The Society of Pension Professionals has warned pension dashboards will have to provide illustrative figures to defined benefit members, as it will not be possible to have accurate quotations due to the complexity of current benefit structures.
In a report published today (September 13), the industry body made a series of recommendations to the Department of Work and Pensions and the Pensions Dashboard Programme on how estimated retirement income calculations should be approached from the beginning of the project's rollout.
Since one of the design principles set out by the DWP was that they will initially be used only for presentation not calculation purposes, the dashboards will not be able to calculate projected pensions.
The responsibility is therefore placed on providers and schemes to supply an estimated retirement income for each member.
These calculations will be especially difficult in DB schemes, where annual retirement income will be calculated based on current earnings.
Deferred individuals, on the other hand, could see their annual pension uplifted to include any inflation-proofing that has already been amassed.
Four types of income
The SPP report identified four types of estimated retirement income: at leaving, at current date, projected and adjusted, and projected to retirement.
While admitting none of the calculations were perfect, the SPP dismissed the first and third option, since they are “figures as a date either in the past or in the future”.
The industry body's preferable approach would be ‘at current date’, since it is readily available for active members and is almost always quoted on their benefit statements.
For most deferred members, the same option was deemed a reasonable approach as such pensions increase broadly in line with inflation.
The SPP is also in favour of not including future accrual benefits in the figures presented in the dashboards, since for active members, for example, these calculations “rely on sweeping assumptions" and could be "easily misunderstood”.
“Excluding future accrual would be a clearer indication of what has already been earned and cannot be taken away, as well as being simpler to produce. It would also not fall in value when a member leaves the scheme,” the report stated.
Illustrations
Besides the risks brought by automation of data, there are other issues which mean the data presented by dashboards cannot be considered an accurate quotation, the industry body stated.
The report acknowledged that typical schemes had different retirement ages for different tranches of the benefit, as well as different pension increases and guaranteed minimum pensions, alongside other structures, which cannot be reflected in a simple estimated retirement income.
“In straightforward cases, which will cover tens of millions of records, the estimated retirement income may be 100 per cent accurate or very close to accurate. But in complex cases, which could cover millions of records, it will not (and cannot) be,” the report stated.
Due to this, the SPP warned the figures presented in dashboards will be illustrations, with suitable caveats and warnings being “essential whatever estimated retirement income is produced and shown”.
The report stated: “The dashboard cannot be about calculating accurate benefits, it needs to be about providing something helpful, and a pension at leaving notionally (and approximately) revalued to a current date is helpful as an illustration, even if strictly speaking it does not exist.
“This change in mindset from ‘quotation’ to ‘illustration’ is essential for the dashboard to work for both members and schemes.”
The SPP also noted that in cases where the estimated retirement income was known to have substantial shortcomings, schemes or administrators must have the discretion to return “estimated retirement income not available” rather than supply a figure that is misleading.
Recognising the approximations that may be required, administrators should be permitted to aim for reasonable and helpful illustrations rather than accurate calculations, the industry body said, since in many cases the figures will only be used for dashboard purposes.
“If their own circumstances mean it makes sense to produce accurate calculations that they can re-use in day to day administration then they are able to and encouraged to do so. But they should not be required to do so,” the report added.
Maria Espadinha is editor of FTAdviser sister publication Pensions Expert
maria.espadinha@ft.com
