It is potentially stretching matters a little to compare the FCA’s Retirement Outcomes Review to a work of art, but if we permit ourselves the analogy then the type of art which would seem most apt would be the triptych.
For those who might not be familiar with the triptych, it is a work of art consisting of three connected panels, each of which shows separate, but generally related, paintings or carvings.
The description seems appropriate when we remember that the measures being introduced by the FCA are also split into three separate, but related, phases.
The first of these involved changes to the timing and content of wake-up packs, with the rules taking effect from 1 November 2019.
The third phase involves the introduction of drawdown investment pathways and changes to drawdown annual statements, and will not come into force until August 2020.
However, this article focuses on the second panel in the FCA’s triptych which will take effect from 6 April 2020 and involves changes to the requirements governing drawdown and UFPLS key features illustrations (KFIs).
In relation to pension schemes, the FCA requires KFIs to be issued to clients when they enter into a contract for a new product.
The FCA’s rules treat drawdown as a new product, meaning that a KFI has to be issued when the client first goes into drawdown.
In addition, when a client varies an existing contract, FCA rules currently create a requirement for clients to be provided with sufficient information to understand the effect of that variation.
What goes into a KFI?
Before looking at the illustration changes you can expect to see from April 2020 it is worth considering briefly the constituent parts of a KFI.
If asked to describe the contents of a KFI, I suspect most people would focus on the projected value of the pension scheme a number of years in the future.
This information will be familiar to advisers as the “What the benefits might be” section, covering the amount of income that will be payable from the fund and its projected value at five yearly intervals with each of those figures projected using lower (2 per cent), intermediate (5 per cent) and higher (8 per cent) rates of return.
However that element, officially termed a ‘standardised deterministic projection’, is only part of what goes into a KFI.
Other than the projection, the other main element contained within a KFI is ‘appropriate charges information’.
This charges information is itself made up of a number of elements.
- A description of the nature and amount of charges a client will or may be expected to pay in relation to the product including, where relevant, any investment charges within the product. If applicable a description of the nature and amount of adviser charges a client has agreed may be taken must also be included;
- An effect of charges table;
- Reduction in yield information; and
- For a personal pension scheme, the amount of interest that the administrator or trustee retains in relation to cash held in the pension, if any.
If your client’s fund will be reduced to zero following crystallisation the effect of charges table and reduction in yield information do not need to be included, but the other elements of the ‘appropriate charges information’ do still need to be supplied.
Finally, in addition to the projection and charges information, a KFI for a personal pension must also include details of the rate of interest that will be earned on cash held in the scheme bank account.
Questions appear on the last page of this article.