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