent a lot of time talking about it over the last couple of years. I think from an adviser business perspective they’re still looking for help. And there’ll be some businesses that are very robust and have this set up. And I think the challenge advisers will have is how do they best convey this subject to their clients? Now I think as experts around this table we produce more material. I think providers that have attitude to risk tools and processes. They can build in different dynamics to help explain that to a client. Because I think, as Matt said earlier, one of the key things is going to be the earlier you can have this conversation with a client, start to paint that picture, the journey you’re going to take them on, the easier it will be for the adviser.

But, conversely, as Ant alluded to, the sequence of returns risk, that’s not just a point in time. That’s the glide path that Jon alluded to earlier, getting clients into that right space maybe five, 10 years out from retirement when they want to start to take their income, of really being very cognisant it could be a 20 or 30-year journey. So it could be a combination of derisking, or maybe having to take more risk with certain parts of their pot to make sure it’s sustainable, but understanding different elements, how is it going to behave? I think as Ant touched on, you might want an element maybe for your first five years, you’ve got real confidence on how that’s going to be behaving. It’s bringing all of that together, and painting that picture to the client is going to be the challenge, and I think it’s something that we all need to do more in regard to.

PRESENTER: Well pensions have traditionally been built on the idea of accumulating assets and then purchasing an annuity. Now the investment pot is more likely to end up providing an income rather than buying one. So what are the particular challenges that this throws up? Jon Hogg, what would you say to someone who said well actually this isn’t particularly novel, we’ve had drawdown since the 1990s, people live longer, so maybe they just buy an annuity a bit later in life, the world moves on, has anything really radical changed?

JON HOGG: I don’t think anything radical has changed, the opportunities are fundamentally different. But before I move on one thing that I would say is I still do see the use of annuities. I wouldn’t say that annuities are dead. But what I would say is that annuities play a particular use in retirement planning. But arguably it’s probably later in life when perhaps health considerations dictate that you can get a better rate, or by age you get a better rate. But I see that more as a blended solution. So you might consider or look to the annuity to provide the client’s fixed income needs in retirement, so their absolute spend rather than discretionary spend with the money purchase solution working around the edges providing the flexibility. And it’s interesting, well it’s certainly interesting to me when you look to the FCA’s recent report, admittedly typically in the unadvised space the number of full encashments that occur, where the whole pot it taken in one hit.

So clearly investment solution timeline there is less important. And it just strikes me that actually is that the most efficient use of the money? So I don’t tend to see that when I talk to advisers, where they look to all the other solutions and options that are available to them that would deliver a significantly better outcome. So I think in summary drawdown is still hugely attractive to an increasing number of individuals, because they don’t need to commit to that annuity purchase, hand the money over. But it’s how you use it tactically. And I think as I say there’s an education piece that perhaps needs to be done or continued to ensure that clients who seek not to take advice are not disadvantaged either because they don’t shop around, they take their current provider’s offering. They don’t determine whether that’s good value or bad, and then don’t look beyond taking all of their cash and income in one go.

MATT WARD: And two points of note, so drawdown has been with us for a while, and what have we seen in the market that has changed, so two things for me to bear in mind. If, as the research shows, AKG’s research shows for this guide, the FCA stats show more drawdown than annuities for the time being, but two things. So we used to have a GAD framework in place for drawdown, which for the footballers amongst us had some goalposts for what people could do with drawdown. We now have ultimate flexibility, so those goalposts have come down. One of the roles for the adviser is to project manage and put some framework around what’s possible with drawdown. The other thing is drawdown initially probably a minimum investment of £¼ million prior to it being seen as a viable solution. And now again we know if we’ve got people that might have used to have bought annuities and are now looking at drawdown, then pot sizes for drawdown are also down. So you might have some considerations where the drawdown fund’s got to do an awful lot of things to achieve the sustainability that people tell us they want.

PRESENTER: Well picking up on that Danny, I mean is there a danger that people are putting too much pressure on their pension pot? It just can’t do what they’d like it to do for them.

DANNY KNIGHT: I guess there is always that debate, and it probably comes back to what we’ve said several times today. Those clients that are advised, have been on that journey for a decent period of time, will be well informed, and I guess there shouldn’t be any surprises when they get to that point. So I think one of the overarching things is the need for advice, even probably more so for clients going into that drawdown space. Clients are living for a lot longer, which is fantastic news. So I think the dichotomy that people will have there is making sure they probably segment their pots. Some clients might be in a fortunate position where they’ve got sufficient assets that they can live from, or income from marketable sources, we get that.

