FCA Handbook - COBS 19.13 Digital pensions simulations

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COBS 19.13 Digital pensions simulations

Application

(1) This section applies in relation to a firm that provides an interactive pension simulation.
(2) The exception to (1) is where the firm provides the interactive pension simulation in connection with a personal recommendation (excluding providing targeted support) to the retail client in relation to the same personal pension scheme or stakeholder pension scheme.

(1) The definition of interactive pension simulation has several components:
1. (a) It must relate to an in-force personal pension scheme or stakeholder pension scheme and be communicated to a retail client through a digital pensions calculator.
2. (b) A firm must use information it holds about the retail client and their in-force pensions in order to create an initial simulation for them. The FCA expects that, in order to generate an interactive pension simulation, a firm would need to hold:
  1. (i) sufficient underlying information relevant to the assumptions set out in COBS 19.13.5R; and
  2. (ii) relevant information about the pension product concerned, the investments held within it, and charges.
3. (c) The firm must provide the interactive pension simulation in such a way that enables the retail client to interact with it. A firm must also meet the minimum requirements in COBS 19.13.5R.
(2) Where a projection does not meet the necessary conditions in the definition of an interactive pension simulation, the rules in COBS 19.13 will not apply but the rules in COBS 13.5 may apply instead. Where neither COBS 19.13 nor COBS 13.5 apply – for example, in the circumstances explained in COBS 13.5.1CG(1) – firms may still need to comply with wider requirements in PRIN 2A and COBS.

Purpose

The purpose of this section is to ensure that firms which provide interactive pension simulations:

(1) support retail clients’ engagement with pensions and retirement planning;
(2) give appropriate risk warnings about the limitations of an interactive pension simulation; and
(3) support retail clients’ understanding and meet their needs.

Consumer Duty and other COBS rules

Firms are reminded that the interactive pension simulation and any related communications will also be subject to other general requirements in the FCA Handbook, including in:

(1) PRIN 2A.2 (Cross-cutting obligations);
(2) PRIN 2A.5 (Consumer Duty: retail customer outcome on consumer understanding);
(3) PRIN 2A.6 (Consumer Duty: retail customer outcome on consumer support);
(4) PRIN 2A.9 (Monitoring of consumer outcomes);
(5) COBS 2.1.1R (the client’s best interests rule);
(6) COBS 4.2 (Fair, clear and not misleading communications); and
(7) COBS 19 (Pensions supplementary provisions).

Digital pensions calculator interaction: minimum requirements

A firm must:

(1) provide an initial interactive pension simulation and enable a retail client to interact with at least the following assumptions contained in that simulation:
1. (a) (where relevant) the point in time the retail client will access their pension;
2. (b) the level of contributions;
3. (c) for standardised deterministic simulations, the level of the rate of return in accordance with COBS 19 Annex 7.2R; and
4. (d) the method or methods of accessing the retail client’s pension or decumulation options; and
(2) follow the interactive pension simulation rules in COBS 19 Annex 7.

Where a retail client has accessed flexible benefits, a firm is not required to enable that retail client to interact with the assumptions in COBS 19.13.5R(1) where these would no longer be relevant to support the retail client, but the firm may elect to do so.

(1) Firms are required to provide an initial simulation using default assumptions in accordance with COBS 19 Annex 7. This should include information the firm already holds about the retail client. Firms should then enable the retail client to interact with at least the assumptions in COBS 19.13.5R(1) with a view to producing further simulations.
(2) For the purposes of COBS 19.13.5R, a firm should enable the retail client to either amend default assumptions included in the initial simulation or select from different assumption options provided.
(3) For example, a retail client may be offered the option to:
1. (a) change the default date on which the retail client expects to access their pension that the firm has included based on information that firm has about that retail client in relation to the product; or
2. (b) select from a range of different dates provided.
(4) Firms may enable retail clients to interact with a wider set of assumptions than those listed in COBS 19.13.5R(1), such as information relating to costs and charges. Where firms do so, they should ensure that this function is consistent with relevant rules, including the requirements in COBS 19.13.8R and PRIN 2A.5. This includes testing this function appropriately to ensure that making it available would be consistent with COBS 19.13.10R.

Presentation of an interactive pension simulation

A firm must ensure that an individual interactive pension simulation is, or any combination of interactive pension simulations are, presented in a way that, from the perspective of the retail clients that the firm expects may access the simulations:

(1) is likely to be consistent with the information needs of retail clients;
(2) enables retail clients to understand:
1. (a) the limitations of the data and outputs, including the inherent uncertainty of future pensions savings; and
2. (b) the assumptions used to generate the simulation;
(3) is capable of being understood by retail clients, including in particular the assumptions in COBS 19.13.5R(1);
(4) enables retail clients to effectively engage and interact with the assumptions; and
(5) supports retail clients’ ability to make a decision about their pension.

