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Painting by numbers

Nearly all the major reviews last year referred to the need to increase consumer education on financial services products. Pensions have been singled out as an area where more needs to be done and recently we have seen two developments.

The first is the publication of the feedback paper on the consultation carried out on point-of-sale pension projections (CP134) and the second is the pension calculator launched by the FSA and the ABI.

Projections are part of the sales process and help in establishing how much the customer should save to meet his or her objectives. It is important that the manner in which they are presented does not get in the way of the message they are trying to get over. Presenting too many numbers can be confusing for consumers.

CP134 proposed the introduction of a real-terms projection in today&#39s prices, along with the current range of three monetary projections. The reason for giving a real-terms projection was sound enough – pensionholders would start receiving them from April 2003 under the statutory money-purchase illustration rules and it makes obvious sense to have an illustration at the point of sale prepared on the same basis.

The more telling question is whether it is necessary or helpful to show real and monetary projections. This question was not asked in the CP134 consultation but the feedback indicates that, while there is widespread support for real projections, there is some concern that real and monetary figures could confuse customers.

Nevertheless, the FSA is proceeding with its original proposal. The only change is that real projections at the point of sale will not be mandatory from April 2003 but will become so from the date that will apply to the rest of the changes to key features to be made following the publication of the findings of the FSA&#39s wider disclosure review.

So it looks like advisers will have to explain two different forms of projections – real and monetary – to clients. The discretionary introduction date of real projections means that, for a while, real figures will be included in the projections of some providers but not others.

Monetary projections will cease to have any relevance after the product has started as no other figures in this format will be provided regularly. Furthermore, the figures that consumers will get pre-sale from other sources, such as the pension calculator or the projections in stakeholder pension decision trees, will be on only one basis – real projections.

One possible justification for the proliferation of figures at the point of sale is that the monetary projections will give a better impression than the real projection of value for money, especially compared with other forms of investment. However, one monetary projection and not three could have achieved this purpose.

But the feedback to CP134 opens up the strong possibility of a further projection being provided in future. This would be a completely different form of projection known as a stochastic projection. Such a term is unlikely ever to appear in consumer documentation so we do not need to get too hung up about the terminology. But it is worth explaining briefly the differences between this proposal and what currently happens, which, for the eggheads out there, is known as a deterministic projection.

The real and nominal projections discussed so far are based on a fixed set of parameters and assumptions (investment returns, price inflation and so on) and a calculation formula that will always produce the same answer when performed in the same circumstances. Stochastic projections recognise that things are not as predictable in real life. They are the output from a model that produces projected results for a high number of different combinations of assumptions, randomly generated but internally consistent.

The model then puts all these projected results in numerical order and expresses the output as the percentage probability of exceeding a given figure or set of figures. This is usually shown graphically. Because the batch of projections is randomly produced, the answers for the same case will be slightly different on each run.

Any introduction of these would be a long way off as the FSA has promised more consultation on the subject. In the meantime, we have the new pension calculator, which the FSA says in the press release accompanying its launch will help “meet the FSA&#39s objectives on consumer education”.

It has its own website at which gives users a projected weekly pension based on their selected retirement age and monthly contribution.

The actual site itself is more about information than education but the user is directed to a number of FSA publications that will contribute to the educational element.

Some warnings are given in the text about its unsuitability for those currently in an employer&#39s scheme and, interestingly, both the sponsors felt it was necessary for users to agree before they can use it to certain conditions and also to acknowledge that the pension calculator does not provide financial advice.

The FSA clearly wishes to make available all the necessary components for consumers who wish to do their own pension planning. The combination of consumer factsheets and the pension calculator could enable anyone so inclined to conclude whether they needed to save for a pension and how much they should save. The comparative tables will then direct them to the providers offering the lowest priced products. Forthcoming annuity comparative tables will allow them to complete the cycle of DIY pension planning when they retire.

In the growing savings market the Government hopes to create, there should be more room for all forms of product selection and completion, including the non-advised method described here. In a more static market, any new methods will potentially take business from the advised market, which makes it more important that the value of advice is promoted and recognised by consumers as a continuing service and not just something used to facilitate a sale.


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In the interim

There are times when a financial services business will need expert assistance from outside to make the most of a short-term opportunity or cope with an unexpected crisis. Here are just a few examples. A major acquisition by a national IFA firm or the merger of two networks will cause tremendous upheaval for all concerned. […]


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