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9th Jul 2013
The degree of change needed to the systems which generate Key Features Illustrations (KFIs) brought about by the implementation of the RDR was the most complex, and costly, for many years. However, the changes due for implementation by April 2014 are even more far reaching. They will test the capacity of the industry and its systems to implement the changes in a cost effective way. However, they also introduce the opportunity (requirement) to reduce the complexity of the output and hence improve the customer experience.
The change in the intermediate rate of projection from 7% to 5% for pension products and ISAs (and from 6% to 4.5% for life insurance and other taxed products) has been known for some time. Along with this change comes the formal requirement that the starting point for setting rates for different asset classes should always be to define an intermediate rate that is appropriate for the type of investment (not assume that the maximum rate set by the FSA should be treated as a standard rate but revised downwards where appropriate). In practice, the majority of providers have already moved in this direction.
The final change in this area is that the lower and higher rates should now always be set on the basis of fixed +/- 3% flanking rates, even if this results in a negative rate applying.
CTC Elements default basis allows providers to specify varying growth rates for different asset types. The rates are specified separately for low, mid and high bases. Meaning that providers can already input the new flanking basis referred to above.
A much more fundamental change, at least from the viewpoint of the consumer, is the introduction to the KFI regime of Inflation Adjusted illustrations for all pre-retirement pension illustrations. The requirement is that all the figures presented in the relevant KFIs should be presented in real terms (or as ‘today's money'). This change puts in place the long held desire of the regulators to bring together the SMPI and KFI regimes.
For the present the regulator has stopped short of mandating the use of Real Terms illustrations for Income Drawdown purposes and the production of KFIs on the current Nominal Terms basis can continue to be used.
Due to the clear possibility of confusion amongst customers of a change between Real Terms and Nominal Terms where a customer is approaching retirement, but fully intends to leave the funds invested, CTC Elements Illustrations module will in future allow either type of illustration basis to be selected.
The final type of pre-retirement pensions illustration addressed by the regulators relates to Transfer Value Analysis from defined benefit arrangements. Here the regulator does not mandate a change, but does encourage one. Where CTC clients wish us to, we will facilitate the use of either real terms or nominal on an illustration by illustration basis.
The new COBS rules also introduce some mandatory changes to the wordings of the Effect of Deductions table.
It should be noted that the regulator specifically understands that the introduction of inflation adjustment will result in customers being shown illustrations where the effect of their pensions saving produces negative results in ‘today's money' terms.
This area introduces perhaps the greatest potential for change, and applies not just to pensions but to all types of products to which the KFI regime applies. The regulator has long believed that current KFIs are poorly designed, too technical and too long. They are looking for significant simplification and have researched drafts which are typically half the length of many currently produced by providers.
They have now embedded into COBS specific guidance which amongst other things says that a firm should:-
CTC recognises that, over the years, compliance concerns have led to a build-up in the complexity in KFIs and welcomes the opportunity to endorse much more user friendly KFIs in the future. To this end, CTC has already produced a house style based on the new rules for use as a basis going forward.
It is notable that, although the regulator only conducted research around pension KFIs, they have actually chosen to extend this rule change to the whole range of products to which KFIs apply.
In the spirit of bringing together KFI and SMPI regulations the DWP has also consulted around the production and dissemination of SMPIs and other documentation.
Firstly, it has suggested that rather than specifying that the annuity basis to be used in SMPIs to always be based on inflation linked annuities and with allowance for a dependant's pension, in future customers would be able to choose a more suitable basis for their circumstances. Further it is suggested that the option of taking tax free cash at retirement could be illustrated.
Although such flexibility is to be welcomed, CTC doubts the practicality of a variable approach given that most SMPI statements are produced in bulk alongside the other annual disclosure requirements. However, if providers and schemes were able to collect and store a customer's preference then there is no reason why illustrations could not be produced on this basis.
CTC Elements already accommodates client specification of the annuity basis at system level (ie including the ability to specify an increase and dependant's benefits options other than those currently required for SMPIs).
The second element of DWP consultation relates specifically to clarifying the provision of SMPI and other annual disclosure material in electronic form. This falls into line with the way we are becoming used to obtaining information on a whole range of financial and non-financial products.
The DWP most helpfully suggests the basis on which such a change could be implemented. The new requirement being that information can, by default, be provided in electronic form provided that a customer, after 3 reminders, has not opted for the paper based version.
This provides the opportunity for significant savings for the industry. Again, CTC has systems in place that can allow providers and schemes to implement such a paperless approach in a highly cost effective way.
The final set of changes due for implementation in April 2014 relate to the proposals announced in the budget to reduce the annual allowance from £50,000 to £40,000 and the lifetime allowance (LTA) from £1,500,000 to £1,250,000 from April 2014. Alongside these changes HMRC are introducing two new types of protection:-
These changes are still, in part, subject to consultation but CTC can confirm that appropriate changes to relevant systems modules will be made available at the appropriate time.