Where an interactive pension simulation enables a retail client to select the type of simulation from those set out in COBS 19 Annex 7.1R, the firm must ensure there is adequate explanation of the nature of that simulation type and how it differs from the other types of simulation available.

A firm must be able to demonstrate how it has designed and presented the interactive pension simulations to comply with COBS 19.13.8R and COBS 19.13.9R.

For the purposes of COBS 19.13.8R(1) to (5), firms should consider, and aim to minimise, the risk of the retail client relying on:

(1) overly optimistic simulations;
(2) overly simplified simulations;
(3) illustrations, including graphs or charts, that risk giving a distorted view of potential performance or the desirability of the retail client taking actions to improve outcomes; and
(4) information presented in any other way that could be potentially misleading.

Enabling retail clients to retain pension simulations

A firm may enable a retail client to retain a copy of an interactive pension simulation, together with any additional information the firm considers necessary to support the retail client’s understanding of that interactive pension simulation, in a durable medium.

Where a firm enables a retail client to retain a copy of an interactive pension simulation, the firm should ensure this includes any specific wording required by COBS 19.13.8R, including:

(1) any risk warnings to help the retail client to understand the interactive pension simulation, including in relation to the assumptions on which it is based and how the approach in the digital pensions calculator may not reflect the retail client’s actual decisions or circumstances; and
(2) any additional information that would be necessary to support retail clients’ understanding of the nature and limitations of the simulation.

Testing and monitoring of digital pensions calculators

(1) Firms should undertake appropriate testing and monitoring activities under PRIN 2A, and in particular PRIN 2A.5.10R and PRIN 2A.9, in relation to their interactive pension simulations.
(2) Firms should:
1. (a) carry out testing on the digital pensions calculator; and
2. (b) use the results of their testing to ensure they are complying with COBS 19.13.8R to COBS 19.13.10R,
before the calculator and any simulations are made available to retail clients.
(3) Firms’ monitoring should include:
1. (a) regularly reassessing the digital pensions calculator to ensure it remains consistent with the requirements in COBS 19.13, COBS 19 Annex 7 and the rules in PRIN 2A, including, in particular, that any rates used remain appropriate for use in an interactive pension simulation. Firms should consider the appropriate period and intervals for reassessing the digital pensions calculator, taking into account the complexity of the tool, its functionality and the potential risk of consumer harm;
2. (b) obtaining information from retail clients about their experiences using the digital pensions calculator and interacting with simulations generally, including the level of their understanding of:
  1. (i) the interactive pension simulations they have received;
  2. (ii) information provided about underlying assumptions; and
  3. (iii) the limitations of the interactive pension simulations;
3. (c) identifying any relevant intervening events, including where there are changes to pensions legislation or actuarial good practice, which may necessitate reviewing the digital pensions calculator; and
4. (d) identifying where any changes to the digital pensions calculator, including in relation to its functionality, would amount to a significant adaptation.
(4) Based on the results of both testing and monitoring, the firm should adapt the tool, assumptions and/or the way the simulations are presented, as necessary.

Record-keeping

In order to comply with the general record-keeping obligations under SYSC 3.2 and SYSC 9 (as applicable), a firm must make and maintain a record of how it has complied with the rules in this section and under PRIN 2A. This includes the processes for approval of the digital pensions calculator, both before the firm provides any interactive pension simulations to retail clients and in relation to any subsequent changes to:

(1) the digital pensions calculator;
(2) assumptions; and/or
(3) the way simulations are presented.

(1) The record in COBS 19.13.15R should be sufficient to demonstrate how the firm has met the requirements for the provision of interactive pension simulations.
(2) The record showing how the firm complies with rules in COBS 19 Annex 7, including in particular where rates of return are referred to, should include at least documentation setting out:
1. (a) the basis of the method and calculation used for any rate (whether for a deterministic or stochastic model), including the assumptions, models and inputs (including the approach to investment growth) used;
2. (b) why the firm considered the basis in (a) was appropriate in light of obligations under PRIN 2A;
3. (c) decisions taken in relation to any rate to be used in interactive pension simulations, including the data used for stochastic models, such as the number of simulations run;
4. (d) the regular reassessment of any rates to ensure they remain appropriate (see COBS 19.13.14G(3));
5. (e) any changes made to the rate(s) used, including in relation to the methodology, the basis for the change and how it was approved;
6. (f) a clear explanation of how the firm determined annuity rates for the purposes of COBS 19 Annex 7; and
7. (g) (in relation to COBS 19 Annex 7.7R for stochastic simulations) the firm’s reasoning for key modelling choices in relation to the number of simulations and assumptions used.