Identifying the best place on the regulatory spectrum to deliver advice or guidance to the mass market is the question stretching some of the best minds in the pensions sector.
For the world’s biggest asset manager, the relatively new category of advice without a personal recommendation represents the sweet spot for product development. Its US arm has just bought robo-advice firm FutureAdvisor, with a global rollout planned for the future. BlackRock UK DC managing director Paul Bucksey regards the area as fertile ground for providers and intermediaries alike and essential for addressing the chronic advice gap made greater by the pension freedom reforms.
“For the mass market, it is advice without a personal recommendation. So you can use personas – ‘People like me are doing the following’ or ‘Here are some investment ideas you may want to follow’ – while making it categorically clear that this is not a personal recommendation,” he says.
“It is pretty obvious that there are a lot of people who need guidance. EBCs who have traditionally worked on the design of pension schemes haven’t really got the footprint to engage in individual advice to that group and the IFA community has been falling in numbers.
“The net net there is that you need propositions that are a bit more than ‘Here is a website with a modelling tool,’” he says.
Target date solution
BlackRock is already out there undercutting other providers with a to-and-through drawdown proposition that gives multiple withdrawals, administration and fund management through its multi-asset core LifePath Flexi target date fund for 41 basis points. It certainly stands up as an attractive proposition, although it is currently available only to schemes using BlackRock’s admin services.
“We have a target date solution that we think is the optimal way of taking people to and through retirement. So our LifePath Flexi target date fund changes through the member’s life. At retirement, you come out of the group scheme and become a direct customer but you maintain your investments,” says Buckley.
Easy does it
Whether this proposition is a toe-in-the-water exercise or part of a big plan for drawdown world domination is not clear.
Bucksey says: “We have not yet taken the decision to put the infrastructure in place to receive applications from a wider market. There is nothing to stop us – we aren’t doing it yet but it is something we always thought we would want to do at some point.”
He sees the drawdown market dividing into two.
“There are two ways you can draw down: the Sipp market or a simplified drawdown solution.
“We think people up to £50,000 will want it as cash; from £50,000 to £250,000, they will want a simple, low-cost drawdown solution; and anything beyond that, people may choose a Sipp.
“We have had people call us, who have seen the press, wanting it. And we have also seen EBCs saying the service being provided by their existing provider is not quite up to scratch and they may want to bring in an external provider.
“There is also a DB dimension to this. We have seen our first DB client come in and say people want to take either a full transfer value or a partial one. We have the processing for that,” he says.
But BlackRock is not quite at the point where it wants to make a huge splash in the sector.
“Advertising in the Sunday Times for drawdown is something we would love to get to but we need to make sure everything is working and in place before we get there. When that happens is being discussed at the moment,” says Bucksey.
And how does the model address the thorny challenge of setting a withdrawal rate for drawdown? What happens when the cohort of people who are worst hit by sequencing risk run out of cash a decade before they are supposed to?
“It is not just drawdown that carries risk,” says Bucksey. “People who buy an annuity and then die early also lose out. You could find trustees, providers and advisers criticised for not pointing out the benefits of drawdown.
“Drawdown undeniably carries risk but we should not lose sight of the fact that buying an annuity does too.
“And as an aside, I struggle to see how the secondary annuity market can happen – so it is a once-and-done purchase. So we need to be sure that, however we engage with retirees, we take the time to explore with them the three options,” he says.
For Bucksey, the answer is to ensure that the customer has had ample opportunity to take up the more secure annuity option – with at least some of their pot – before going down the drawdown line.
“We have a tool that talks about the tax,” he says. “And then the next stage is, once you have decided what you are going to take, how will you structure this income? We are making it mandatory that the individual makes the decision – they can model anything from 100 per cent drawdown to 100 per cent annuity and anywhere in between.
“We are trying to be deliberately conservative in the way we are projecting future returns from a drawdown pot. We are erring on the side of caution, which should mean people are concentrating on the features rather than the starting point of income. And that is important because if you say ‘You have £100,000 and you can either have an annuity of £4,000 a year or draw down £7,000 a year’, naturally people will go for the £7,000,” he adds.
One of the key areas of debate in decumulation is whether drawdown should be positioned as a vehicle to generate more income than an annuity.
