The Pension Advice Proposition

The pension landscape is shifting towards more personal choice and individual accountability. The Defined Benefit (DB) model is no longer available for new members (in the private sector) and many schemes are closing down. Within Defined Contribution (DC) schemes, personal pensions  and PRSAs, there are more fund options and a variety of products to choose from. All of this means that individuals need more advice on how to plan for their pensions. However, public policy is going in the opposite direction.

IORP II has seen the Pensions Authority’s proposals around the need for larger schemes come to fruition. Auto enrolment is now firmly on the horizon and some department officials still believe that by simplifying pension structures and setting up large schemes with self-service tools, quality coverage can be achieved. The danger is that the need for individual advice in pensions which has been overlooked in relation to auto enrolment will continue to be discounted by decision makers in the coming years, and this poses a challenge to the Financial Broker community to be clear about the benefit that individual advice brings to pension planning. So what are the benefits of individual advice in the pension planning process?

Analysis of the consumer’s retirement needs

Firstly, Financial Brokers will discuss the consumer’s targeted income in retirement, highlighting bench-marks if required. He/she will look at any existing pension provision, including expected State benefits (contributions should be checked); he/she will then highlight gaps between desired and projected benefits and the savings required for the consumer to obtain their target income in retirement. This may be an iterative process until the goal matches affordable savings, but this creates a clear concrete plan rather than an aspiration. Sustainability preferences will now also need to be considered. Such goal setting and financial planning brings greater discipline to the regular savings required to achieve these.

Advice on tax

The Financial Broker will then inform the consumer about the tax relief on contributions and how these are claimed. For those wanting to maximise the tax efficiency of their retirement savings, the Financial Broker will highlight maximum contributions and the structures needed for this. The consumer will also want to know about tax on retirement benefits, tax free cash options etc., and the Financial Broker will inform him/her about these.

Choice of best product type

There is a myriad of different pension structures – DB, DC, self-directed, self-administered, PPP, PRSA (Standard and Non-standard). Some choices may or may not be available to the consumer, but the optimum structure will depend on employment and funding levels. The structure chosen will influence funding options and retirement benefits and the Financial Broker will advise the consumer on the best structure for his or her specific situation.

Risk profiling of the consumer

Fund performance is key to the benefits the consumer will get at retirement. Losing 1 % a year investment growth will shave a significant percentage off the consumer’s fund at retirement; conversely being inappropriately invested in risk assets close to retirement could be disastrous. Risk profiling will assess the consumer’s tolerance and capacity for risk and retirement objectives and ensure that this is matched with an appropriate investment strategy. The individual advice that Financial Brokers give optimises the investment strategy for the risk profile of the consumer, the expected duration to retirement and the expected post-retirement benefit mix (tax free cash, annuity, ARF, rate of drawdown).

Understanding of consumer’s total financial position

The Financial Broker will typically have a relationship with the consumer stretching back years. They will know their financial goals and plans, risk tolerance and details of financial products held (including pensions). Large schemes try to fit consumers into life styling arrangements, e.g. moving from equities to bonds as retirement gets closer. But even more sophisticated arrangements that allow for targeting ARF use in retirement may not get a full and accurate match of the consumer’s circumstances to pension strategy. What if the consumer decides to retire early or late? What about the rate of drawdown in retirement – how will that impact investment strategy? What about other pensions and investments – how does that influence target benefits? Only individual advice can give a holistic view and accurately select the optimal pension arrangement for the consumer.

Choice of provider

Financial Brokers provide a ‘fair analysis’ of the market. This search optimises the match of pension provider against the consumer’s needs. Financial Brokers will assess provider investment performance, charges, fund/product design and service to get consumers the best deal. In addition, because they operate independently of providers, the existence of a body of experts constantly scrutinising pension providers makes for a more competitive market, which benefits consumers overall.

Setting pension goals within a wider financial strategy

Financial Brokers giving Individual advice will take a holistic view of a consumer’s pension, investment and protection needs rather than adopting a sign-up strategy. This will ensure that the pension is integrated with the overall financial planning of the consumer and urgent needs not provided for by the pension scheme will be addressed.

Explanation of choices and key features

Financial Brokers will explain the choices a consumer must make when setting up their pension and will highlight key features they should know in non-jargon terms. This makes consumers who obtain individual advice more engaged and confident in their pension planning, which in turn makes them more likely to act in their best interests and persist over time with their plans.