But for the average investor they probably still need their pension pot to work for them a little bit harder in retirement than they might expect. And that’s where I come back to actually probably having some assets that are still working hard with the stock market, but maybe having an element of that that’s really dealing with that comfort, allowing them to have their income, enjoy their retirement, allowing them to sleep at night, but mitigating some of that market noises that we are now faced with, which is the new norm.

PRESENTER: And, Jon, as you’re out and about talking with advisers, is there much evidence of how many want to outsource this as an issue to a product provider, and how many want to keep it in-house and run portfolios on behalf of clients?

JON HOGG: I think there’s still both. We still see both, but I do see a larger proportion moving towards the outsourced solution. Notwithstanding the investment risks, you’ve got the regulatory risk, you’ve got the reporting risks that they’re now facing. And clearly whilst picking funds has proved successful for many in the past, I think we’re in a different climate today. And I think the right minded adviser sticks to what they’re good at, which is giving advice, and giving the investment risk responsibility to the outsourced third party solution. So we certainly see an increasing demand for that, and less predefined portfolios, which might have been the case previously.

PRESENTER: And, Anthony, from an investment perspective, can you have a portfolio that is all things to all men? Or when you’re sat there talking to the product design guys, how much, do you need a range of different portfolios, because all of your clients have different needs?

ANTHONY GILLAM: We spend a lot of time thinking about what that customer need actually is, and designing portfolios that actually do what they say on the tin, that actually have an outcome orientated focus to them. And certainly for the retirement solutions that we’ve put together, for example, we do spend a lot of time with advisers and our product guys thinking about what is this thing actually supposed to do. So I think that’s very important. Moving on from the parameters of the product itself, I think the investment options that we’ve got have changed as well, and have grown and developed. And I think particularly as we’re moving into pension freedoms, retirement investing, the manager needs a lot more flexibility in order to deliver on some of those customer outcomes.

So for example if we’re trying to mitigate sequence of return risk, if we’re trying to smooth out that investment journey, the use of derivatives for example I think is something that’s very important to allow us to help to defend on the downside. I think that’s key; thinking about other customer outcomes, inflation risk for example. What types of alternative strategies that might not be available on the mainstream but are perhaps available to professional investors, what are those types of strategies that we can use, but again very specific focus here, mentioning sequencing risk, mentioning inflation risk, both of these are very customer focused issues, customer focused risks, and so we’re looking to grow those investment opportunities with the risk that we’re actually trying to solve.

PRESENTER: Danny, if you were an adviser and your product provider yes the products we’ve got are great, they’ll do for decumulation as well, what do you need to have a look at to make sure they genuinely are fit for purpose for decumulation, rather than it’s just an accumulation product with a bit of extra put on top?

DANNY KNIGHT: From an investment perspective I guess.

PRESENTER: What would your advice be to an adviser?

DANNY KNIGHT: I think from an adviser perspective, they need to understand what the product is there to do. From an investment perspective we’ve touched on earlier today really that there’s been very easy returns in markets over the last 10 years. Volatility has been particularly benign, that has repressed the issue, and clients ultimately end up in a positon that could cause them some pain. I think we’ve seen the resurgence of volatility. That could be hugely painful for clients’ pots and their assets if they’re not in the most appropriate space. So I think ultimately it’s for an adviser to really understand that they do need to consider clients’ assets in a different way in this space. But more importantly potentially use different tools and different models to look at the risk those solutions are taking. Just looking at a three-year chart, or a five-year chart or a scatter chart could hide a whole plethora of behaviours that could be problematic for client when they’re taking regular withdrawal.

We all remember the financial crisis that was many years ago. That’s probably dropped out a lot of performance charts as well. So it’s really looking at the asset classes, understanding how they could behave during certain economic stress points, spending a lot more time with maybe the investment manager or the discretionary portfolio manager, whoever you’re actually investing with, and to understand how might that portfolio behave certain market conditions. What can the adviser expect from it, and then convey that to the client. I think from the client’s perspective it will be having a more rounded conversation around their income needs. But should something unforeseen happen with markets, this might be the level you’re receiving, can you tolerate that? And it’s just having those well-educated conversations with the client.

PRESENTER: But, Jon, picking up on that, I mean the unexpected doesn’t just happen in markets, it happens in life as well. So how important is it that you’ve got flexibility built into whatever your retirement plan is that you’ve worked out with your client?

