While there is not an exact definition of what a centralised retirement proposition (CRP) is, the following might be a neat way to sum it up: a consistent approach to retirement advice that extends across an entire firm. While it covers both investment and withdrawal strategy, it may also extend to attitudes to risk and fact-finding.
But the inexact definition has provided an environment for change, adaptation and innovation, resulting in an increasingly sophisticated framework that has been growing in prominence over recent years.
For advisers, the advent of CRPs in financial planning offices has seen their use and implementation change, increasing in scope in response to the changing financial landscape, while also raising concerns about longevity and risk.
Helen Lupton, compliance director at True Bearing, says the concept of a CRP was once unknown to most planning firms and represents a step-change in the role of an adviser.
“Retirement planning was just that – creating a viable plan for clients at or in retirement – and checking it stayed on track so they could lead the lives they wanted without fear of running out of money,” she says, adding that the needs of clients, as well as external factors, have been forcing advisers to utilise CRPs in more complex ways.
“Following timely commentary from the Financial Conduct Authority (FCA) on ‘vulnerability’ and the market drop last March due to Covid-19, risk and sustainability of income has quite rightly been brought to the fore,” Lupton adds.
Additionally, the rise of CRPs coincided with the introduction of MiFID II and PROD responsibilities, but advisers found that a centralised process helped in meeting the accountabilities around client suitability and disclosure without being overly resource-intensive.
This changing regulatory landscape helped to pave the foundations for the proliferation of CRPs, and not just in the number of firms who utilise them, but their scope and complexity.
Matt Amesbury, head of retirement advice at Purely Pensions explains that, until recently, CRPs were more basic in structure.
“They would normally mirror a central investment proposition and you would find that a person’s allocation would closely mirror their overall risk appetite,” he says. “However, the approach these days is far more tailored. Advisers are now able to go into much more detail about a person’s accumulation profile, drawdown preferences, risk appetite and retirement status.”
But while the adviser takes on an additional, often more complex workload, Amesbury argues that the process benefits the client: “Taking these factors into consideration means financial planners can make more bespoke recommendations for their clients and add significantly more value to them in the process.”
Yet the increasing popularity of CRPs among advisers is not universal, and many firms are still reluctant to introduce them.
FE fundinfo’s 2021 Financial Adviser Survey of 250 UK-based financial advisers found that around two-in-five (38%) advisers currently have a CRP. A further 25% said they do not have one but are developing a plan, leaving 37% without such a proposition.
Minesh Patel, Chartered financial planner at EA Financial Solutions, says that while there is value to a CRP, its primary use is a tool used to achieve a broader purpose – meeting cash flow modelling.
“Cash flow modelling has always been vital to the work we do and is an integral part of any proposition,” he says.
But the value added by a CRP, Patel believes, comes in its robust methodology and ability to promote a shared understanding across a firm.
“When you understand the process and what the charges it’s then easier to report to both PROD and MiFID. The point is that a CRP is robust, but if you’re creating your own CRP within a firm, and already have a centralised investment proposition then it makes sense to have something structured, tailored and formatted as you’re going to be using it all the time.
“Cash flow modelling is key, then the CRP is used to achieve that model. It’s all about process.”
Collective change and individual plans
Advisers and providers are continually adapting propositions amid a changing economic backdrop.
David Mulholland, business development manager at Brooks Macdonald, says the CRP can trace its origins back to the 2008 Global Financial Crisis, an event that triggered a steady fall in 15-year gilt yields, and consequently annuity rates.
“Prior to the Global Financial Crisis, an annuity could deliver an income of approximately £15,000 per year for a £100,000 premium, a solid guaranteed income, which provided great peace of mind to clients at the time.”
As schemes such as annuities and defined benefit pensions fell out of favour, risk began shifting towards the consumer, resulting in more people with significant risk later in retirement.
“This is something the FCA has been mindful of when considering client behaviours since pension freedoms in 2015,” says Mulholland.
This behavioural shift away from annuities and de-risking investments and savings at retirement has seen more savers entering drawdown, in part due to the introduction of pension freedoms by the FCA.
Subsequently, the change in advised savers’ habits and rulings from the FCA has forced firms to utilise a clear and consistent process to ensure the efficient management of clients, often for longer periods of time. While continuing to advise clients in drawdown through a CRP requires additional ongoing capacity, it presents further opportunities to evaluate the vulnerability of clients – something the FCA has been vehemently advocating for.
Despite some reluctance to adopt a CRP, a growing number of firms appreciate the affordance of simplifying complex topics such as income sustainability in both a collective sense for the firm and on an individual basis for clients.
Mulholland says the CRP’s additional focus on “sequencing and longevity risks” benefits the client by eliminating potential areas of risk and misinformation in a reliable and formulaic manner.
“A good CRP looks to provide information on all available income options so that clients can make informed decisions about their retirement and avoid any misconceptions or adviser bias around recommendations,” he says.
And for the adviser, the ability to “segment retirement clients” alongside provider solutions will help in determining the most suitable route to achieving certain objectives but can improve reliability and efficiency.
With clients in drawdown, the clear risk is sequencing and ensuring the longevity of their retirement plans.
One strategy, utilised by Phil Casey, managing principal at Punter Southall Aspire, is to draw only natural income, but it comes with limitations.
“Whilst protecting the principal, this method does not provide clients with certainty of income and can compel firms to recommend funds that may skew asset allocations which may not be appropriate given market conditions.”
Sceptics of CRPs often claim they are inflexible and lack the back-testing during market cycles necessary to produce strategies that reduce a client’s exposure to sequence risk and the potential collapse of their retirement plans. While valid criticisms, providers and advisers are continually making improvements.
At Punter Southall Aspire, Casey has adopted a ‘multi-bucket’ approach. Under this strategy, he explains, “funds that are going to be required for income in the shorter term are held in low/no risk ‘buckets’ starting with cash, which are regularly topped up,” but strategies like this will “continue to evolve and improve” to best suit the CRP and the needs of the client.
As the pandemic took hold and forced people to take stock of their finances, the CRP proved itself as a valuable asset, bringing to the fore two key elements of financial planning: risk and sustainability.
“CRP investment strategies have gained a lot more attention since the start of the Covid-19 crisis,” explains Amesbury, who says they have resulted in better outcomes for clients amid the pandemic.
“As elements of the market experienced large volatility and many companies reduced, or even suspended their dividend payments,” he adds, “we have seen a further consideration when selecting income funds as part of a CRP for retirement.”
While the investment habits forged over the past year begin to settle, the changing landscape presents a compelling case for CRPs. With advisers placing a greater focus on managing income and cash flow modelling of higher-risk investments later in life, a CRP is becoming an increasingly attractive option to deliver retirement income.