Sententia Articles March 2020

In this issue

The Inequality Just Gets Worse…opinion piece from Novia's CEO Bill Vasilieff 

Novia's CEO Bill Vasilieff looks at the growing gap between private sector pensions and taxpayer-funded public sector final salary schemes.


Pathways Ahead: How can advisers position themselves favourably against the changing backdrop of the non-advised decumulation landscape?

Henry Cobbe, head of Novia's DFM division Copia Capital Management, looks at the impact for advisers of the "investment pathways" drawdown options that d2c providers will have to start offering to non-advised customers. 


The Inequality Just Gets Worse…

The inequalities in pensions just keep getting worse and are consistently under the threat of worsening due to tax changes imposed by the Treasury. The threat to higher rate tax relief (which is really only tax deferral) just escaped this Budget. While those in the public sector continue to enjoy final salary pensions at the taxpayers’ expense, the affordability of pensions for the private sector gets more and more challenging – at the whim of the tax collector (who enjoys an index-linked, taxpayer-funded final salary pension). The idea of a defined benefit pension in the private sector is now just a pipedream as most employers’ schemes have disappeared in recent years due to regulation, increasing longevity and – tax!

The Labour Chancellor of the Exchequer, Gordon Brown, started it all in 1997 with one of his infamous ‘stealth taxes’ when he abolished the tax breaks on pension funds. The Treasury is able to collect this money because Mr Brown abolished the tax relief pension funds earned on dividends from stock market investment. This change was reckoned at the time to cost pension schemes around £5bn a year but this was subsequently revised to £10bn, and this figure has never been challenged. This is an enormous sum and a great burden on pensions savings.

Also, for the past few years we have seen continuing speculation that successive chancellors were about to abolish higher rate tax relief on pensions and only give relief at the basic rate. It is long overdue that the Treasury should stop regarding pensions savings as tax avoidance and see it more as tax deferral, which it is. What higher rate taxpayer in their right mind will pay into a pension and get basic rate tax relief only to be faced with the prospect of paying higher rate tax when they take their money out? And for the sake of ‘equality’ surely those higher rate taxpayers in the public sector should pay the marginal tax above basic rate on their significant employers’ contributions into their pensions?


Pension savings in the UK are undoubtedly kicked around like a political football, with chancellors seeing them as a piggy bank to fund other policies. You may recall that in 2006 there were new tax rules introduced by the Labour Government of the time which became known as ‘pension simplification’. The Labour government intended to rationalise the British tax system as it applied to pension schemes - a noble cause, you will agree. The concepts of an Annual Allowance which determined the limits on how much you can contribute and the Lifetime Allowance which is the amount of pension fund over which charges may be levied (unless you had secured protection) were introduced.

Many more new concepts have been introduced since but take the Lifetime Allowance as an example. Originally it was set at £1.5m and was supposed to rise with inflation, which it did initially, and rose as high as £1.8m. However, it was then drastically cut back and now stands at £1.055m. And the same goes for the Annual Allowance, which started at £225k and rose, but now stands at £40k. Lots of other complexities have been introduced and all of this is down to the Treasury, with the result that pensions are more costly to deliver both for the provider and the adviser. Anyone who ‘goes it alone’ is taking on a formidable challenge and I dread to think how many get it wrong and end up paying more tax than they need do.  It really is time that the Treasury stopped playing politics with our pensions and started to give real incentives for us all to save for our future rather than continually looking to penalise all savers other than themselves.


Pathways Ahead: How can advisers position themselves favourably against the changing backdrop of the non-advised decumulation landscape?


The regulator’s concluded Retirement Outcomes Review for non-advised customers contains a feature worth noting, set out in Policy Statement PS19/21: the introduction of “investment pathways”, highly governed options for non-advised drawdown. For clearer differentiation, we’ll use the term Retirement Pathways.

Essentially this is a type of decumulation Stakeholder with a soft price cap of 0.75% rather than 1.50%. The aim is improved outcomes for inexperienced investors not receiving advice, and as such you could be forgiven for thinking this should really have come in alongside the Pension Freedoms in 2015.

Retirement Pathways will lead to a major change in retirement investing. Whilst the most direct impact might seem to be on non-advised providers - who must offer retirement pathways to their customers – the impact will also be felt beyond the non-advised market. Platforms that are both advisory and direct-to-consumer are also impacted, and in fact advisers need to consider retirement pathways when assessing suitability for their clients considering drawdown.

So advisers would be wise to keep themselves abreast of these developments. Indeed, an FCA letter to financial advisers was published on 21 January 2020 in advance of the forthcoming “Assessing Suitability 2” (AS2) with an emphasis on retirement incomes. We will look more at what Retirement Pathways mean for advisers below.

The key initiatives themselves are similar to the governance arrangements of automatic enrolment workplace pension schemes, and include such things as reasonable, clear and regularly communicated costs and charges; appropriate investment strategy options for different pathways; ensuring cash is not a default option; and creating an independent third party oversight framework (whether though an Independent Governance Committee (IGC) or a third-party Governance Advisory Arrangement (GAA)). 