JON HOGG: I think it’s hugely important. And if we look back to the introduction of freedom and choice three and a half years ago, it wasn’t just about how clients could all of a sudden access their money in a completely different manner, death benefits changed at the same time as well. So having the ability to pass the money on in the most efficient, and that could be income tax, inheritance tax, capital tax solution, has got to be forefront of their mind as well. So as I say clearly the stuff I tend to get involved in isn’t around the investment solution, but clearly that’s hugely important. It’s about using the new solutions that are now available to individuals in the most appropriate manner. They called it freedom and choice, but with that comes risk and responsibility. And clients and advisers need to understand that whilst they have all this choice, and essentially the shackles have been taken off, the risk they run is running out of money, and that’s clearly a big challenge.

PRESENTER: In the switch from accumulation to decumulation strategies, what do you need to look for in an investment solution, and how feasible is it to expect smooth returns and capital preservation as part of the deal? Well, Matt, with the research that you’ve been doing, what’s the attitude of advisers, do they think that providers can produce income and capital growth at the same time?

MATT WARD: There’s certainly a sense of we asked advisers in the survey for the guide as to what the typical asset allocation profile if you like was for customers in decumulation. And just over half, so the majority talked about a balance of income and growth. So you get that initial sense of again with drawdown it’s trying to do a lot of things, and within that they want the customer to have their income, but also deliver some growth over the term. So it takes you back into the investment solutions piece, and can it do everything? So there could be a challenge there for both advisers and those developing solutions in this space.

PRESENTER: Well, Anthony, how do you go about thinking about a product that has a bit of capital growth, has some protection in there, and also produces a sensible level of income?

ANTHONY GILLAM: Yes, well I think again we said earlier in the session you’ve got focus on what are the actual risks that those customers are running. And for us when we look at the outcome that we need to generate, the investment solution has to pick up the slack in terms of inflation and sequence of return risk. And so we’re very focused on making sure that we have got a portfolio that can deliver a reasonable level of growth. So by that we mean protect the purchasing power of that pot, so deliver after inflation returns. But we need to make sure that we’re also comfortable with the way that that capital behaves. So that means not taking excessive risk in terms of volatility. Essentially smoothing the journey, and particularly when we’re thinking about sequence of returns, trying to make sure that we’ve got a portfolio that can defend on the downside. And there are lots of different ways that we can do that.

Lots of different emphases that we place that are perhaps different in terms of the style that we’d use in decumulation. I mean diversification is clearly key. There’s a lot greater emphasis on diversification, diversification of assets within our retirement solutions. So there’s going to be some growth assets in there. We still think equities are a valuable part of that solution. But what you probably see is a greater emphasis on alternative asset classes. And these are asset classes that can both deliver the outcomes that we’re looking for, so inflation plus for example. So real returns and pretty rich pickings I think actually in the alternative space for those types of assets, but also if you talk about alternative assets as typically being assets that have a low correlation with equities and bonds, so again to try and maximise that diversification that we have in our portfolio.

I think the other thing that’s key, actually, and again this comes back to this idea of doing something different in retirement, is actually from a fund manager’s perspective having a different mindset. So really being aware that as a fund manager, if we’re managing an accumulation solution you have a particular mindset, which is to maximise that customer’s return through time. With decumulation we’re perhaps a little bit less focused on that ultimate destination, and perhaps a little bit more focused on the journey, so more focused on providing a smoother ride. And I think as a fund manager you have to have a different mindset when you’re approaching that. You have to be very aware again of what those customer outcomes are.

PRESENTER: Jon, when you’re talking to advisers, do you get a sense of how sensitive to volatility their clients are, particularly as they get older?

JON HOGG: Completely, and this comes back to I guess the heart of the discussion today. It’s making sure you don’t take out the income, the money that the client needs at the wrong time. And that’s why again employing the right income solutions alongside the right investment solution is hugely important. So to look beyond the traditional annuity-style approach, or tax-free cash and income on an annual basis; do it more perhaps on a phased basis, on a tactical basis, look to the solutions that essentially mean that you take less out. So perhaps you’re not going to sell the asset at the wrong time once in every 12 months, it might be over a period of 12 separate events. So, as I say, I keep coming back to just look to the solutions that are available and use them in the most sensible manner.

PRESENTER: Do you have any rules of thumb of what constitutes a sustainable income that a portfolio can?

