One thing uniting much of the pensions industry is the generally poor regard we – and our customers – hold defined contribution pension illustrations in. There is a widespread acceptance that this is something we have to conform with, rather than a communication to be celebrated.
With this low starting point, the recent consultation by the Financial Reporting Council (FRC) on how the Statutory Money Purchase Illustrations (SMPI) projected figures are calculated should have been welcome news. But the worry is that instead of tackling the issues head on, the FRC’s proposals are just making a bad situation worse.
The FRC is reviewing SMPIs as Pensions Dashboards will use the same calculation basis to show dashboard users their estimated retirement income. The FRC wants to introduce greater consistency between SMPIs from different providers to help users understand and compare pensions.
The main core of the FRC’s proposals is to introduce one set of rules for the assumptions for projected growth rate in the fund, but instead of basing this on asset class, they propose the growth rate is linked to the volatility of the fund over the last five years. I have two main gripes with this approach.
Firstly, it does nothing to help consumer understanding, and in fact will make it worse. Most customers don’t truly understand the concept of volatility, and even if they do, they won’t make the direct link with fund performance. Plus, a SIPP customer holds many different investments within their pensions – some of them funds, but some direct investments. The consultation is silent on how the growth rates for direct investments should be worked out. The notes explaining what each fund’s volatility is over the last five years, and therefore what growth rate has been assumed in the illustration could run to pages and pages. Which no-one will read.
Secondly, this proposal comes from the viewpoint of trust-based and insured pensions, rather than the SIPP platform market. AJ Bell, alongside other platforms, offer over 4,000 funds to our customers plus numerous other direct investments. To categorise each one and review it each year, as well as the new 1,000 securities we add each year, will create a great deal of work for no benefit. It will not mean more accurate projections, nor clearer or simpler projections leading to better engagement by customers.
We urge the FRC to think again. This is a fantastic opportunity to go some way to tackling the problems with personal pension illustrations, to introduce simplicity but also consistency.
The ideal approach would be to look at this from the customer’s viewpoint. Instead of taking different approaches to point-of-sale illustrations and annual illustrations, we recommend FRC and FCA work together to devise an approach for all stages of the customer journey, using the same assumptions for inflation, growth rates, and pension income. That way the information the customer receives during their pension lifetime should all tie up, giving them the tools to understand what their pension could be worth in later life, and putting them in a more powerful position as they approach their retirement.
This article was previously published by Professional Adviser
Financial adviser verification
This area of the website is intended for financial advisers and other financial professionals only. If you are a customer of AJ Bell Investcentre, please click ‘Go to the customer area’ below.
We will remember your preference, so you should only be asked to select the appropriate website once per device.