The readability of product disclosure statements

Short and sweet, or just short? The readability of KiwiSaver product disclosure statements

Associate Professor Aaron Gilbert & Dr Ayesha Scott

Mid-2016 heralded a change in the way KiwiSaver schemes provide potential investors with key information necessary to make an informed decision, moving to simplified product disclosure statements (“PDS”). The new regulations, set out in the Financial Markets Act and guidelines given by the FMA, require KiwiSaver providers to provide information in a format that a “prudent but non-expert person” (FMA Guidance Note: Effective Disclosure 2012, p9) can understand. These changes are designed to improve investors’ access to information, using plain English language and a standardised structure. In turn, the simplified documents should be better placed to assist investors to make informed decisions about a “key pillar of their retirement savings strategy” (FMA’s Compliance Focus for 2013, p8).

But do simplified product disclosures help investors? Now that the grace period has ended, and Product Disclosure Statements have replaced Prospectuses as the principle source of information for investor decision making, we ask whether simplified disclosure has led to KiwiSaver investment statements that are easier to read. We use various metrics to measure readability and explore whether shorter is sweeter or, well – just shorter.

There are a number of ways to objectively ‘read’ a text and assess how easy it is to access the information contained, referred to as readability. We measure the complexity of each word (its number of syllables) and whether they are ‘everyday language’ or specific finance terms. Specific finance words and terminology are defined as words that require some knowledge of finance to understand. We use sentence length to assess how ‘snappy’ or dense a passage of text may be. Finally, we quantify how easy a document is to read by using its Fog Index, a function of average sentence length and the percentage of complex words, a measure of readability used in many fields including health and accounting research.

We calculate the readability of 21 KiwiSaver providers, taking their last prospectus and their first simplified product disclosure. Overall, our results suggest thatan investor still needs a high level of general literacy to read a simplified PDS, just as they did to read a prospectus. However, they need less specialised finance knowledge to read a PDS and this is a win for the new regulations. Specific findings include:

  • The PDSs are much smaller, now approximately 16 pages rather than 80+ pages of the average prospectus. As a result, the simplified PDSs contain 82% less words on average.
  • The average PDS has 16 words per sentence. This is 60% longer than the average prospectus (9 words per sentence).
  • The average Fog Index increased from 10.3 to 12.5 with the move from prospectuses to PDSs. This is in line with the sentences being longer in the PDSs – usually because they contain long lists rather than paragraphs. However, the lower the Fog, the more readable the text and these Fog Index values suggest investors need the equivalent education of Grade 11 (Fog = 10) to university entry (Fog = 12.5). We consider this level of general literacy to be quite high for a document designed for a general audience of New Zealanders.
  • The language used in the PDSs is in general simpler than the prospectuses and on average there are less specialised finance terms. This suggests the regulations have had an impact on the readability of investment disclosures.

Lastly, we compared the ‘Must-knows of KiwiSaver’ webpage from Sorted - a comparison website designed by the Commission for Financial Capability – to our collection of simplified product disclosures. We found that the language used in the PDSs is generally on par with the Sorted webpage, however the simplified PDSs contained 75% more complex words.Clearly, more work needs to be done to ensure the goals of the simplified disclosure regulations are met.

The results discussed here form the first phase of our study. For the second phase, we will investigate what KiwiSaver investors (or potential investors) think about simplified disclosure. Are the KiwiSaver PDSs better than the traditional prospectuses? Are the simplified disclosures more readable, and the information they contain more accessible, for their intended audience?

Our focus is on the elements of investment statements that are useful to investors and how KiwiSaver product disclosures can be improved further. Ultimately, investors require both access to information and information in a form that a layman can understand to make sound informed decisions about their retirement savings. It is the responsibility of the industry to ensure that important information, such as PDS’s and annual reports, can be easily understood by all investors.

If you are interested in this article and would like more information please contact:

Associate Professor Aaron Gilbert - aaron.gilbert@aut.ac.nz

Dr Ayesha Scott - ayesha.scott@aut.ac.nz