Personal Pension  

Moss: review of stochastic modelling needed

Next year’s pension reforms mean the FCA needs to look into the issue of stochastic modelling, Bruce Moss has said.

The strategic director of Newbury-based eValue said some stochastic modelling used by advisers unreliable.

Mr Moss was speaking as he unveiled a white paper on the pension freedoms which raises concerns about the industry’s readiness for the reforms.

The 22-page paper - called Big Changes, Big Challeges: Unresolved issues in the run-up to the new pensions regime - makes a number of recommendations to the Government, the industry and the FCA.

One of these is for a thematic review by the FCA into the issue of stochastic modelling.

Mr Moss said: “Stochastic forecasting is uniquely well-placed to help what you are seeing as someone building up an annuity.

“I think the FCA needs to do a thematics review of stochastic modelling because there is potential for product bias.

“Depending on the model you use you can conclude drawdown is the best option or an annuity is best value.

“Stochastic modelling just shows a point in time. What it is not good for is telling people about a journey and because retirement is a journey you cannot use a model which is just a snapshot.”

Mr Moss, who said he has contacted the FCA requesting a review, founded eValue in 1993 when stochastic modelling was made available to people with defined contribution pensions for the first time.

He said: “These models are widely used and you can come to very different conclusions.

“A lot of product providers offer some sort of modelling for advisers when they are working with their clients.”

Mr Moss said he is in favour of the pension reforms but said they are being introduced too quickly.

Among seven recommendations, his firm’s white paper calls for better “signposting” to help consumers understand the difference between guidance and advice as well as restricted and independent advice.

It also calls for the industry to work on providing simplified advice and a long-term investment in resources by the industry.

Mr Moss said: “The problem is our industry likes to make things complicated.

“The customers that retire over the next two or three years are the guinea pigs.”

Adviser view

David Penny, managing director of Taunton-based Invest SouthWest, said: “The analysis used to derive the results could be anything and it is very corruptable.

“There is a tendancy for advisers to rely too much on it and there needs to be a real focus on the variables.

“It is a tool we use but what it must not be is a crutch because it is very fallible.”