“It is possible it will give more than an annuity but a major correction could mean that doesn’t happen. Or you can think about all the downsides of annuity and all the downsides of drawdown. So a good solution may be that they do a bit of both,” says Bucksey.
So does the presence of Nest arguing the case for mass-market drawdown through its investment blueprint make it easier for fully commercial providers to do so too? Or alternatively, does Nest have an unfair advantage in the drawdown space given it is hard to envisage a corporate intermediary ever facing regulatory action for recommending a government-backed scheme?
“What Nest could do that others would find more difficult is the intergenerational piece,” says Bucksey. “Some of the collective DC/defined ambition issues, and whether you need to be able to cash out on a single day, are issues that Nest can possibly deal with differently.”
BlackRock has also been looking at insurance – a hybrid product with it providing the investment management and an investment bank or insurer providing the gap insurance.
Bucksey says: “I guess the challenge is cost – to add in guarantees is expensive. So another question is whether the charge cap will be extended into decumulation. If the charge cap is 75bps for accumulation, to get something with a guarantee under 75bps in decumulation would be a tall order.
“We will see tools marketed more closely with investment products, so your withdrawal levels are closer to your fund value. The perfect storm is keeping your withdrawals at a high level when your fund value takes a tumble. And you have to communicate frequently with the member, communicating that they will run out of money more quickly if they keep the same level of income.”
Just as providers and advisers were coming to terms with building propositions based on how they thought the regulator might interpret the 2014 Budget changes, along came this year’s Summer Budget with its possible abolition of tax relief on pensions. So does this leave pension providers having to second-guess even more regulation?
“The starting point is that BlackRock already believes DC was heading more retail in nature. The retirement challenge is people not saving enough. We know people are either not saving or, if they are, they aren’t sure how much to save.
“So in the absence of people being willing to pay for advice, or if there aren’t enough advisers left for them, it is up to people like BlackRock to step up with tools for ‘Help me’ investors rather than for the true self-selectors. That comes with challenges.
“The lines were getting a bit blurry about how best to do that. We are a retirement business but is that DB, DC or just savings? So we need to think creatively about what that means. It might not be a BlackRock product. It might not even be an equity or bond product; it could be something else.”
And where does Bucksey stand on incentives for pension saving?
“The Summer Budget raises some interesting issues around whether there should be tax relief on pensions. There is a school of thought that says tax relief was needed only when people could choose to save in pensions or not. Largely people are auto-enrolled now so that questions that. But I still think that tax relief is attractive,” he says.
But what about CPS fellow Michael Johnson’s point that in the past decade the fund management industry has received around £270bn of what he calls taxpayers’ money? And that money is a government investment in the future that asset managers levy charges on for 40 years, which could actually be given at the end more efficiently – his one great trade.
“I can see his point but I don’t agree with it,” says Bucksey, who prefers to describe that £270bn as people’s own money.
“Perhaps there needs to be some redistribution but tax relief has been a really good carrot rather than a stick to get people to save. If we are not going to compel people to save, we need some kind of incentive.
“The problem with not giving the incentive up front is that it is a very long-term bet that things aren’t going to change. And we have seen in the past couple of budgets that there can be massive change. So people talk about a lack of trust in retirement savings products. There is more that providers can do but there is also a lack of trust that the rules will not change.
“A good example is the contracting-out piece. You had loads of people contracting out of Serps as long ago as 1988, getting incentives to do that and then gradually realising that the incentives weren’t good enough and being encouraged to contract back in.
“A lot of people didn’t contract back in because they would rather have had the money in their account than trust the government not to take it away. Mathematically at the time the advice would have been to stay in Serps but, for those people who took a view that they would have it now, they were proved right,” he says.
For Bucksey the message is simple – save as much as you can, in whatever vehicle you can, so that one day you will be able to stop work when you want to.
“Wouldn’t it be great to be independent of salary, so that you could be free to work if you want or not? Because a lot of people are going to be working a lot longer than 65.”
About Paul Bucksey
2011-present – Managing director DC, BlackRock UK
2010-11 – Head of DC business development, Friends Life
2004-10 – Director, DC business development, Fidelity International
2001-04 – Senior manager, PricewaterhouseCoopers
Lives – West Sussex
Enjoys – Football, shooting and is currently learning to fly