Greg Kingston: Sipp lessons from the Volkswagen emissions scandal

Pensions-savings-retirement-piggy bank

A few years ago I changed my car. Like many people I tried to do the right amount of research first. I looked at the options and specifications, including the performance and fuel economy.

The latter is measured by a standard test, providing economy data for urban driving, extra-urban driving and a combination of the two. It is called the New European Driving Cycle (NEDC). The Department for Transport describes this test as “…intended to give potential car buyers comparative information about the relative fuel consumption of different models in standard tests”.

I’ve never come close to achieving the fuel economy claimed by my car’s NEDC, and I doubt others have either. The tests simply don’t represent real world driving. The NEDC test has remained unchanged since 1997, and most people understand and accept that the numbers it churns out are incorrect, yet we do still put some faith into it. If the unrepresentative numbers for car A are higher than the unrepresentative numbers for car B then we assume car A must be better, even though we know they’re all incorrect.

The recent VW scandal has taught us all a few things, one of which is the fact that the NEDC fuel economy test simply isn’t fit for purpose. You cannot rely on it to determine how fuel efficient your car will be when you drive it.

I was reminded of the NEDC test when reading the FCA’s CP15/30 – Pension reforms – proposed changes to our rules and guidance, and thinking how some of the proposals might apply to the full (bespoke) Sipp market.

The consultation proposes a number of changes, including that retained Sipp interest is to be shown as a charge and then included in the projections, effect of charges tables and reduction-in-yield measures.

The consultation paper concludes: “This will enable consumers to compare charges on pension products on a consistent basis and enable firms to compete more equally.” This sounds familiar, particularly in conjunction with the definition of a key features illustration taken from COBS: “information describing projected performance and the effect of charges prepared in accordance with the rules on preparing product information.”

A KFI attempts to give a saver the same comparative information as the NEDC test does to a driver. But the KFI test has variables that differ between providers and products, so savers don’t even benefit from the standardised test that car drivers do. A projection years into the future merely magnifies the differences and the potential to mislead and confuse savers.

The NEDC test doesn’t work, and plans to replace it are likely to be fast-tracked in light of the VW scandal. In the meantime more effective applications, such as, have been developed independently, using real world crowd-sourced data to deliver far more accurate comparisons.

A car driver isn’t particularly interested in their car’s output of CO2, THC, NMHC, NOx etc – they simply want to get a good idea of how many miles per gallon they’re likely to get in the real world and how much their road tax will cost.

Sipp investors probably want the same thing, but they’re unlikely to get it from their KFI. The proposals in CP15/30 risk confusing them further.

Greg Kingston is head of communications and insight at Suffolk Life