
How Envizage supports good consumer outcomes in this area
The FCA published “Retirement income advice: good practice and areas for improvement” earlier this summer. As we head into autumn, we look at their guidance on sustainable income withdrawals and comment how Envizage facilitates good consumer outcomes in this critical area.
So what have the FCA said?
The FCA publication states: :
“Managing sustainability of income withdrawals
When making a personal recommendation, we expect firms to consider clients’ current and future income needs in retirement. The sustainability of income withdrawals is key to this.
We do not mandate how this is done. However, where firms choose to use cashflow modelling (CFM) or a withdrawal guide rate, they should adopt a reasonable approach that is tailored to the client’s circumstances and objectives. We published findings on how firms can improve the quality of CFM.
Examples of good practice
- When a retired client asked to increase their withdrawals to meet increased discretionary spending, the firm ran new CFM projections. They considered all the client’s assets and recommended that increases be taken only from non-pension assets. This reduced the client’s potential IHT liability, based on the tax regime at that time.
- A firm used an external market provider for its CFM and sense-checked the output using their own internal system. This mitigated the risk of errors made in the original cash flow and avoided causing the client foreseeable harm.
- Another firm investigated and trialled a variety of cash flow modellers before deciding on its CFM provider. The firm updated the assumptions used in the CFM tool on an annual basis to make sure that the outcomes for clients remain reasoned and reasonable.
Examples of areas for improvement
- A firm was unable to document the rationale for and the evidence underpinning its CFM tool’s underlying assumptions. We had concerns about whether this use of CFM would lead to consistently good outcomes for clients with different needs and objectives.
- Another firm projected that income withdrawals would lead a client to run out of money at age 76. No stress testing was completed to assess the impact on the client, nor was it clear whether their income requirement was solely the client’s or whether this was joint. If the client’s sole requirement, the firm appeared to have recommended withdrawals at a level they knew was unsustainable despite this being evidenced through their CFM.
- We observed some modelling which was only carried out to clients’ average life expectancy – thereby risking foreseeable harm.”
How Envizage supports good outcomes for sustainable retirement income
The FCAs guidance is welcomed. As is anything that can help improve outcomes in the critical area of retirement income advice.
However it assumes the current advice landscape where:
- The latest figures from the FCA show just under 1/3rd of consumers taking financial advice before accessing their pension for the first time, and
- Where they do take advice it is often not commercially practical to offer an individual financial plan.
In effect, you are asking customers (or their advisers) to predict both when they will die and what investment returns they will achieve until that point.
This is unlikely to produce positive outcomes, with customers prone to setting overly optimistic drawdown rates if they don’t seek professional advice.
At the other extreme, customers might layer conservative estimates on investment returns and longevity resulting in unnecessarily low withdrawal rates. This leads to less income early in retirement when it’s most likely to be enjoyed and a potentially large unspent pot at death, likely then to be subject to inheritance tax.
At Envizage we believe that this is not just a personal problem for consumers but also a societal “bad”. The risk is that huge amounts of capital are simply not allocated appropriately and economic growth is stifled.
That is why our core engine brings in both investment and longevity uncertainty to provide a single measure of success of the retirement plan. But calculating success or failure is no good unless you have access to a plan. That is why we are focused on everything that will help us put a plan in everyone’s pocket. These include
- A conversational interface to engage customers where they are at;
- Integrations, open banking and open finance to gather as much data as is available electronically
- Simple customer facing interfaces to supplement data where known
- Synthetic population data to supplement missing or unknown data with ‘People Like You’ data
- Configurable modelling rules and financial planning approach to give a forecast without hours of planning by a paraplanner
- Configurable Next Best Actions to support the continuum of financial support from guidance and financial planning that is not across the advice boundary, through Targeted support and Simplified advice into full advisor support Holistic advice, and
- AI driven but compliant explainability options to communicate the outcomes to the individual consumers at scale.
Here at Envizage we’ve built a Holistic advice engine that can help millions of people around the world understand their choices and tradeoffs so they can make better decisions for their future. This can be used to support firms delivering Holistic or Simplified advice, Targeted support or guidance to help their customers improve their financial outcomes. If this sounds relevant to you and your organisation, let’s talk: contact-us@envizage.me