In recent months there has been a lot of speculation about whether or not the FSA will make drawdown a permitted activity. While there is certainly a large body of opinion in favour of this approach, the current FSA review is still under way and it is as yet unclear what conclusions will be reached. This delay should not be seen in a negative light, however, as it shows how seriously the FSA is taking this subject.
The FSA (PIA) has been remarkably proactive about drawdown and associated retirement options.
You should already be familiar with two regulatory updates on this subject – RU55 and RU67. If you are not, then this is a cause of concern and will no doubt be of interest to the FSA in its current review.
As a reminder, RU55 was titled Continuing Professional Development Guidance Notes – Pension From Withdrawals And Guidance On Illustrating Critical Yields For The Purpose Of Pension Fund Withdrawals.
RU55 was issued in August 1998 and it was the first occasion that the regulator had issued a full set of guidelines on the appropriate training necessary to fulfil their requirements.
This was followed in June 1999 with a further update (RU67) on personal pension fund withdrawals.
Among other things, this second update recommended that all advisers active in the area of pension fund withdrawal (and associated business) should be familiar with the training material issued by the Chartered Insurance Institute – Planning For A Flexible Retirement: A Guide To Pension Fund Withdrawal And Other Retirement Options.
At the end of the update, the PIA stated it had “encouraged” the CII to provide an examination based on the learning material referred to above. It also stated that, while at this stage it did not plan to introduce a new permitted activity for pension fund withdrawal, this decision was to be kept under review in the light of findings from future visits.
Many IFAs have followed RU55 and RU67 and many firms have undertaken specific training in the areas of retirement options but has this training been sufficient?
This is an impossible question to answer in this article as each IFA has their own blend of existing knowledge or experience in this area and specialities within an individual client bank would influence their activity.
As retirement options cover all clients at retirement, it is a fair assumption, however, that all IFAs should be familiar with the options available to at least the level required under RU55 and RU67.
It is also true the CII has witnessed a demand for some form of assessment in this area. Initially, this meant that a CPD assessment pack was developed to support the workbook but the CII, through its financial services arm Sofa, was aware that many in the market would welcome a formal examination – this was even without the PIA's kind “encouragement”.
During 1999, Sofa and the CII conducted research in the market on the viability of developing a new examination. A wor-king party of practitioners then met to develop the CII's approach.
Although this was a CII/Sofa initiative, the LIA was invited to participate so that the widest cross-section of the market could be represented. A number of key points emerged:
1: Drawdown was only one of many options open to clients at retirement and a full understanding of all the options was necessary.
This should apply to all advisers including those engaged in “simple” annuity purchase.
2: Many IFAs believed the area of retirement planning was so complex that a separate examination in this area would be welcome as a way of ensuring standards.
This new examination would be complementary to G60 – it was not felt that G60 covered the area in sufficient detail and equally it would be impossible to extend G60, which was already viewed as a very demanding paper.
3: Drawdown and other options were not only a pension issue but also an “investment” issue, due to the fact that good investment management was seen to be paramount if these plans are to succeed.
4: The idea of a half-credit AFPC paper was welcomed by practitioners as this would not only provide a stepping stone from FPC to AFPC but also enable fairly narrow areas to be examined to an honours degree standard.
Based on the above, the working party went on to develop a draft syllabus for two new half-credit examinations – K10 Retirement Options and K20 Pensions Investments.
The first sitting of K10 will be in April 2001 and the existing workbook, Planning For A Flexible Retirement, has been revised to satisfy the new syllabus, and retitled, Retirement Options, the course book for K20.
Pension investment is currently nearing completion and should be available by the end of April and the first sitting of this examination will be in October 2001.
So what does K10 Ret-irement Options cover? Very simply, everything associated with the retirement alternatives, including annuities, drawdown, phased, Sipp and a basic review of the investment issues.
In particular, K10 is designed to satisfy the knowledge requirements laid down in RU55.
Some big IFA firms have already stated their intention to make K10 Retire-ment Options a compulsory paper for all their advisers and many expect their advisers will then voluntarily move on to K20 as this will then provide them with the full AFPC credit.
The availability of half credits has raised a few eyebrows as some (incorrectly) believe this will diminish the AFPC standard. This is certainly not the case.
The new half credits follow the modular approach now favoured by most universities in the awarding of degrees and each two-hour examination will still be set and marked at an honours degree standard.
By offering subjects in bite-sized chunks, it should be easier for FPC-holders to progress to AFPC and membership of Sofa (MSFA). Equally, these half-credit papers will provide additional choice and flexibility for those moving up to ASFA and FSFA.
So will the FSA make drawdown a permitted activity? The jury is still out on this one but it is fairly safe to say that any introduction of a permitted activity is unlikely to be restricted to drawdown only. Retirement planning requires an understanding of all the retirement options.
However, it should not be the regulator who dictates how K10 and K20 are used. This is up to us – the market. If we really want to be recognised as a profession we need to take ownership of our own professional development and all advisers should seriously consider sitting these new papers.