I recently asked one of my colleagues to provide a summary of the key Conduct of Business Sourcebook rules that dictate what goes into a pensions key features illustration (KFI).
Back came a list of 16 major rules that we must abide by when producing pensions illustrations for our clients in 2024. There are, in reality, even more than that.
That is a lot of rules which determine exactly what we must put in these illustrations. They mandate how our customers present projections to consumers and how those projections are calculated. Many are frankly a turn off for people reading (or rather not reading) these vital documents.
Right now, KFIs are likely to discourage them from saving more before retirement. Equally, they are not helping those in decumulation to carefully manage retirement income in line with investment growth, never mind combat the ever-present drains of charges and inflation.
I have decided to outline the top seven rules that, at worst, are likely to completely alienate and disengage the few consumers that do read their pension statements today, or, at best, give them a worst-case scenario view of what their savings could buy at retirement.
1. Prescriptive introductory words
The illustration must display the following prescribed wording “in a prominent position”: “The Financial Conduct Authority is the independent financial services regulator. It requires us, [provider name], to give you this important information to help you to decide whether our [product name] is right for you. You should read this document carefully so that you understand what you are buying, and then keep it safe for future reference”.
This reads like the health disclaimer included on tobacco products. There is no latitude for providers to be able to change this to be more understandable and useful for the consumer.
2. Low, mid and high growth rate projection restrictions
Cobs mandates that projections for future growth must be no higher than 2 per cent, 5 per cent and 8 per cent for the low, mid and high growth rates in tax-exempt wrappers. In addition, it stipulates that there must be a 3 per cent difference between each of the growth rates used.
This does not always accurately reflect the returns that fund managers expect to achieve, which are sometimes higher than this, but cannot be illustrated.
3. Projections must use a standardised deterministic model
It is well understood within the industry that deterministic projections fail to take account of random and unexpected movements in markets triggered by major events, like we have seen over just the past 16 years with the great recession, the pandemic and the Russia-Ukraine war.
By contrast, stochastic models incorporate probability and randomness into their models, accounting for certain levels of unpredictability that increasingly seem to be the norm today. Yet the FCA places several caveats on the use of projections calculated using stochastic modelling, which together make their addition into KFIs very onerous for providers.
Stochastic projections may not predict everything, but they are often more accurate and therefore beneficial to consumers. However, due to FCA constraints, most providers do not produce them.
