Much has been written about the Pensions Green Paper since it was unveiled last December. There are a few key Government objectives which deserve a quick summary. First, the Government is striving to offer people better financial choices so they can plan for the future. The second involves reaffirming the role of employers in helping people to save for retirement.
Its third aim is to create simpler and more flexible pensions. One specific area of simplification is likely to be rationalisation of the eight tax regimes that surround pensions today. Last, and most contentious, the Government needs us to work longer to help reduce the mounting burden on the state pension system which is already creaking under the burden of a population that contains an ever bigger percentage of people over the current retirement age.
These objectives look, on the face of it, simple enough. The competing challenges that they face are several. First the “clean-up” years following 1980s and early 1990s' pension misselling has cast a long shadow over the industry and this has engendered some mistrust of pensions among consumers.
Second, pensions are naturally very complex products and many different pensions products have been created to meet the needs of specific groups of people and, if anything, this complexity is set to rise as pension providers aim to offer more personalised solutions. Third, people want to retire earlier these days – many are working much harder than previous generations to try to make this possible.
Finally, the pressure that market conditions and the tax on company pensions dividends have put on defined-benefit occupational schemes has been enormous over the last three years. Many employers have had to spend tens of millions of pounds propping up pension funds. Many others have closed corporate pension schemes to new joiners.
The way of the future appears to be defined-contribution schemes, putting more of an onus on employees, albeit in some cases supported by employer contributions. The employer is backing out of its commitment to look after the new generation of employees – against the wishes of the Government.
With this backdrop in mind, it has never been more important for consumers to make the right financial choices. Closer examination of one recent consultation paper from the FSA helps show how the regulator plans to stimulate more intelligent financial decisions. The CP170 paints a picture of key features document mark II, dubbed the key facts document. Key facts will offer not only projections of what a certain level of contribution will create in terms of a pension fund at retirement age but will also enable consumers to suggest life scenarios or case studies, gaining insight into how these scenarios will affect their pension pot on retirement. It goes beyond what is currently offered in key features, which is simple projections based on notional retirement dates, to offer a level of interpretation not previously offered.
Key facts will also insist on reduction of technical-speak, which only serves to obfuscate the situation. It will also be based on a completely standard template and carry FSA branding. Providers will be discouraged from trying to differentiate their products through customised documents. It also suggests that it may offer a “real value” of the product being offered so that comparison can be made more easily with other products. Clearly, this puts a greater onus on providers to put the technology in place to enable the key facts to do what it promises – provide the key facts in a straightforward, easily understandable way. Sim-ply tweaking existing documents is not enough.
Key facts will undoubtedly demand significant investment in new technology, manpower and systems to deploy it. The FSA believes that it will cost the industry £100m and has agreed to give it three years to put the new document in place. Dunstan Thomas believes that FSA cost estimates may be underestimated by as much as four times. CP170 will not be the only change that the FSA pushes into the compliance process in the next few years.
The Green Paper raises the spectre of the combined pension illustration designed to provide a complete view of consumers' financial position on retirement. Data will probably need to be taken from multiple employers' occupational schemes, and from an array of private pensions, state pensions and even provide the property equity information of consumers.
Without these multiple data feeds, it will be impossible to have a true view of the net worth of an individual. The need for this complete wealth picture implies a role for employers as well as the Govern-ment in providing information to identified individuals, ideally in an automated way.
As if all this was not enough for providers' compliance teams and employers' HR staff to come to terms with, they will almost certainly have to face the increased customisation of pension products making extraction and display of relevant information a more difficult process.
One only has to look at pensions which offer multiple external fund links to know how collection of data which makes up the true value of that pension is no easy matter.
But all is not as grim as it appears. Technology providers are already offering tools and products which provide the sort of customisation and interpretation of figures which key facts and the combined pension illustration will demand. These technologies can extract relevant information from multiple data sources, lay it out for the consumer to understand what he or she is planning to buy and ultimately make a more informed financial product choice. The FSA's holy grail is achievable but not without using the technology that software specialists are offering.