4. Cobs-prescribed inflation-adjusted percentages
Cobs rules mandate that KFI projections must factor in future inflation and that the rate used must be 2 per cent per year. This is aligned with the Bank of England’s long-term inflation target, but as 2022 and 2023 showed, inflation can be much higher than this – 2 per cent is not always appropriate.
It would therefore seem sensible to allow consumers to model the effects of different levels of inflation on their projected retirement savings.
In addition, the 2 per cent inflation rate for Cobs illustrations is different to the rate we have to use for statutory money purchase illustrations (SMPIs), which is set at 2.5 per cent by the Financial Reporting Council, which is responsible for the SMPI assumptions.
This represents another area where we have to explain the difference when, from a consumer’s point of perspective, they should just be the same.
5. Projected figures must be rounded down
Final projection figures must be rounded down to the first three significant numbers so that £1,389,945 is shown as £1,380,000 for example.
While the FCA’s rationale for doing this is to ensure that consumers use the illustration as a guide to what might happen in the future, rather than set an expectation of an exact figure, it does mean that large fund values can be significantly understated.
6. Annuity at retirement must be displayed
Even though less than 10 per cent of those drawing on their pension for the first time in 2023 purchased an annuity, the FCA still mandates that annuity values must be provided in all pension illustrations.
The rates used to calculate the annuity must also be based on historical mortality data. The data currently in use is based on information collected from UK insurance companies from 2015 to 2018.
Not only is this data very out of date, but it also ignores the impact of the pandemic on mortality data, which has been significant over the past four years.
7. Two regulatory regimes demand different disclosures for charges
Although pension illustrations are mostly governed by the Cobs rules, charges can also be disclosed in line with Mifid II rules, which were brought in by the EU in 2018 and adopted into UK law as part of Brexit.
While most illustrations will use The Investing and Saving Alliance's best practice guide to disclose charges in a way that is compliant with Mifid II, the material differences between the two regimes make understanding and comparing illustrations more difficult.
How does consumer duty fit in?
The highly prescriptive nature of the Cobs rules for determining projection values and mandating some of what must be disclosed in a KFI has arguably worked well in a world where everything was delivered annually on paper, but these are increasingly neither read nor acted on.
