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Helping clients visualise pension transfer risks and rewards – cashflow over stochastic modelling

22 August 2017

Julie Lord, director of Prestwood and chief executive of Magenta FP, says she shares the FCA’s concerns around simple use of stochastic modelling when advising on DB transfers. It requires a more rounded approach, she argues.

In its recent consultation paper on pensions transfers – CP17/16 – the FCA expressed concerns about consumers’ ability to understand the outcomes of stochastic modelling*.  Used alone, we agree 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.

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.

The above 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.


However, modelling 4% annual withdrawals increasing by 2% pa could generate the chart below, 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.

Pictures paint a thousand words.  These simple images speak for themselves and are easy for consumers to understand.  Prestwood’s 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 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.

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