Tag Archives: Russell Ward

UK pension reform reading list

The UK’s retirement landscape has changed significantly. Pension reform now provides retirees with broader access to their retirement savings. However, reform has also shifted more post-retirement risk to the individual. This reading list highlights some of the issues at hand.

“Blended retirement solutions” (subscription required)
Individuals need financial plans that offer income solutions and address key retirement risks. This FT Adviser article  highlights a retirement framework development by Milliman and AXA Wealth that help advisers assess their clients’ needs based on a well-known psychological theory. The framework is detailed in a report entitled “Retirement planning: Bespoke retirement solutions are ‘the new black’ in 2015” by Milliman consultants Colette Dunn, Chris Lewis, and Emma Hutchinson.

One model which can be used to determine at-retirement choices in the context of these risks was set out by management consultancy Milliman along with Axa Wealth. It is based on US psychologist Abraham Maslow’s famous ‘Hierarchy of Needs’, which placed people’s innate requirements in order of priority to ensure psychological health. Axa Wealth transposed this hierarchy on to retirement spending ‘priorities’, to differentiate between essential and more discretionary costs.

In the retirement hierarchy, the money set aside to feed oneself, pay for a roof over your head and meet essential bills is defined as ‘essential’. Income to meet these needs would be subject to a very low attitude to risk.

More ‘discretionary’ spending, which could include everything from running a car to holidays, is less set in stone and so open to greater risk. Often objectives here might require significant investment growth to be fully realised.

The more important given needs are considered, the less risk your client will be willing to take. This could result in possibly several layers of risk needing to be met.

A final element is ‘legacy’, or the wealth your client may wish to pass on when they die. This is classified as the most aspirational of the needs and thus subject to the highest risk.

Once ranked, these income requirements can be placed into a framework.

• “Actuaries warn of retirement cash running out
Many experts believe retirees run a higher risk of depleting their retirement incomes, which is due to pension freedoms. Colette Dunn comments on results from a survey of industry experts at Milliman’s Forum.

• “Calculating pension income
Advisers need to develop new approaches to help their clients manage new retirement risks. Milliman’s Dunn and Russell Ward discuss solutions that address market risk and inflation risk.

• “A retirement planning model for the new pensions world
In this article, Dunn and Chris Lewis highlight a retirement framework that advisers can employ to match a retiree’s income needs to specific levels of risk.

• “Reform spells healthy future for advice
Reform offers advisers and providers an opportunity to innovative solutions that may help participants navigate the new retirement environment. Milliman’s Dunn and Ward provide their perspectives.

• “Blurred lines of retirement saving
In this article, Dunn highlights important conversations advisers need to have with people at different stages of their retirement planning.

UK pension reform offers new opportunity

People retiring after April 1 in the UK will have the freedom to do whatever they like with the money from their various pension plans. This FT Adviser article by Milliman’s Colette Dunn and Russell Ward offers perspective on the effect reform will have on an individual’s risk and also on the impact on defined contribution pension schemes.

Here is an excerpt:

To reflect changing retirement patterns and provision, DC schemes need to offer flexibility. Individuals want the flexibility to postpone retirement and/or phase pension income, to align with continued participation in work. These are two fundamental ways for individuals to manage the risk that pension income will be less than they require. Flexibility to integrate the Nest pension with other pensions so that the total pension income is level could also be beneficial. Individuals also want to have their money when they need it. In other words, they require flexibility in terms of sequencing. For example, individuals may want a lump sum when they retire to update their house, buy a new car or go on holiday. They may also need an increased income towards the end of their retirement if they need to fund care costs.

It is clear that the next generation of products need to enable ongoing advice. As the circumstances of the retiring individual evolve, their retirement solution must have the ability to adapt, so that they can respond dynamically to changing needs.

Given an individual’s need for certainty in retirement, we expect guarantees to remain in demand for at least part of their solution.

…The new environment provides an opportunity for advisers to help individuals throughout their retirement, and for providers to offer solutions which recognise the changing needs and regulatory environment. This will enable individuals to make better choices which provide improved risk-adjusted returns on their retirement savings and deliver a better overall chance of meeting their goals. The tools and techniques required to deliver these solutions are available now.