Recommendation

There is an intimidating array of choices a consumer faces in taking out a pension (which can serve to make many people postpone making decisions). Following the know your customer analysis and assessing the consumer’s needs, the Financial Broker will recommend a specific option or range of options to enable the client to take appropriate action.

Documentation

The Financial Broker will complete all relevant documentation to ensure that the pension is properly set up; the Financial Broker will also vet and explain the documentation issued by providers.

Regular Reviews

The Financial Broker will meet the consumer to regularly review the pension and provide ongoing advice on:

  • Varying contributions (good business years, income changes, etc.)
  • Tax and pension legislative changes
  • Investment performance and new fund options
  • Projected retirement benefits.

As the circumstances, resources and goals of the consumer change, the Financial Broker will give advice and ensure that the pension plan is updated to meet their current needs.

Taking benefits

At retirement, the consumer will have a range of options regarding tax free cash, annuity, ARF and rate of drawdown. These are huge decisions with lifelong consequences for the consumer. The Financial Broker will work with the consumer 5-15 years out from retirement to ensure:

  • Benefit options are optimised (transfers considered if available)
  • Contributions are maximised (e.g. to at least fund maximum tax-free cash in an occupational pension scheme)
  • Fund choices are aligned with expected post-retirement choices
  • The consumer is clear about expected benefits.

Before and at the point of retirement, the Financial Broker will educate the consumer on the pros and cons of different options and the investment/longevity risks around ARFs. This ensures the consumer makes well informed decisions with no surprises later in life.

Claims

Pension products will typically have associated death benefits and income protection. The pension fund itself will become a significant death benefit as it grows. The Financial Broker will be of assistance to a consumer or their loved ones in the event of a claim on these benefits. They will liaise with the insurer and trustee to ensure paperwork is completed and the claim is paid as promptly as possible – taking some of the stress away from the consumer/beneficiary.

Personal and professional service increases your wealth

If you are dealing with a Financial Broker, you typically have a long-term relationship and he/she will have a full grasp of your needs and requirements. You do not have to repeat yourself to different people as you may have to do when dealing with an institution. Studies show that such a long-term relationship with a professional Financial Adviser can have a significant positive impact on your wealth:

  • Canada (CIRANO Report, 2012) – wealth up 173% over 15 years
  • Australia (KPMG Econtech Report 2011) – higher annual savings
  • UK (Unbiased/Standard Life Report 2012)– pension funds 100%
  • Ireland (BI Value of Advice Report 2023) – pension funds up 55%.

The Canadian report sourced this sizeable wealth effect as stemming from three factors – higher savings ratios, more allocation to equities/noncash assets and better tax efficiency of savings (e.g. use of pension products). These reports clearly demonstrate that the Financial Broker has a positive ‘financial coaching’ role to play with consumers that delivers tangible results over time.

Large scheme economies of scale, technology, auto enrolment and simplification are sometimes put forward as the route to the future of pension provision. Each of these has some merit but they will hone the need for Financial Broker advice, not replace it. Large scale may reduce costs but at the higher costs of lower contributions and suboptimal fund selection for individuals. Technology and financial calculators may only be effective in combination with individual financial advice and education, which enables their effective use by consumers; this may reduce the cost of financial advice or enhance the effectiveness of such advice without replacing the core need for an individual adviser to the consumer. Auto enrolment in Australia is reported to have increased the demand for financial advice when pension fund values reached a critical value (once annual salary). As for simplification, we are getting there slowly but even when public policy achieves this goal, it will only reduce the task of choosing between product structures – the rest of the work will remain.

The reality is we are moving inexorably to a world of more individual choice, control, and responsibility with regard to pension planning. The dismantling of DB structures, the extension of ARF choices and the pressure on state benefits all point in this direction. The opportunities AND risks for consumers are greater in this world. Vanilla solutions may produce passable performance, but Financial Brokers should position themselves as empowering individual consumers to get the best-in-class pension planning.

Auto enrolment will shortly be commenced and whilst the details are still being distilled, an occupational pension may be a viable alternative to some groups of employers/employees.  In this process, Financial Brokers can add immeasurable value to employers and employees and Brokers Ireland will bring supports to our members in offering such services.