“Increased transparency on performance and charging structures is a step forward in the pensions market and should give consumers far more clarity.”

The FSA has laid out new rules to help consumers understand the cost of the self-invested personal pension.

The City regulator has told companies providing self-invested pension plans (Sipps) that they must spell out to consumers just how much the charges impact on the investment return they receive.

In a bid to make pension charging more transparent the Financial Services Authority (FSA) has published new rules that bring Sipps in line with other personal pensions when it comes to the information they have to disclose to their customers.

Not only will charges be made more understandable, the FSA is requiring that Sipp operators disclose any interest or commissions they receive from banks, so consumers ‘are left in no doubt about the profits the operators keep’.

Sheila Nicoll, an FSA director, said: ‘As the size of the Sipp marketplace grows and roughly half of individual pension schemes sold to consumers are Sipps, it is clear that we must take a market-wide regulatory approach. We simply cannot justify maintaining the status quo.’

The new rules come into force on 6 April 2013 and will require Sipp providers to make changes in a number of areas.

Charges

In its consultation document on Sipps the FSA said ‘as sales of Sipps have continued to grow, regulatory concerns have emerged. We have identified disclosure documents for pension schemes that are not of the quality we require, particularly for charges disclosure’.

From now on Sipps will have to issue an ‘effect of charges’ document that details just what is being charged and how the charges impact the return the investor gets on their pension.

Product Information

The FSA said in its report that Sipps are too complicated: ‘We have stated, on several occasions, that we are dissatisfied with the quality of some of the product information prepared by firms. Our research has confirmed that consumers struggle to wade through what they perceive as far too many pages of incomprehensible text which is poorly laid out and full of complex terminology’.

From now on Sipp providers must issue Key Features Illustrations (KFI) that provide product information that is easier to access with simpler language and clearer layout.

Projection Rates

Projection rates, set by the FSA, are the rates companies use to illustrate what return an investor might get depending on the risk level of the product or how well the market does. Typically the rates used to illustrate future returns have been 5%, 7% and 9% but the FSA has now lowered the rates to more realistic levels of 2%, 5% and 8% for tax-advantaged products such as pensions and 1.5%, 4.5% and 7.5% for non-tax advantaged products such as endowment policies.

Interest from Banks

In the spirit of transparency the FSA has now said Sipps must declare any interest or commission they receive from banks

The FSA said: ‘Favourable interest rates obtained from banks should be used to obtain competitive advantage and benefit from the consumer rather than provide a secret profit for the operator.’