 By Tom Murray, Head of Product Strategy, Exaxe
The idea behind Key Feature Illustration (KFI) documents is an excellent one; standardised projections should allow consumers to compare products from different providers and enable them to understand the effect of the different charging structures used by the different providers.
Of course, the KFIs don’t guarantee outcomes but it does enable those who wish to choose on the basis of price rather than on the promises of returns to make an informed decision and it helps them to understand the effect of the differing features that may be attached to a particular plan, as the associated costs will reduce the projected outcomes.
However, there are problems with the KFIs. There are regular changes in the regulations governing them, as the effect of these documents on the buying public is assessed. These changes are required because the investing environment changes frequently and the assumptions behind the illustrations in the KFIs need to be changed accordingly to reflect the current situation rather than to merely replicate what happened in the past. These changes should happen far more often but instead tends to only happen after a gap of a number of years with the result that the illustrations quickly become outdated as the assumptions no longer reflect the world that the investor is living in. Of course, regulators should be able to respond more quickly to the changes in the real world, but they are generally restrained by the cries from the industry that changes are expensive and time consuming to introduce and should therefore be only made every few years rather than a few times a year, a timeframe that would be more responsive to the changing state of the economy.
While this might reduce the cost incurred by the industry, it has two detrimental effects – on the consumer and on the industry itself.
From the consumer’s point of view, it means that the illustrations are out of step with reality. The original projection rates were standardised to prevent unscrupulous companies from using rates that were too high and therefore misleading customers into the belief that their funds would grow at a ridiculously high level. However, these have now been outpaced by the realities of the world and now the regulated rates are widely seen as too high and therefore also misleading. Of course, given that the idea is to allow customers to compare across different providers, one cannot seriously expect the providers to correct this issue themselves and thereby make their own projections look artificially lower than every other market player.
From the industry’s own viewpoint, the infrequent changing of the basis for illustration removes the pressure to upgrade their technology. As a result, they don’t have the ability to make use of illustrations more dynamically. This is a pity for a number of reasons. The outdated versions of illustrations can look unrealistic and compare unfavourably with other forms of investment. When most people are thinking of how they will fund their retirement, those without pensions consider a number of options, not just a pension product. Particularly attractive as an idea is buying a property to produce a stream of rental income which will provide for the owner’s needs in retirement and at the same time will be accessible as an asset either to get a loan against, perhaps via an equity release programme, or by selling to realise the value. The difficulty for pension investments is that this means of providing for our future is easily understood and in order to compete against it, pension product illustrations need to be accessible, modern and up-to-date.
A second problem with sticking with legacy technologies for illustrations is that the staff is left maintaining out-of-date systems and spreadsheets. This work can be difficult but also repetitive and boring. This is deeply demotivating for the staff and while it is a highly skilled job, the professionals involved are therefore even more likely to become bored with the antiquated approach and the sheer drudgery of maintenance – it’s not what they’ve believed they were studying for through all those years of examinations.
The answer is to make the move to a modern illustrations system that will not only deliver what is required by the current changes mandated by the FCA but also will allow future changes, such as the forthcoming PRIPs to be incorporated without the need for major programmatic changes. The FCA can assist in this move by refusing to listen to the moans coming from the provider companies and insisting that changes are made on a more regular basis in order to encourage pension saving. This approach would push companies along the path of moving to newer technology platforms which will allow, via configuration, improvements to be drip fed and minor adjustments made based on feedback from the implementation of the regulations rather than the big bang approach that is enforced at the moment.
Once providers have moved to newer technology platforms, the whole approach to pension illustrations can become much more dynamic, flexible and able to take on the challenges of a changing marketplace.
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