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FCA pension illustration reforms ‘will create trust-based bias’

Insurers could face an exodus from contract-based pension schemes next year following an FCA overhaul of illustrations, experts have warned.

Under changes announced by the regulator in March, providers will be required to show customers the impact inflation could have on investment returns from April 2014.

The new rule, which will apply to generic and personalised pension illustrations for both personal and stakeholder schemes, is being introduced by the FCA after research conducted by the regulator suggested customers find this approach easier to understand.

Insurers have previously warned pension sales could suffer as a result because they would appear to be worse value than products where illustrations are based on nominal returns, such as Isas.

The move to inflation-adjusted illustrations will also see providers required to project a negative investment return to customers for the first time.

CTC Software, a firm that prepares key features illustrations for providers, says the reforms will create a bias towards trust-based schemes which are not covered by the FCA rules.

CTC director Nigel Chambers says: “Contract-based schemes will need to send members a document saying real investment growth could be negative.

“Master trusts do not have to send that document out, so I would expect to see greater opt-out rates in contract-based schemes as a result.”

Technology and Technical managing director Kim North says: “This is going to create a clear divide between contract and trust-based pension schemes.

“Unless a standard illustration regime for all pension schemes is introduced I think we will see a shift away from contract-based schemes and towards master trust arrangements.

“Under these proposals it is possible that different advisers will project different growth rates for the same fund, which flies in the face of the RDR.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. As with key facts, client agreements, terms / conditions and now illustrations, I would be surprised if any client actually reads any of this stuff. The point that most regulators seems to miss is that the more information you provide the less relevant it becomes (to the clients mind) and therefore easier to ignore. We need to simplify things and to engage clients in this process, not isolate them with meaningless paperwork. I fail to see where they get this research from as I have yet to meet one person that has been asked their opinion. Yes the effects of inflation are important to our clients and especially to us as an industry. However chopping down rain forests just to fill up our bins so they can be recycled is crazy all so we can tick a box saying ‘I have told you’ ….. or an I being too naïve and honest?

  2. Greg – The FCA seems conscious of your comments. Hence (following research with consumers) they have directed the industry (PS13/2) to produce a much more simplified KFI.

  3. All illustrations are worthless. We need to encourage people to look more closely at monitoring their accumulated value as opposed to future estimates which are misleading whether they are positive or negative.

  4. This just makes me giggle. PP sales were going to fall off the cliff anyway with AE introduction apart fro the self employed that is. Apart from that I could not tell you the last time I used an illustration’s projections with a client, it must be in the 90’s. I do mention them to the client but emphasise the fact they are meaningless but are required to be on there. The only useful part of the illustration is the RIY to show the plan costs and even then it is the illustration of my recommended provider which 99.9% of the time the client accepts. I do have other ones non file for them if they wish to see them. So to be honest advisers should not get their knickers in a twist over this. It will be as damp as commission disclosure on th eillustrations was in the early 90’s.

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