JON HOGG: Well it’s an interesting conversation, and one that I often have with advisers, and I look back to the experience in the States not that long ago, where they would reference the safe rate of withdrawal, and they’d talk about a figure of circa 4%. And my challenge to that is I don’t think you can use the word safe, there’s no such thing as a safe rate of withdrawal. So what is a sustainable rate of withdrawal? Talking to advisers, very generally they would position it somewhere between 2 and 3% after charges. But if you then look to the regulator’s evidence recently in terms of average withdrawal, so in the tax year 2016/17 I believe average rate of withdrawals for those clients using drawdown or the uncrystallised fund pension lump sum solution was circa 5.9%, which in any market is somewhat stressing the fund isn’t it and clearly unsustainable today. So I think less is more sometimes.

PRESENTER: But Danny is there a sense in this that actually from what we’ve discussed we’re essentially on a journey back towards with profits. We want security, we want certainty, we want a big asset mix, doesn’t it sound awfully like a product that everybody was buying 30 years ago, what’s different this time?

DANNY KNIGHT: Potentially, and I think one of the points that Jon touched on was the level of income that some clients are requiring. So I think the key there is to have multiple products. I don’t think there’ll be one product for a lot of clients that’s going to meet all of their needs. And I think framing exactly what sustainability looks like. I think from a client perspective, their recent bias around, I’ve heard somebody having 5% income, 6% income, what type of growth they receive from the stock market can often frame their assumptions. So I think it really does come back to that advice point. I think being very clear with the client, the implications of what they are receiving and what they’re needing; some analysis that we did that I think it was 82% of customers didn’t like income variability. Now some clients, they can tolerate income variability, but for the mass affluent individual 82% have a certain amount that they need month on month, quarter-on-quarter.

So I think the key really there is just to really have those tools, have those conversations that a client understands the implications of the income they’re taking. Understands realistically what can be achieved from a tax wrapper from the stock market, and is under no illusion ultimately that there’s no way of masking what the stock market’s given them, but making sure that they’re advised correctly. And potentially adjust their position over time. So I think it would be a combination of good education, financial planning, and probably having that flexibility to change their need and their investment option over that journey.

PRESENTER: Now we’ve talked through a lot in the last 25-30 minutes. I just want to get from each of you a final thought. From all of this, what’s the one lesson you want to leave everyone with today, Anthony?

ANTHONY GILLAM: Well for me it’s actually focusing on what the investment solution is supposed to do, and having a clear set of parameters as a fund manager in terms of what is it that we’re trying to deliver. And I think for us we’ve identified a clear set of risks I think that customers are facing, so top of the list inflation risk and sequence of return risk, and then designing a portfolio that actually is able to withstand both of those two key issues. That I think really is critical for me.

PRESENTER: Danny?

DANNY KNIGHT: I think from an investment perspective we need to continue to be innovative. We have to embrace the challenges that advisers and clients face, understand what the client need is. We’re trying to build product to deliver against, that ultimately is what we’re here to do. And I think over time I think the acknowledgement that the drawdown space is different, from an investment perspective it probably should be treated differently. We need to cater for that.

PRESENTER: Jon?

JON HOGG: I concur with both my colleagues there. The one thing I’d really point to is just looking to the solutions that are available to the client, and not avoiding the elephant in the room that is tax. And if you look at the experience of the Revenue in the last three-and-a-half years, and specifically emergency tax and the rebates that they’ve had to process because clients have paid too much tax, I think we have a clearer eye on that, then that might make the pressure on the investment solution that bit less.

PRESENTER: Matt?

MATT WARD: I think income sustainability is going to be the buzzword for a couple of years. So through the research that we’ve done, if we’re still saying that even though we see drawdown as being potentially more popular than annuities at the moment, but that customers worry about running out of money, and advisers want to provide them with a lifetime level of income if they can, then that’s going to be the discussion piece around how do we make drawdown sustainable, sensible, from an adviser and a planning framework, and from people that are putting the solutions in front of them. Finally the thing about the guide is to reflect on things. The brilliant thing you can see is advisers are busier, but we know when all of us are busier the chance to look back on your processes and your proposition are sometimes less, given less attention. So we’d encourage people to reflect back on do they think they’re doing the right things, are there other things they can bring to their skillset, their solutions for retirement planning?

PRESENTER: We have to leave it there. Gentlemen, thank you all very much indeed for joining us. Thank you for watching. There is a copy or a link to the guide that’s below the player, so do please click on that and have a look, from all of us here goodbye for now.