Risk. An innocuous enough four-letter word. Not likely to offend in the way others do, yet nonetheless loaded with connotation likely to elicit visceral reactions in many.
Successfully helping people engage with what risk means to them personally – so they understand their attitude towards it, and capacity for it – is no mean feat.
Successfully meeting that challenge remotely, without a human being to support end investors through the investment process, renders it a Herculean effort.
Enter investment pathways. Not quite 12 labours-worth of effort, but with a tight deadline for implementation, and even tighter one for establishing an Independent Governance Committee (IGC) or Governance Advisory Arrangement (GAA), it may well feel that way for pension providers.
Pension firms intending to offer pathway solutions need to have established an IGC or a GAA by 6 April 2020. The IGC/GAA will then need to assess whether the fees are good value for money relative to the quality of the pathway solution provided and also whether the pathway solution is appropriate for the pathway objective and the characteristics of the consumer.
Providers will need to take into account any IGC or GAA concerns before the [now delayed] deadline for implementing investment pathway default fund solutions for non-advised consumers accessing their pension savings through drawdown.
The FCA is clear: “We do not want consumers to select a pathway solution if the risk profile of the solution does not match their attitude to, or capacity for, risk. Providers must describe the riskiness of each investment solution that they offer, to enable consumers to make this assessment.”
This is where the task may start to feel akin to slaying the nine-headed Hydra, because “enabling consumers to make this assessment” has historically proven particularly tricky, not least because the battle is with a reptilian by-product of evolution (the limbic brain) that doesn’t respond to logic.
So, explains the FCA, it falls to IGCs and GAAs to assess “the investment design of the pathway solution, including the underlying investments and allocations to these. To align the characteristics of pathway solutions with the interests of pathway solution investors, the firm would need to take into account the prescribed objective of each pathway solution, as well as the characteristics of the consumers that the firm expects to be using its pathway solutions.”
How will IGCs ensure appropriateness?
Unfortunately, there is no easy answer here; we will have to wait and see. IGCs will find themselves on a journey similar to 2015 and pension freedoms. At the time, defining the term value for money, and what it meant in practice, was a challenge. Therefore they will need to take a pragmatic view given the demanding timescales. We are likely to see a variety of approaches, but what will be interesting is to see how IGCs develop, and what they believe assessing appropriateness means in practice.
Given the need for non-advised consumers to understand what they are buying, approaches need to focus on communications and setting realistic expectations of outcomes and risks – including the risk of sustainability of income.
Without a robust software proposition, one that uses time-dependent forecasts from an economic scenario generator, which tests 10,000+ plausible future investment scenarios, the labours to meet investment pathways deadlines for pension providers, IGCs/GAAs, and, to a lesser extent, advisers – who will be required to provide an RU64-type ‘why not’ investment pathways rationale when making personal recommendations for drawdown – will indeed feel Herculean.
There may be no requirement to slay lions or capture bulls, but for IGCs and GAAs looking to fulfil their independent oversight duties on appropriateness without fit for purpose software, the task in hand will prove just as challenging.
Tim Jablonski is product director at EValue
This article appeared in the April issue of Professional Adviser’s bi-monthly sister title Multi-Asset Review. To make sure you receive your own copy of the next issue, please register your interest here