D2C drawdown and the standardised objectives

Before we look at the impact on advisers, let’s first look in a little more detail at what d2c providers will have to offer. These providers are now required by the regulator’s PS19/21 policy statement to offer mandatory pathways from 1 August 2020. Non-advised customers entering drawdown will be offered four investment options aligning to the regulator’s four standardised objectives. The provider will then offer a single investment solution for each pathway, which could be a single fund (or age-appropriate target date funds) aligned to that objective. The provider’s IGC or GAA must scrutinise these solutions diligently to ensure they are appropriate and cost effective.

The standardised objectives have been formulated to align to particular actions that the investor is planning to take, as follows:

  1.        Option 1: I have no plans to touch my money in the next 5 years
  2.        Option 2: I plan to set up a guaranteed income (annuity) within the next 5 years
  3.        Option 3: I plan to start taking a long-term income within the next 5 years
  4.        Option 4: I plan to take my money within the next 5 years


Although the regulator did not place a cap on price for Retirement Pathways, it did suggest during the consultation that providers ought to have in mind the 0.75% “Total Cost of Investing” of automatic enrolment workplace pension schemes. This means providers will likely lean towards offering multi-asset funds constructed with low-cost index funds, but that’s no bad thing, given that it’s asset allocation rather than fund type that’s all important in delivering investment outcomes.

Funds aligning to the standardised objectives

To align with the pathway chosen by those planning to set up a guaranteed income in the next five years, providers will presumably offer funds with asset exposures similar to those held by annuity providers to fund annuities, so that when they get to the point of buying the annuity, the asset mix will not change, even though the payoff profile does (exchanging surrendered capital for life-long guarantee). This means that if there is a change in annuity rates, there is a commensurate value change in the assets used to buy that annuity.

What about the other three pathways? We would expect to see multi-asset passive funds being used, with lower risk-return profile for those commencing near-term withdrawals but a medium-term risk-return profile for those commencing medium-term withdrawals. Providers could go for “relative risk” traditional multi-asset passive funds, but Target Date Funds will surely play a key part in drawdown for these non-advised investors.

The impact for advisers

From the start, these changes have contained much for advisers to take in. Advisers need to position themselves in ways that take into account the changes to the retirement landscape of non-advised investors in decumulation. Copia foresee these upcoming changes in the d2c market putting pressure on advisers in four different areas, namely comparison, cost, appropriateness and governance.

The pressure regarding comparison will be to show that the investment options advisers offer to customers in drawdown compare favourably in terms of appropriateness and value for money with those on offer to non-advised market via the Retirement Pathways. It’s been suggested that Assessing Suitability 2 may lead to the re-introduction of an RU64 style rule with a Stakeholder-like requirement for comparisons to Retirement Pathways.

Regarding cost, advice provided in retirement doesn’t have a cost cap, and is added over and above the total cost of investing. But with all-in investment costs anchored at 0.75%, we believe that good value for money for advised clients in retirement will be a Total Cost of Ownership of 1.25% to 1.75%, of which advisers are assumed to be charging typically 0.50% to 1.00%.

Regarding appropriateness, we believe that advisers will be able to offer more bespoke options for building a decumulation strategy than the non-advised Retirement Pathways. Target Date Funds - which will no doubt play a big part in the non-advised default strategies - assume a single risk profile and a single investment term starting from the year in the fund’s name. Our managed portfolio approach is more granular and can have one of five adviser-selected risk profiles and one of four adviser-selected investment terms making 20 portfolios in all. This enables a retirement plan that has more specific alignment to an investor’s “withdrawal profile”. And with model portfolios not being unitised, they can be delivered at a lower cost than a multi-asset fund or target date fund. Copia launched low cost Retirement Income portfolios for decumulation about three years ago as a response to Pensions Freedom, so in this respect we believe we are ahead of the curve.

There will be Product Governance requirements for the investment options D2C providers select for Retirement Pathways, and a direct comparison can be made with the Product Governance requirements for the investment options that advisers select for their Centralised Retirement Proposition (CRP). All aspects of product governance should be considered in the context of CRPs, including deciding whether to select funds or delegate to managers.

Assessing Suitability 2

Whereas Assessing Suitability focused on CIPs in general at a time when advisers’ responsibility was primarily for clients in the accumulation phase, we believe Assessing Suitability 2 will focus on CRPs, since advisers’ responsibility now includes clients in decumulation. In accumulation the focus is on attitude to risk, each client’s risk profile, and accumulation portfolios; in decumulation, on the other hand, the focus should be on:

  •          capacity for loss - economic measures of shortfall risk rather than a volatility figure, income replacement ratio and liability matching
  •          each client’s withdrawal profile - timing of withdrawals and their size relative to asset pool, and the degree of confidence in achieving a particular level of income durability
  •          decumulation portfolios - the investment engines that are designed to support term-specific withdrawals, rather than targeting long-term growth

We are working with adviser firms to help them get their CRPs into shape ahead of the introduction of pathways with our Retirement Toolkit. This is composed of:

  •          Retirement Risk Profiling Questionnaire: integrating ONS life expectancy data
  •          Retirement Income Portfolios: based on risk profile and investment term that are purpose-built for decumulation
  •          Retirement Withdrawal Rates: that sets out a min and max withdrawal rate for each portfolio
  •          Retirement Income Calculator: to apply those rates to client-specific cases
  •          Guaranteed Income: the ability to integrate Retirement Income portfolios with Guaranteed Income for partial or complete later-life annuitisation

If you would like to find out more about our Retirement Toolkit, please contact your Novia representative.