The pensions dashboards will allow anyone to find all their UK pension accounts and see how much these are currently worth. With defined benefit income estimates requiring complicated calculations, that could be easier said than done though. Will the government's ‘simplified basis’ help schemes to show a retirement income to savers? 

 

The Department for Work and Pensions has proposed that dashboards will show details of all occupational pensions someone has when they input their details and press the button, often referred to as ‘sending a request’. This request is then sent to all pension schemes in the UK – or their integrated service provider – to see if there is a match anywhere. If there is, the pension scheme will send data back showing the pot value for defined contribution or in the case of DB, the estimated retirement income. This value can be up to 12 months old; DC schemes can therefore fall back on the value shown in the last benefit statements if necessary, rather than having to have the latest data to hand. 

 

Defined benefit schemes, however, are not obliged to produce annual benefit statements. Some DB schemes send them voluntarily, especially those with a large governance budget; others do not. Even where a scheme currently shows an estimated retirement income to deferred members, this does not necessarily come in the way the DWP proposes it should do. Currently DB schemes can show the income estimate using a value as at leaving date; as at request date; or as at retirement date, while for dashboards, the DWP has proposed that DB schemes need to show an estimated retirement income that is revalued to a date within last 12 months. 

 

 

Knowing how much income to expect from a DB pension is important, said independent consultant Richard Smith, because many savers also have defined contribution pensions and need to know how much more to save. “If I don’t take revaluation into account, I might oversave in DC,” he argued. 

 

To comply with the proposed dashboards requirement, DB schemes could for example calculate every single member’s retirement income annually and keep it on their files to use as and when a dashboards request comes in – a costly exercise – or they could attempt to do each calculation at the point a member sends the request.  

 

Smith said that every scheme needs to take a view on which approach to take. “Do I do a bulk exercise, probably annually, on all my deferred members, so the figure is there waiting if a request comes in? If none of them use the dashboards, the figure is just sitting there. Or do I do a real time calculation when a request comes in?” said Smith.

 

The DWP, perhaps recognising that both bulk calculations and on-request calculations are onerous, is giving DB schemes 10 days to produce the value when a request has come in. 

 

It has also said it will let schemes calculate the income on a ‘simplified’ basis if they choose to. This proposes increasing the pension by inflation for each year up to the current date, rather than by the factors specified in the scheme rules. Smith said he believes few trustees will want to use this approach.

 

The DWP itself seems to have some doubts about this approach, asking in its consultation at the start of this year: “Would the resulting values be accurate enough for the purposes of dashboards and as a comparison with other pension values? Is the potential for this degree of inconsistency of approach reasonable? What are the potential risks to consumers or schemes in providing a value based on a simplified calculation?” 

 
Smith argued that this approach would only produce inaccurate values for a small number of people, but the simplified option sits uncomfortably with many trustees. The Pensions and Lifetime Savings Association has said while the simplified basis could be useful, most trustees would want to produce the DB income on a more accurate basis. 

 

It said in its consultation response that views across member schemes were mixed on the simplified approach, ranging from those that see inaccurate simplified figures as unhelpful, to others who feel it could be a useful option. “On balance, the PLSA feels that most trustee boards will wish their TPA to automate deferred revaluation calculations on a scheme rules basis,” it said, adding that in exceptional cases, and for a limited period, the option of simplified basis could be useful. “But this would only be acceptable if clear ‘disclaimers’ were displayed on dashboards and all liability concerns had been resolved. The regulations could be extended to require trustees to take advice that this is a reasonable approach for them to take for a limited period,” it said. 

 

 

Providing a number to a member has to be done as accurately as possible, believes Shola Salako, a professional trustee at Dalriada Trustees. The simplified basis for the calculation in place of the correct one doesn’t meet that requirement, she argued. 

 

For Graeme Riddoch, responsible for DB fintech development at sister firm Spence & Partners, the simplified basis is not useful for either members or trustees: "Great – now you’ve generated a number that’s wrong. Let's go ask the trustee who is on the hook for this what he or she thinks of providing a number that’s inaccurate, even though from a regulatory point [TPR] says, ‘It’s ok, nothing to see here’.” 

 

Riddoch disputed that most larger DB schemes – which will have to connect to the dashboards from late next year – already produce annual benefit statements. "Some do, some don’t,” he said. “Most schemes just do it, typically, if and when somebody asks. They get back in two weeks, they might have to go offsite, do it manually, check the records,” he added, saying that 10 days is “probably not enough to do it on demand”. 

 

The most efficient way to make the dashboards work would therefore be calculating every member’s income, he believes. “One very large scheme is adopting that approach, to run every single calculation and hold it. But the cost of running these calculations – because they are not automated, you have to get the actuaries to check the number – is eyewatering,” he said. “You could put a man or woman on the moon.” 

 

While some schemes spend large amounts of time and money on getting the numbers ready, there is currently “a big unknown” about whether there will be any demand for them, he said, though he thinks it likely there will be, citing experience from Denmark.  

 

Ten days is not enough for on demand calculations, agreed Karl Lidgley, client manager in the third-party administration team at Hymans Robertson. “Given the response times that [the Pensions Dashboards Programme] are looking for, real time calculation of ERI on request for data isn’t likely to be an option for most schemes,” he said. “The most likely approach would be an annually calculated [estimated retirement income] being held by the API connecting to the dashboard environment outside of the administration system.” 

 

 

Lidgley said that the majority of his DB clients do not currently produce annual benefit statements, but clients which use the administrator’s web services have an annual increase of deferred pension values completed as standard. Members are also able to model their retirement benefits into the future on a web modeller service. 

 

Currently just over 50% of admin clients allow web access to members. “It tends to be the smaller schemes where this is not the case, so the vast majority of members are covered by web services and [estimated retirement income] will be relatively simple to obtain,” said Lidgley. 

 

Where schemes do not give web access to members, “we are looking to engage them into providing this service for members in order to simplify the dashboard requirements”, he said. Lidgley admitted that for some there may be cost constraints which make this a challenge, and the manual route for calculation within the timescale set out in the legislation will have to be applied. 

 

This is where the simplified option could come in. Lidgley said the simplified basis might be "an option for smaller schemes in the short term to provide an immediate response to a dashboard query, rather than waiting for a manual calculation”, making it clear to members that the figure is not accurate. 

 

Over time, the intention of his firm would be for all schemes to provide an accurate, rather than a simplified, calculation to the dashboards, he added. 

 

Would you use the proposed simplified basis for calculating a DB member’s estimated retirement income?