Is the FSA demanding too much of Statutory Pensions Illustrations?
One of the most significant findings from the recent annual provider survey,which Dunstan Thomas commissioned in March this year,revealed that accurate disclosure of ‘effective deductions on illustrations’ is now right at the top of an already long list of providers’ concerns as they work through an avalanche of administrative changes ahead of the Retail Distribution Review (RDR) deadline in just six months time.
So why are providers struggling so much with disclosing effective deductions on illustrations? The reasons are linked to imminent reduction in projection rates1 that have been promised by the Financial Services Authority (FSA) and will also need to be implemented in illustrations early next year.
Let’s take a step back to look at the original intention of projection rates in illustrations as laid out in the FSA’s Conduct of Business Sourcebook (COBS) projection requirements. They are:
- To enable consumers to see what returns they might get on their investment.
- To compare product charges.
- To see how charges could affect returns.
The main problem is that projection rates and the effect of charges on these projection rates are clearly inter-dependent. So when the FSA demands the use of lower projection rates as the economy deteriorates - moving the mean growth rate from 7% down to 6%this fall has a knock-on effect on how charges affect these lower projected returns. If customers weren’t feeling poorer in retirement at 7%, take a look at PwC’s recent recommendations for projections to be set at between 5.25% and 6.5% to bring them closer to reality. We won’t know the actual numbers until the end of 2012 apparently – coincidentally exactly when RDR comes into force.
So in the meantime, an uneven playing field is being created by the fact that some providers have moved faster than others to make anticipated projection rate changes and during this hiatus period the projection valuations become useless for the purposes of comparing products.
The problem is being compounded further by the FSA’s enthusiasm for asset-class based return projections which are naturally not yet standardised (no doubt PwC is working on it). Again some providers move faster than others to create asset-class and portfolio-specific illustrations.
So within a few short years we have moved from a world of standardised projections expressed in Key Features Illustrations (KFIs) and Statutory Monetary Purchase Illustrations (SMPIs) upon which products really could be compared based on projected values, impact of charges and Reduction in Yield (RIY) calculations; to one in which it is almost impossible to compare two products based on growth projections and the impact of charges alone.
The upside is that the illustration customers will receive in the future will more closely resemble real growth, certainly if an inflation calculator is added; but the downside is that it may look nothing like a different provider’s illustration. Or at least this is the danger at present.
Such is the complexity of trying to use illustrations to compare ‘like with like’ right now that we have been working with several providers to implement a simplified RIY calculator within the illustration while supporting the communication on projections and the impact of charges with an additional letter to support IFAs’ disclosure communication with the customer. Providers see this as a positive way through what is a potentially nightmarish communications job.
As if things weren’t difficult enough for ‘old guard’ life assurers and pensions providers that are used to operating with KFIs and SMPIs in a constant state of adjustment, March 2012 saw the publication of the FSA’s CP12/05 which charges SIPP providers with the same level of disclosure as other retirement product providers. All providers are in it together now. Except that SIPP operators also need to disclose whether they retain bank interest or commissions and articulate the impact of these ‘secret profits’ on member projections which that they will have to give out going forward.
This issue was raised as a concern more than a year ago when CP 11/3 was published but the FSA is now demanding full disclosure in this area to be in place by the end of the year.
“We propose to amend the rules to require firms to show whether they retain bank interest or receive commissions on cash held in a bank account within a personal pension scheme,” it says.
Furthermore full KFIs, including projections, effect of charges and reduction in yield calculations, will be required of SIPP providers on top-ups and other asset changes in investors’ pots, even when no income drawdown is being taken.
The SIPP provider community, which is exposed to this hiatus for the first time, again by year end, has been vocal in its concern. Steve Cameron, head of regulatory strategy at Aegon recently went public to ask the FSA to delay changes to SIPP projections that will require non-insured SIPP assets and their charges to be included in projections.
“The cost and complexity of projections will go up dramatically and it will be risky for us to integrate changes to charges in the system while there are other things happening with the projection rates.”
Getting illustrations right going forward will not be easy as all pension providers now walk the tightrope between using new projection rates as they are mandated by the FSA while altering charges in response to market conditions and still offering illustrations which are standardised enough to be of use for comparison purposes in product selection.
Clearly the timing of these changes is very tough for providers given their proximity to RDR and Auto Enrolment. However it is our firm belief that illustrations must continue to be evolved in many of the ways that the regulator is requesting. For without this evolution illustrations will fail to properly inform customers about whether they are still on track to reach their target retirement income given changes in market conditions.
1 Source: http://www.fsa.gov.uk/static/pubs/other/projection-rates12.pdf
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