Where are we going wrong with clients' pensions illustrations?

However, this passive, non-interactive approach to consumer communications now runs in direct opposition to what the FCA demands of regulated firms in the 'consumer understanding' outcome of the consumer duty: “We want consumers to understand the information they are given and make timely and informed decisions.” 

PRIN 2A.5 of the FCA handbook sets out the FCA’s expectations, but these can be summarised as:

• Communications must be clear and not misleading while supporting a consumer’s understanding by having the information needed, use language that is likely to be understood and equips the consumer to make effective, timely and properly informed decisions.
• The communication channel needs to support the decision-making process and enable the consumer to review the information and their options.
• Communications should be tailored to consider the consumer’s characteristics (including vulnerability), the product complexity, the communication channel and the role of the firm producing the communication.
• Communications need to be tested to ensure they are supporting good outcomes, with any deficiencies corrected.

Moving from a regulatory straitjacket to a more principles-based approach to regulation of illustrations

It is not all bad, I am a big supporter of the key summary information within which all providers must show the following:

1. the value of the crystallised and uncrystallised funds in the retail client’s personal pension scheme; 
2. the value of the pension commencement lump sum, if relevant;
3. the projected value of the retail client’s personal pension scheme or stakeholder pension scheme five and 10 years after the date of withdrawal; 
4. reduction in yield information prepared in real terms in accordance with Cobs 13 Annex 3 3R or Cobs 13 Annex 4 3R;
5. the retail client’s age when their funds are projected to reduce to zero, if relevant; and  
6. first year charges expressed in cash terms and determined in accordance with a range of other rules. 

It is a lot of information. However, having this all together, front and centre of the document, means the client does not have to rifle through the whole document to gather this valuable information.

I am also a firm believer that the consumer duty outcomes are a positive addition for consumers. They offer an opportunity to revisit the traditional methods of educating and engaging consumers. Against this, the prescriptive regulations which govern the look and feel of KFIs and other regulatory documentation now seem out of step.

The consumer understanding outcome presents a real opportunity to create a more engaging, consumer-focused and personalised communication approach that better meets the needs of the consumer. However, currently a separate piece of regulation is straitjacketing us.

It is time, therefore, that a more principles-based approach is adopted for documents such as KFIs, giving firms the freedom to highlight aspects that are relevant to individuals.

So, if a person in their early 60s has already expressed an interest in purchasing an annuity at retirement, then continue providing that annuity calculation (or better still an interactive tool with which to generate their own personalised annuity quote). 

However, for the nearly 90 per cent that have expressed no such interest, providers should be able to place this quote further down the document and instead offer prominence to something more suitable to that individual, such as an income drawdown affordability calculator showing likely income levels given contribution history, projections and other relevant parameters. 

Controlled guidance rather than prescription must surely be the right approach in future as we move to a world where the customer is truly in the driving seat when planning for retirement.

They must be given user-friendly tools in a medium and approach that works best for them, providing easy to understand information on which they can make better informed decisions. 

Doing it this way should drive more consumers to realise that they need financial advice to optimise their plans for retirement. And for those already taking advice, it highlights the value that financial advice is giving them.

This change of approach will inevitably improve financial education, as well engagement and ownership levels, while ensuring delivery of both accurate and more insightful information for the consumer.