Inconsistent retirement estimates could undermine dashboards

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Inconsistent retirement estimates could undermine dashboards

Consumer confidence in pension dashboards could be undermined unless the methodology for calculating estimated retirement income is standardised, the Financial Reporting Council has said.

The design principle of the dashboards programme states that the system will initially be used only for presentation purposes, and that the dashboards will not be able to calculate projected pensions.

The responsibility is therefore placed on providers and schemes to supply an ERI figure for each member.

The Department for Work and Pensions is proposing that schemes will have to supply this figure alongside other data provided to the dashboard, including information on the ERI type, its basis, its calculation and payable dates, and an indication as to whether it includes safeguarded benefits.

Money purchase, or defined contribution schemes, will have to supply information on the projected pot size used to calculate ERI, so a user logging on to the dashboard would be able to see the projected ERI value for all schemes, as well as a projected final pot value for their DC scheme, where applicable.

Dashboards need consistency

The assumptions and methods used to compile statutory illustrations of DC pensions are governed by the FRC’s ‘actuarial standard technical memorandum 1’, which the regulator has proposed updating to account for the introduction of the pensions dashboard.

In a paper published on February 15, the FRC explained that, though leaving these regulations unchanged would “minimise the work required of providers”, resultant ERI projections “would not provide the individual saver with consistency in projections from different providers”. 

“This would raise concerns about the validity of aggregating resulting ERIs and continue to present significant communication challenges in explaining why the projections are not consistent. It might also not be possible for the individual to see the differences in the assumptions that produce the various illustrations as these are not part of the proposed data standards,” it said.

Inconsistency in these projections could pose reputational risks both for schemes and providers, and to government and regulators, it continued, as it is likely to be publicised and “undermine public confidence in pensions dashboards and pension saving more widely”.

“Although these risks do exist under the current regime, they are brought to light by the introduction of pensions dashboards. For these reasons, we consider it essential that dashboard ERI projections are prescribed in such a way that any two providers projecting identical funds for identical members should calculate identical ERIs,” the FRC paper states.

At present, the regulations allows for “some flexibility” in determining both the accumulation rate used for projecting fund values, and the form of annuitisation chosen, but the FRC proposals would see both prescribed for dashboards purposes.

It also proposed aligning the sets of assumptions used for ERIs and statutory money purchase illustrations to avoid confusion and preserve confidence in the figures.

The proposals, which have now been put to consultation, would have an effective date of October 1 2023. The consultation itself closes on May 6.

Kate Smith, head of pensions at Aegon, said: “We broadly welcome the FRC’s consultation as this will give greater consistency across pension providers for calculating ERI used in statutory money purchase illustrations included in annual benefit statements, and equally importantly, show the same ERI for the same pension saver on pension dashboards.” 

“This is an important common-sense approach as greater consistency of illustrations will hopefully aid an individual’s understanding of the size of their defined contribution pot at retirement date and how much annuity income it could buy. The fly in the ointment is that fewer individuals are buying annuities, preferring instead to use income drawdown to provide a retirement income,” she continued.

“The new rules will start to apply to statutory money purchase illustrations and ERI illustrations on dashboards over a year from October 1 2023. By the time pension dashboards ‘go live’ to consumers in mid-2024 they will see greater consistency of ERI illustrations, but this may not be achieved fully until October 2024.”

Benjamin Mercer is a senior reporter at FTAdviser's sister publication Pensions Expert