A significant regulatory timing mismatch threatens to leave retirement savers vulnerable, as a critical initiative designed to help them is set to launch months before the tools supporting it are properly vetted. Financial technology provider EV has raised an alarm over a potential two-year “guidance gap” in the Financial Conduct Authority’s (FCA) updated pension market regulations. The FCA’s “Targeted Support” initiative is scheduled to begin well ahead of the implementation of new, more stringent rules for the pension projection models that are fundamental to its success. This discrepancy creates a period of material risk where consumers could make life-altering financial decisions based on projections from outdated and potentially unreliable planning tools. This situation runs counter to the core principles of the FCA’s own Consumer Duty, which explicitly mandates that financial firms must use realistic and justifiable assumptions in the tools they provide to the public. The delay in finalizing the new regulations for the underlying models could inadvertently undermine the very consumer protections the FCA aims to bolster.
Outdated Models Create a False Sense of Security
The new FCA guidance aims to rectify several long-standing problems inherent in current pension modeling, which often provide an overly optimistic and misleading view of retirement outcomes. A primary area of concern involves the establishment of Capital Market Assumptions (CMAs), which are used to project variable asset returns and future inflation. These crucial inputs often lack sufficient scrutiny, leading to projections that may not reflect realistic market conditions. Another significant flaw lies in the widespread use of deterministic projection models. These tools frequently assume a constant, linear rate of return for investments, a scenario that rarely occurs in the real world. This approach dangerously ignores “sequencing risk”—the outsized negative impact of poor market returns during the initial years of retirement drawdown. By failing to account for market volatility, these models can lull consumers into a false sense of security about the sustainability of their retirement income. A further misleading practice is the use of current annuity rates to illustrate a potential purchase decades from now, an assumption that is highly speculative and provides little practical value for long-term planning.
To mitigate these risks, industry experts called for the FCA to align the implementation timelines for its “Targeted Support” initiative and the updated guidance for pension projection models. A strong recommendation was made for financial firms to act proactively on the intent of the new regulations immediately rather than waiting for the final deadline to be enforced. This proactive stance was seen as essential to protect consumers from the outset. Furthermore, a crucial proposal was put forth advocating for a new standard of due diligence. This standard suggested that all guidance modelers, whether they employ deterministic or stochastic methodologies, should have their core assumptions formally reviewed and signed off on an annual basis. The review process was to be conducted by suitably qualified, independent experts to ensure objectivity and rigor. This step was considered a fundamental requirement to guarantee that the financial planning tools powering critical consumer decisions were built on a foundation of reliability and realism from day one, thereby upholding the spirit of the Consumer Duty.
