Proposals to change pension illustrations risk causing further confusion for people planning retirement, interactive investor warns.
Fresh proposals to standardise the measures used to produce pension pot and retirement income forecasts risks further confusing pension savers about the amount they are likely to end up with when they retire, says interactive investor.
A consultation by the Financial Reporting Council (FRC) that closed on Friday 6 May, asked for input on proposals to align its standards with the incoming Pension Dashboards illustrations standards.
interactive investor, a Self-Invested Personal Pension (SIPP) platform, warns that proposals could produce further inconsistency and confusion for pension savers as they grapple with planning later-life finances.
A statutory money purchase illustration (SPMI) is an annual statement showing how much your pension benefits are worth now and what they could grow to by the time you reach retirement, using data from the FRC. These often give different figures to the illustrations set by the Financial Conduct Authority (FCA) when someone first takes out a pension.
However, the FRC proposals do not address the confusion already caused for consumers by the inconsistency of having two sets of standards for the same projections.
ii calls for a joined-up approach
interactive investor warns that the continuation of a siloed approach seems to contradict the commitment made by the DWP in 2020 to address this inconsistency and to “identify the most appropriate ownership of the assumptions going forward.”
A joined-up approach between the two bodies would be most helpful to pension savers, interactive investor believes.
The platform also suggested in its response that introducing new categories for volatility measures could add to inconsistency and cause further ‘overwhelm’ among pension savers. Growth assumptions used for the volatility bands should also arguably not be based on historic market performance as current forecasts suggest we could be entering a ‘lower for longer’ growth market, as highlighted in the interactive investor report: ‘Is 12% the new 8%?’
However, interactive investor agreed that people need a better understanding of how estimates for their pension pot are generated, for example, the growth and volatility assumptions behind the estimates, to help with their retirement planning.
These forecasts can help someone decide, for instance, whether they need to increase their contributions to meet their target retirement income, or whether it is necessary to change the underlying investments in their portfolio to a higher or lower proportion of equities to boost their growth prospects.
The consultation comes ahead of the introduction of Pensions Dashboards, which will bring together all of someone’s pensions in one place and display estimated retirement income illustrations.
Standardise projections to help people plan, says ii
Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “People make big decisions off the back of the amounts they see on their pension statements. We wholeheartedly support the need to standardise projections and assumptions for people looking at their pension statements and wondering if they are on track. However - these assumptions need to be explained to pension savers clearly and consistently. The measures outlined in the current proposal could fall into a similar trap to other regulation around disclosure; adding to the very problem they are trying to solve.
“While forecasts can never be treated as guarantees – no one has a crystal ball – the current system means that the predicted pot size and retirement income can vary from statement to statement and provider to provider, which is confusing and makes it difficult for people to plan.
“It even leaves people open to making big mistakes. For instance, by potentially assuming you could have more coming your way in retirement than will actually be the case, you could choose to make interest-only payments on your mortgage, assuming you will have enough in your pension to pay it off when the time comes. If your estimate was too high, this could turn out to have been a dangerous assumption.
“Assumptions and projections are more crucial than ever, as workplace pensions are increasingly built up on a defined contribution rather than defined benefit basis.”
An engagement opportunity not to be missed!
O’Connor adds: “The bodies governing the crucial information we see about our pensions must be mindful of not adding to people’s ‘overwhelm’ when it comes to their long-term finances, but at the same time, need to promote greater understanding.
“For too long within the disclosure regime, product manufacturers have placed too much focus on just meeting regulatory standards, rather than having provided the customer with pertinent and engaging information. It’s important that with Pensions Dashboards coming in, regulatory bodies and providers don’t miss an engagement trick.
“Customers are already absolutely inundated with disclosure documents. Having forecasts that disagree can cause confusion. Standardising them should make them more useful, but context is also necessary to make them more understandable.
“We would like to see a joined-up disclosure regime, where customers receive consistent communications about the nature of their investments and in particular, the level of return they might expect.
“If the goal is to help people understand the impact of volatility on the growth of their fund, a great step forward would be developing educational supporting materials for customers on this, provided separately.”
“Ultimately, the impact of these proposed changes is huge. Many pension savers do turn to this information for an important indication of how well they are doing. A key point we would also emphasise is that this can change year to year, and can make a huge impact on retirement incomes, so within all of this – the FRC needs to prioritise communicating the very real risk that they could be wrong.”
Show Me My Money!
Almost half of people (48%) currently don’t know how much is in their pension, according to an interactive investor research report,‘Show Me My Money!’,
Last year, ii’s ‘Is 12% the new 8%? report highlighted that ‘lower for longer’ growth in the global economy, as indicated by recent forecasts, could require younger workers in particular to add more to their pensions to adapt to the new, muted growth world.
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