There are various challenges still to overcome – not least ensuring member data is matched correctly and protected from scammers – but there is general agreement that dashboards are a good thing.
At the very least, they will ensure members have a central resource they can use to find retirement pots they have lost track of.
However, the project risks getting unnecessarily tied up in knots over plans to reform growth projections, which few people pay attention to and, invariably, will end up being wrong.
Statutory money purchase illustrations
The problems began when the government made clear it wanted dashboards not just to display the values of people’s pensions, but to project that pot to their retirement date and convert it into an estimated retirement income. These figures are available from statutory money purchase illustrations (SMPIs).
The occupational and personal pension schemes (disclosure of information) regulations 2013 govern SMPIs, with guidance on how to produce them provided on a statutory basis by the Financial Reporting Council.
Under current rules providers have flexibility to set their own SMPI growth rate – it just needs to be “justifiable” and take account of charges and inflation at 2.5 per cent. This has the advantage of being relatively simple but also means different providers will produce different SMPI growth rates.
The FRC needs to go back to the drawing board and devise a simpler solutionDue to concerns that the lack of consistency of this approach risks undermining trust in dashboards, the FRC now wants to mandate growth rates used by providers, using volatility to determine the rate.
The proposed rates are set out below, with investments placed in a volatility group based on their volatility of monthly returns over a five-year period.
Projections will always be wrong – so let’s keep it simple
The FRC methodology delivers the unwanted hat-trick of being of zero benefit to savers, costing a significant sum to introduce (costs that will ultimately be paid by members one way or another) and being a complex nightmare to implement across thousands of funds, equities and bonds.
The plans also risk creating perverse outcomes. For example, someone with their entire portfolio invested in one highly concentrated, high-risk (and therefore volatile) fund would likely be projected a higher return than someone with a well-balanced, diversified portfolio.
Of course, the high-risk fund may deliver better returns over the long-term – but it may not. This feels like an odd message to be pushing to savers, many of whom presumably will be engaging with their pensions for the first time.
What’s more, the FRC’s approach, if adopted, will mean savers viewing two different pensions via dashboards could potentially see two different growth rates. This will inevitably create further confusion.
Consistency
The FRC needs to go back to the drawing board and devise a simpler solution. For example, a single growth rate of 5 per cent a year could be used, with clear signposting that that this is for guidance only and lower-risk investments might have lower expected returns.
We also need consistency between Financial Conduct Authority point-of-sale disclosures and SMPIs – something that is lacking at the moment.
For example, FCA rules require 2 per cent inflation to be factored into point-of-sale disclosures, while for SMPIs the figure is 2.5 per cent.
There is no reason why the two sets of disclosure requirements should be different. This might not have been a major problem in a world where most people do not engage with these statements, but if dashboards are to be a game-changer, policymakers need to make sure what they see is consistent.
Tom Selby is head of retirement policy at AJ Bell
