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Why the FSA must act on RU64

Regulatory Update 64 (RU64) was published by the Personal Investment

Authority (PIA) on 30 March 1999. Its “proper” title was Advice on Personal

Pensions in Advance of the Introduction of Stakeholder Pensions.

Although RU64 covers less than one side of an A4 sheet, from the outset it

has been contentious and difficult to interpret.

The Association of British Insurers issued two separate “Explanatory

Memoranda” to its members to try to clarify what RU64 was (and was not)

about. But even today, the central concept of “material disadvantage”

remains unclear.

With no equivalent trade body to the ABI, many IFAs had to form their own

judgement as to how RU64 should be interpreted. And with the phrase

“pension misselling scandal”still very much in evidence in the media, it is

hardly surprising that pension sales have seen a downturn. This “pension

planning blight” has been with us for over a year and is clearly linked to

the uncertainty that RU64 introduced to the market. This is particularly

ironic given the Government&#39s stated aim of using its welfare reform

programme to extend both the scope and the depth of pension savings.

So am I against RU64?

Well the answer is no – or at least not the principle of RU64. After all,

it is important that when a major change such as stakeholder is being

introduced, people should understand the implications of the change.

Unfortunately, while that may have been the intention behind RU64, it has

not happened in practice. And the situation is getting significantly worse

as we approach the launch of stakeholder plans.

Because the PIA and the FSA have avoided defining “material

disadvantage”, different interpretations have been made of what RU64

requires. For example, some people believe that only “high early transfer

value” personal pensions can be sold safely. In reality, for many people, a

“high maturity value” plan will bebetter advice and should be recommended.

This is because “material disadvantage” should only be considered in the

context of a client who may benefit from switching to a stakeholder plan

once that option is available.

But things have changed considerably since RU64 was published. From what

we now know (which is much more than was “known” in March 1999), clients

who are looking for cost-effective advice or who are looking for decent

levels of life cover in their plans or who are looking for with-profits

investment or flexibilityof investment choice – all these clients will

probably be better served by having a good personal pension than by having

a stakeholder plan.

The FSA has a responsibility to make key issues clear to advisers to help

ensure that the quality of advice given to customers – both now and in the

future – is of the highest possible standard.

This will also help ensure that advisers are more confident in advising on

pensions, so bringing to an end the damaging – to all parties –

pensionplanning blight.

There is one other very important area which must be addressed by the FSA

and which must result in clear guidance to advisers.

The final DSS stakeholder regulations state that employers will be exempt

from the stakeholder access requirements if they provide a suitable group

personal pension arrangement for relevant employees.

The detailed requirements for “suitable” plans are set out in regulation

22, including,in clause 2(b), that “…no charge or penaltyis

imposed…..for transferring…..or for ceas-ing to contribute”.

The terms of clause 2 (b) are qualified, and explained, by clause 7. This

makes it clear (to those in the “pensions priesthood” that the “charges

and penalties” in clause 2(b) do not include the deduction of normal

charges (including future charges).

So a GPP with “fair” transfer values, based on deduction of the charges

which would have been made if contributions had continued (and if a

transferhad not occurred), will satisfy the Government&#39s requirements.

But does it satisfy RU64?

Common sense says RU64 must be changed – or redefined – to ensure

consistency with the DSS regulations. The FSA has a duty to clarify the

situation. And it must do so. Urgently.

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