If MVC models are capable of producing such a distorted picture of the comparison between drawdown and annuity, they are equally unreliable for helping a pensioner manage drawdown in retirement. What is needed is a model that shows how investments may move from current market conditions into the future and this is precisely what an ESG does.
The main conclusion to be drawn is that due diligence needs to be undertaken on the ‘stochastic black box’ used for forecasting retirement income. The wrong model has the potential to create serious problems for pensioners. Currently, there is no transparency or requirement for the providers of stochastic models to make any information available. This makes comparisons between models almost impossible and due diligence extremely difficult.
The FCA needs to set out some disclosure standards for the producers of financial planning tools and stochastic asset models. This should be done before problems arise, not afterwards, when the claims for compensation from pensioners start to roll in.
Bruce Moss is founder and strategy director of risk profiler eValue
Key Points
Getting off to a bad start can ruin even a cautious drawdown strategy.
Because they ignore the ups and downs of investment cycles, mean co-variance models are not suitable for use for pensioners wishing to plan income withdrawals.
Due diligence needs to be undertaken on the ‘stochastic black box’ used for forecasting retirement income.
