Years of experience of investment pathways have shown us that people don’t always do what they say they will. That’s why there’s much more to investment pathways than the investments held within them.
Why is there a need for investment pathways? Retiring pension scheme members need to make multiple decisions when they come to take their benefits. When do I draw money? In what way? How should I take tax considerations into account?
Adding complicated investment decisions into the mix will be overwhelming for many, particularly as an increasing number of them may not have had to make any proactive investment decisions while they were saving. So having a framework in place that helps them with this element can make the experience more manageable.
In an ideal world everyone would get financial advice. But, as recent research from the Association of British Insurers has shown, 72 per cent of retirees are not willing to pay for advice. A lot of people will be entering drawdown on a non-advised basis, so it is essential to give them as much support as possible.
What should people look for in a good pathway provider?
Being a good pathway provider is about more than having a good pathway. Of course having a pathway that effectively delivers the objective sought by the investor is crucial. But the pathway itself is just one part of the overall proposition.
A lot of the features that make a good pathway are the same as the features that make a good auto-enrolment default – inbuilt flexibility and future proofing of the investment design, high quality governance and oversight wrapped around the solution and someone making sure the customer is getting value for money.
We have made the decision to implement investment pathways for members of our master trust as well as for those saving for retirement through our contract-based arrangements, even
though there is no regulatory requirement to do so. Having seen how successful pathways are in supporting investment decision-making we want all of our non-advised customers to benefit from this. The benefit is we now have two levels of independent oversight of our pathways ensuring users get value for money – through both the Independent Governance Committee and the Standard Life Master Trust Company board of trustees.
What makes a good pathway?
We have been offering something very close to investment pathways for six years now, which means we have had considerable time to evolve our proposition to accommodate the way customers interact with pathways, the behaviours they display and the areas of extra help and support they would benefit from in making a decision.
Over the last six years we have discovered that people do not always do what they say they will – for example they might say they intend to buy an annuity in five years and then go on to make cash withdrawals.
In fact our experience has revealed that over 10 per cent of drawdown customers deal with their assets in a way that is not aligned with what they said they would do at the outset.
This has shown us that a good pathway needs to incorporate a high level of ongoing engagement and prompts to ensure the customer stays on the right track and are making deliberate investment decisions.
This means going beyond the minimum regulatory requirements and including regular proactive communications and access to tools to make sure the customer is still in the pathway that is most suited to their needs.
How important are member communications in helping to secure best possible outcomes?
It is crucial to have a complete suite of communications and methods of engagement, in the pre-retirement, at-retirement and post- retirement spaces.
And these communications need to reflect the fact that the pathway choice is not a one and done decision, and can be followed by a
number of different scenarios. So, for example, we see lots of members who take tax free cash only when they access their pensions. Others continue to pay in contributions through their employer or independently. And so there’s quite a wide variety of scenarios that you need to be able to cater for. So a provider needs to be able to communicate and engage with the customer on all the potential scenarios. Importantly the provider needs to have the capability and flexibility to engage at the moment that is right for the member, and when they need support and guidance most, and not just when it suits the provider.
How are charges levied on pathways?
As with accumulation, value for money considerations mean it is important people know what they are getting within the price.
The FCA has not introduced a charge cap for pathway solutions but has shared a notional 75bps comparator that it has asked providers to compare their solutions against. Providers levy their charges in different ways so it is important to look at the entirety of the charges. For our proposition, master trust members retain their scheme discount into drawdown charges, and all members using our pathway solutions have charges below 75bps. Once again, this is another area where scheme oversight is leading to good outcomes for members.
Price will always be an important part of any decision, but it shouldn’t be considered in isolation. Support available to customers to assist them in making the choice that is right for them, and to provide the right outcome, should always be a key consideration too.
The post Jenny Holt: Pathway priorities appeared first on Corporate Adviser.
