Billy MacKay: We need a fundamental review of projection rates
Last week saw the publication of a PricewaterhouseCoopers report on the rates of return that should be used for FSA projections. The main recommendation, a drop in the intermediate rate of return from 7 per cent to 6 per cent, was almost universally welcomed as a sensible suggestion.
While I will welcome any move on the part of the FSA to rubberstamp this recommendation, I still have concerns that more fundamental change is needed.
The aim of an illustration is to satisfy two fairly straightforward requirements - allow charges comparability between similar products and provide consumers with an idea of what their investment might be worth at a point in the future.
Having worked in the pension industry for many years, I am often the first port of call for pension queries from friends, family and pretty much anyone else who knows me who does not work in financial services.
After I have done my best to explain KFI, effect of charges, RIY and critical yields, the question I am usually asked is: “So, will that be the amount of money I end up with?” When the answer is: “In all honesty, probably not”, the illustration tends to quickly find its way to a shredder. I am guessing this probably is not the home which the FSA has in mind for illustrations.
I fully support the principle of providing consumers with illustrations and information that helps the decision process. Illustrations can be useful for making charge comparisons but are they fit for purpose for any investor looking for an indication of what they might get back? Do investors read and understand them? The issue is that an illustration which is not being read or which ends up in a recycling bin cannot help with the decision process.
This is why, when I read the PwC review into rates of return, my initial reaction was that a more fundamental review was needed.
We have seen some of the FSA’s thinking over illustrations in their consultation over the requirement of point-of-sale illustrations in Sipps. The aim appears to be a one-size-fits-all set of requirements in the hope they will improve comparability of mainstream products. Requiring illustrations where you are shoehorning all asset types into the same process will complicate the assumptions needed to produce meaningful illustrations. This will significantly reduce the chances of achieving any sort of comparability and again fail to help with the decision process.
Whenever engagement is required in the pension arena, the starting point must be simplicity. It might be important for the consumer to be provided with multiple tools with which to measure the potential performance of an investment, compare the charges of that product with those of a competitor and for some or all of this information to be set out on an annual basis for the first 10 or so years of the investment. But if forcing all this information into an illustration leads to confusion, then surely this is a case where, just sometimes, less is more.
Billy Mackay is marketing director at AJ Bell
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Readers' comments (10)
Who`s paid for this? The MAS?
Bang on the money Billy, good work
The primary purpose of provider illustrations, net of provider charges, is cost comparison - no matter how complicated the charging structure. This is a useful function.
Trying to mix this up with 'what might my investment be worth' is ludicrous as no one can say as no one has the ability to accurately forecast the future. The nearest is the 'monte carlo' style 'trumpet' of future return potential which is an output from various asset allocation systems and which are designed to show the client the potential reward for taking more asset risk (although no promises).
With RDR, there is another issue, which is that provider illustrations may not include adviser charges either at all or in total. The client should be shown the total cost of ownership including relevant adviser charges. Only the adviser has all the information so we should see a shift from provider to adviser illustrations - and two sorts - one to show combined adviser and provider product costs and one to show range of potential outcomes (limited though even that may be to past experience) based on asset allocation.
Stanley, you are absolutely right but do you not think that this is getting ridiculously complected even for the most engaged client.
My experience is that most clients take one look at all the pages and pages of guff, graphs and figures and ask the simple question 'Well, what do you think???'
I guess that is what advisers are there for. A fact that the FSA seems to have missed in all their ludicrous RDR tampering.
If the client trusts you as their adviser they will accept what you say. If you are a good adviser you will tell them the truth and advise them well.
If you are a rogue, well, all the illustrations and guff in the world won't stop that client being mis advised.
Very sound piece Billy, don't think you'll find many disagreeing with this. Re S Kirk's point, of course he's absolutely correct in what he says. The one thing I'd add is that pension illustrations are used over and above pre and post sale purposes as he suggests. They're also used for annual pension illustrations, the purpose of which is to try and give people an idea of what their pension could be. But for the reasons Billy's given, they're just as useless for this too.
Soren,...... you're assuming no pension gets sold direct, you might be surprised. Therefore illustrations should be simple, but they should show all charges and that surely includes those "rebates" and dealing charges...
I totally agree with Billy.
Doesn't the FSA require authorised firms to give consumers fair, clear and not misleading information? Clearly, they've never had to explain an illustration to anyone.
Sensible article Billy, and unsurprisingly I agree with you.
We have long passed the stage where the information at point of sale assists a client in making an informed decision, and we are now at a point where the information prevente people frommaking an informed decision, and worse - potentially disengages them from making any long term savings provision.
At last! Someone else is querying what I have been banging on about for years. But no-one listens.
The average illustration contains so much information and all based on supposition, and nearly all incomprehensible. I have been in this industry for 25 years and I still do not understand the basis behind the tables of "Effect of costs and charges". This does not worry me, because NO-ONE ELSE DOES EITHER! I have talked to any number of Companies and asked for an explanation, and have never received two identical answers. The mathematics eludes me and my calculator which can never replicate the printed projections. Why?
Well, when asked, most Companies will tell you that they HAVE NO CONTROL over those figures, but are created from data and formulae PROVIDED BY FSA. They rarely include TRUE costs and charges and cannot cope with anniversary bonuses and incentives.
So, I have found an answer to the perennial question of, "What is it going to be worth?"
I carry a small crystal ball in my briefcase. (Honestly!) If pushed, I will take it out, set it down and stare at it for a few moments, then say to the client, "Well, I can't see anything, can you?"
The point is made.
Illustrations are a fairy story. On form, we could predict the podium positions of most Olympic athletes in a few months time. Taking all effects into account, we could provide a projection.
And the results will prove us hopelessly wrong.
I use illustrations and projections to explain RiY, Critical Yields and printed costs and charges. Projections and the effect of costs and charges, I explain, are the snapshot of the starting line, and little else, and are based on information that even the Companies that provide them do not understand.
As I said at the beginning of this tirade, I have been in this business for 25 years. I have the benefit of taking out some very historic illustrations and comparing with actual results over 5, 10 and 15 years or more. Guess what? NOT ONE OF THEM COMES ANYWHERE CLOSE TO ACTUAL PERFORMANCE. (In all but 2 cases checked, the results were considerably better than projected.)
So what use is it to the client? What use is it to the adviser?
(What use is the FSA department that creates the formulae to be used for effects of costs and charges?)
I have long opined that most illustrations and projections are totally contrary to TCF, being too long, too technical, too confusing and too obscure for the client (or IFA) to use to make a rational decision.
Roll on retirement!
Surely cost comparison is dangerous as it is completely misleading. Consumers are led to assume that their ultimate return is related to the charges on the product and are encouraged by human nature to go with the cheapest.
However, they could be the cheapest because the quality of the product management or advice is not good. One wouldn't think that badly stored food sold cheaply was a good bargain and the same goes for badly managed investments.
The author is correct. A fundamental rethink of the communication involved at product sale is needed and we need to be very careful that we aren't misleading clients by showing the effect of charges just because we can actually do this.
Value is what is key to any consumer, not cost, and it surely cannot be beyond the wit of the industry to come up with a new way of showing this.