Earlier this week I attended a seminar hosted by a client of ours, Barnett Waddingham, which was part of a series of Pensions Regulator updates. A representative from the Pensions Regulator (tPR) was there to speak, alongside one of the partners from Barnett Waddingham.
The main topic was enhancement exercises – not of the Jane Fonda variety, of course, although I could do with some enhancing exercises, but of the pension scheme variety. Enhanced Transfer Values (ETV) and the slightly more tasty sounding PIE – which as any good pensionista knows stands for Pension Increase Exchange, were the prime topics for discussion. Both are perfectly reasonable methods for DB pension schemes to de-risk; essentially by settling some of the future liabilities sooner than expected. One is FSA regulated (ETV) and one is currently not (PIE). Both could offer goodies earlier to members, which might seem attractive. Ultimately this might come at a cost to the members (based on how long they live, future inflation and other unknowables). However, the gist of the advice offered by Barnett Waddingham and tPR was that when communicating these offers to pension scheme members, the communication must be clear and importantly, understandable.
We are all familiar with the requirements of Treating Customers Fairly, Key Facts Illustrations and so on, and the importance of accuracy when advising people about products or choices – but what is the use when the recipient doesn’t know what to do with that information? TPR representative used a classic actuarial joke to describe this: Two people lost in a hot air balloon ask someone on the ground where they are, only to be told that they are 25ft in the air and heading “that way”. The balloonists assume that the guy on the ground must be an actuary, as although he has given them accurate information, they have no idea what to do with it.
So, instead of just presenting key facts, information must be given in a way that the pension scheme member actually finds useful, and is able to interpret it to make a decision.
In the case of ETV or PIE, the member must know what they’ll get, and what they are giving up; but the pertinence of this concept struck a chord with me. Should this not apply to all financial products and advice? Clear, accurate information is critical, but so is the idea that the recipient ‘gets it’ and is able to use the information to make a considered decision based on understanding. Once again, it comes back to education.
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