This month the FSA consultation paper CP 11/03 was released to improve pension scheme disclosure. In effect the consultation looks to ensure firms give consumers enough information about a product’s charges, risks and main features, so as to enable them to make an informed decision.
At Dunstan Thomas we are always interested in the regulator’s involvement in this part of the market. Our Imago Front Office product is invariably affected by these. The outcome of CP11/03 will have an effect on Imago , which of course will affect your usage.
In this article we look at some of the key features, an opportunity to work closer with Dunstan Thomas and the regulator, and an opinion on the impact of these changes.
Here are some of the key features of the CP 11/03:
Cost comparisons
To ensure that firms give consumers enough information about a product’s charges, risks and main features to enable them to make an informed decision. This should be done in a way that makes it easier for consumers to compare similar products. Where reduction in yields are shown, they must be shown for product charges and for charges overall.
The example table in the consultation paper shows how the effect of charges table must change to show:
1. product charges as a distinct column to total charges,
2. to provide better explanations for the tables,
3. use of more descriptive headings,
4. reduce the length of the tables, by requiring rows only for the year of the chosen retirement date and the first five years of the pension.
These changes are to be made to new business as well as in-force illustrations. The consultation paper lays out some examples. The table below shows an example of the columns proposed for disclosure.
RDR, charges and costs comparisons
RDR rules on adviser charging, ban the payment of commission for advised sales of investments and personal pensions (including SIPP). Product providers that facilitate payment of adviser charges and consultancy charges will be required to describe product and adviser charges separately. The new format for the charges information will need to show the effect of each type of charge in the ‘effect of charges’ table and ‘reduction in yield’ information.
It is believed that these changes will enable consumers to compare product charges on a consistent basis and understand the effects of payment through the product in comparison to payment of the adviser charge separately.
What is a SIPP
The consultation looks to clarify what a SIPP is and in turn improve scheme disclosure. Effectively the definition of SIPP will include any pension product that allows fund or asset class choice. The consultation paper shows some interesting market data that approximately 150 companies are active in the pension market.” The top five pension providers account for more than half the market by number of sales and, together with the second tier providers, cover more than 80% of the market. The small providers share just under 20% of sales.” The FSA estimates that the costs on average of these changes are £775,000 per provider. Clearly users of Imago Front Office will have these changes delivered through the licence fee.
Forthcoming changes will look to:
1. amend disclosure for SIPPs containing commercial property, commodities, ETF’s and shares,
2. disclose bank interest on cash held in the SIPP,
3. the importance of RIY as a method for comparing charges.
Interest
Where interest is retained, it must be disclosed alongside information about charges payable and bank interest rates. By disclosure, this would infer a consumer’s consent of the arrangements provided by the provider and administrator. These rules come into force in April 2012.
Generic illustrations
Generic illustration usage is to be discouraged due to the need to reflect the range of different charging arrangements possible. There are some cases where charging in GPPs is consistent. In these cases generic illustrations will be allowed.
Harmonising projection assumptions
Ensuring there is harmony between projection assumptions made for SMPI (7% less 2.5% for inflation) with other types of illustrations.
Inflation adjustment
Inflation-adjusted projections for pensions are to become mandatory.
In partnership with Dunstan Thomas
The consultation process ends on the 3rd May. We are happy on behalf of our customers to respond to the consultation process. If you would be interested in Dunstan Thomas participating, please do hesitate to contact me, Chris Read, on cread@dthomas.co.uk, whereupon we can review and respond to the questions that the consultation paper poses.
Our opinion
Whilst we welcome these changes in disclosure, ensuring that all providers of pension products illustrate and disclose on the same basis, the devil is in the details as always.
An area that comes readily to note is in the use of RIY where it is being used in pension arrangement that covers more than one type of asset class. In the example that the FSA uses, they show an illustration with a UK equity fund and a UK bond fund. Each of these funds show differential charges as expected. Both of these funds will project at different rates respective to their asset class performance.
RIY figures are sensitive to the projection rate that is used. Without, therefore assessing the impact of RIY on each fund, and the standardisation of each projection rate that a respective asset class can use, the consumer will be misled when it comes to product comparisons, let alone fund comparisons.
To disclose standardised fund based RIY seems to be the way to go. The challenge arises in it being able to disclose this information so that is clear and concise and easily understood by the consumer.
