Messy world planning
My dad hit eighty at Christmas. For the last fifteen years, he's been in receipt of an RPI-linked (max 5%) final salary pension, of a traditional model, and over the years has seen steady inflationary increases, petering out somewhat over the last few years.
Suddenly, out of the blue, he has received a communication from the scheme administrators, offering him the option of converting his inflation-proofed pension to a level one, which will never benefit from future increases. In exchange for foregoing that RPI protection, he'll be offered a one-off increase to his pension of 15% - the widows pension benefits from a similar uplift. Dad's never been great with figures, so he handed me the paperwork and asked, "So what should I do?"
Any thoughtful IFA will know that this kind of question, emanating from a close relative, ups the stakes in terms of pressure. However, we have all the right analytical tools, and the settled belief that as a result, we have the capacity to deliver the right answers. But what if things are not that straightforward?
As it turns out, this particular financial decision is one which hinges on a number of imponderables. There's the not insignificant matter of longevity, although it makes sense to work off industry-standard mortality stats, with the usual caveats. Then there's the matter of future inflation rates, versus current inflation rates, versus average inflation rates. That feeds through to an evaluation of 'cross-over age' and then 'break-even age'. And then there's the rather hard-nosed evaluation of the implications if the rest of my dad's life mirrors the textbook, in terms of longevity.
In short, one tests out the same conundrum from as many perspectives as possible, hoping that in so doing the mists will clear sufficiently to supply us with a nice, clear, objective metric. What we're looking for are the means to give a definitive answer to a very simple question: "Should I stick with the existing RPI-linked pension, or surrender my rights for an immediate uplift?" With any client, one is looking for these kinds of certainties: with one's dad, one wants them gilt-edged.
And, on a personal satisfaction and credibility level, that kind of outcome matters. We think about our role. Thirty-three years of experience in the sector. Plenty of the right kinds of qualifications. A reference library which could easily crush an elephant. More whizzy, analytical tools than you could realistically shake a stick at. Surely to goodness, if anyone can provide the answer to this one, it's me.
But no. After hours of work, and careful rechecking of the figures, it's still all up for grabs. Welcome to the world of Messy Advice. What do you do when the answers aren't clearcut? What do you do, in particular, when the consequences of supplying a wrong answer are apparently so high? What do you do when, frankly, the outcome could go either way - when there's only a binary choice, the odds are balanced, and nobody wants to be the one to pick the unsatisfactory outcome?
ValidPath Member Development
As part of our ongoing support for existing Member Firms, we're planning a 'Messy Pensions' event for a little later this year. We're currently talking to a few specialist pension-providers about content.