Policy Statement - PS 13/2 some initial thoughts
25th March 2013
The purpose of this Policy Statement PS 13/2, is to introduce inflation adjusted illustrations for personal pensions (to match SMPI’s) and to provide new guidance on the preparation of product information to make it easier for consumers to understand. So will this policy statement achieve its aims in relation to the illustrations and are the purported costs to the industry being £29.2m an accurate reflection of the costs involved with implementing this change.
It should be remembered that these illustrations are only being extended to personal pensions (pre-retirement at this point in time) and not annuity, drawdown or other packaged products eg, ISA’s, so there is the potential, and section 2.14 of this policy statement confirms that many respondents to the original consultation paper also share this view, that pensions could be shown to be poor value for money when compared. The mitigation for this is for a statement to be included which will confirm that price inflation reduces the worth of all savings and investments. Will that be enough? Consumers, according to the policy statement, on the whole appear to agree with the new calculation basis but were they made aware that this calculation method was only going to apply to a portion of the illustrations that they see on a regular basis? In my opinion, although I agree with the requirement to show an inflation calculated illustration, a consumer could end up being more confused and if a pension is shown to be a poor savings vehicle then the consumer will vote with their feet and you will see an increase in other financial products being used to facilitate retirement savings. From a software provider point of view, we will need to work with our many clients to understand what their requirements are in relation to their savings and drawdown illustrations and this could lead to increased costs if multiple calculation basis are required.
The cost benefit analysis that has been produced as part of this policy statement attributes that the compliance cost of £29.2m for implementing these changes. On the face of it, that does seem a large cost for the industry to bear but is it realistic? If you look at the table published by the FSA, they are estimating that the big 6 providers will incur a cost of £2,632,000 each to implement this change and that a smaller provider (including SIPP providers) will incur a cost of £10,000. I am not sure on their basis for calculation but the £10,000 per ‘small’ provider is in my opinion unrealistic once you take into account the time that will be taken to develop the new calculation basis and then the new testing and associated requirements that will need to be designed and undertaken by the provider themselves. The cost will invariably be more than that quoted.
It is worth noting at this point that these requirements are only required for new pension contracts beginning after 6th April 2014 but there appears to be no comment made regarding increments and on what basis these should be illustrated although I may have missed it or their interpretation of new pensions contract is increments as well.