STOCHASTIC IS NOT THE NEW SEXY
FCA IS RIGHT TO QUESTION CONSUMERS’ UNDERSTANDING SAYS PRESTWOOD
The FCA has expressed concerns about consumers’ ability to understand the outcomes of stochastic modelling*. Used alone, Prestwood agrees it serves only to confuse consumers. However, a picture paints a thousand words and transparent cashflow modelling helps clients visualise the risks and rewards of DB transfers and makes advice justification easier.
Prestwood Software, provider of leading cashflow modelling software Truth®, is preparing a response to the FCA’s consultation paper on replacing TVA with an Appropriate Pension Transfer Analysis (APTA).
Julie Lord, CFPCM FCSI FPFS Director of Prestwood and CEO of Magenta FP said:
“Although entirely transparent, I don’t believe that a stochastic analysis adds any clarity for the consumer. Telling the client there is a 96% probability that they can achieve a specific level of income in retirement is no substitute for ongoing planning and advice incorporating a lifelong cashflow model which takes into account all of the client’s lifestyle goals and objectives.
“The stochastic model has its place in helping to present a range of investment results for a pension fund which is why Prestwood’s Truth® has a built-in stochastic calculator – but then we need a more deterministic cashflow model to take account of all client circumstances. Stochastic modelling is not the new sexy.”
This picture shows a 96.24% chance of having at least £100k left in their pension fund after 30 years of retirement. But it hasn’t shown whether that is enough for the client to enjoy their desired retirement lifestyle.
In this case, modelling 4% annual withdrawals increasing by 2% pa could generate the chart above which can also be used to demonstrate the difference between leaving funds in a DB scheme and transferring them. The chart is client specific, taking into account all client assets plus their goals and objectives – rather than just looking at the pension fund in isolation.
Julie Lord continued:
“Pictures paint a thousand words. These simple images speak for themselves and are easy for consumers to understand. Prestwood’s powerful tools allow planners to illustrate the potential benefits of DB transfers to their clients, but also to highlight the potential risks. Our Capacity for Loss tool allows clients to visualise the impact of a market fall on their desired lifestyle in retirement, and how this could impact their lifelong cashflow picture.
“We believe that our modelling software can present complex financial information to consumers in simple terms and provide the evidence required by the FCA to satisfy its concerns about DB pension transfer suitability.”
Notes to Editors
- Prestwood Software offers complete end-to-end solutions for Financial Planners.
- Prestwood Software Ltd is part of The Prestwood Group, founded by Paul Etheridge MBE. 3. Prestwood software is developed by Financial Planners for Financial Planners. The Company exists solely to develop and support top of the range programs for Financial Planners in the UK, and Prestwood® Software is widely recognised as the UK’s leading software in the lifestyle linked sector.
- * FCA email@example.com
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