Complexity with simplicity
Projecting what pensions illustrations will look like in 10 years time is fraught with danger. Suffice to say the industry never moves as fast as you expect. It is our belief that inevitably, as our financial lives become more complicated – so too will our requirements of retirement planning products. More importantly, we think people are going to increasingly demand more holistic and dynamic views of their financial status ‘in the round’. Delivering all this information in a way which does not bamboozle the customer will be the key challenge in illustrations in the next 10 years. So the challenge is then to deliver this complexity in a simple enough way for customers to access and make sense of it wherever they are, on any connected device of their choice. Specifically customers want to make sure their pensions and investment products are performing well and delivering good value for money. The other challenge for illustrations is to ensure that they remain easily auditable and compliant with regulatory requirements just as legacy Statutory Money Purchase Illustrations (SMPIs) are today.
The world of illustrations as existed to date is in isolation from the person’s individual circumstances and financial profile apart from establishing the very blunt instrument of judging attitude to risk and selecting funds according to whether you are intrinsically cautious, balanced or adventurous/high risk taking. What we now need to move to is a world that is much more joined up. Questions such as what effect would the selection of this product have on my overall wealth at 50 and/or my retirement income need to be asked? With this holistic view, I might, with my adviser perhaps, do more intelligent planning before buying. I might make different types of decisions about how I take income at retirement.
You might combine drawdown with an annuity – take some early income via drawdown and buy an annuity later, for example. In this way we gradually move to a world which is less product-centric and more holistic and geared to people’s own life plans. It ceases to become as important that you have a SIPP providing the drawdown portion, a stakeholder targeted at creating an annuity, a discretionary trust delivering income for your grand children’s private school fees. It becomes more about the end rather than the means to that end. The trick here is that we finally could get to the point where people will get more actively engaged because they are realising their dreams rather than buying a pension.
To achieve this, the illustration process needs to capture (or at least transfer data on) a great deal more information than is collected even in the Fact Find process today. But finding out the value of multiple assets today demands often labour intensive Contract Enquiries which can take several weeks. More business process automation is needed to streamline and automate this process.
But moving to a more holistic view is all very well but how do you make sure you are buying the right product to fill that defined financial gap. We believe you actually are going to need to step back into a multi product illustration where, if say you are looking for a SIPP to deliver drawdown of X in four tranches from age 50 to 60 you need to be able to look at different SIPP providers drawdown offerings, make fund selections, model what would happen in the situation where this specific asset was moved into this specific SIPP. Once you have planned all this you want to be able to benchmark one product from two or three others, comparing them on different measures like projected performance, range of asset options, Reduction in Yield and so on.
The illustrations process still needs to help direct funds to specific financial tasks. The ability to plan across a whole portfolio for different income retirement strategies, based on different attitudes to risk, is key. Delivering all this in a way that consumers can use it to make an educated decision in discussion with their adviser, is also critical.
A new breed of planning tools
To this end, developments are already underway notably in the employee benefits space to create online tools which make it easier to model retirement/benefit scenarios. Take JLT’s BenPal employee benefits tool. Essentially this gives you the option to dynamically play with various scenarios on screen. So if I continue to put X into my DC pension from age 30 to retirement at age 65 this will, bearing in mind the effects of charges, generate an annuity of Y.
If I stave off retirement and carry on paying into the pension until I’m 67 then the pension will generate Z. This is all presented in a highly graphical, bar chart form which can be delivered to any internet connected device, even downloaded from Apple’s AppStore. It is these sorts of tools which make this information much more accessible then current illustrations documents. These sorts of tools definitely help visualise and simplify delivery of information.
One route into this is for the industry to rally around the idea of stimulating people to investigate their net worth at the same time as other routine financial check-ups such as downloading personal current and savings account statements through their bank’s website. Can the short and the long-term financial positions be brought together on one screen if needs be? The technology is already there to offer this. There are many financial planning tools like Voyant (See: http://www.planwithvoyant.co.uk/content/ukpro/home.html ) and Distribution Technologies ‘Dynamic’ family of tools http://www1.distribution-technology.com/ which offer this sort of holistic view focusing on life events like retirement, payment of university fees for your children etc. Although they rely heavily of manual inputting of financial information at this stage, they do illustrate what is possible if financial adviser, product providers and administrators were to run with this vision.
Dunstan Thomas is looking to incorporate a number of online financial planning environments into its current offering for pensions providers and predicts significant improvements and integration work will go into these to make them more powerful for personal financial planning. The ultimate test will be when these tools are accessible via multiple and disparate channels – ATMs, mobile devices and the PC -so that policyholders that cannot afford hands on independent financial advice can do some self service without exposing themselves to substantial financial risk in so doing.
So what we can predict is that within 10 years these sorts of tools will be in much wider use and various provider’s illustration systems will be integrated into them so that, if in the course of doing all this planning, the customer (or IFA with the customer) identifies a gap in his current portfolio it will be possible to run an illustration and look at the potential impact on the rest of the portfolio of moving that asset into that product, compared to other comparative products for example. Finally, the current regulatory obsession with value for money will also translate to much more sophisticated product comparison tools.