A proposal to base defined contribution projections on historic fund volatility has been criticised by a provider who claims it introduces complexity and would be “extremely difficult” to explain to customers. 

  

The Financial Reporting Council is currently consulting on changes to pensions projections to create more consistency once pension dashboards go live, with the consultation closing at the end of this month. 

 

In its consultation, the FRC is proposing to move to base projection rates on historic fund volatility to create a consistent basis on which estimated retirement incomes are arrived at for the pensions dashboards; currently each provider has their own method, including an assumed rate of increase and an assumption of how the pot is converted into income. 

 

Pensions dashboards will start onboarding pension schemes from April next year, but it is still unclear when they will be available to the public. The Pensions Dashboards Programme has said they should be made available "from” the phase starting next year but admits: “We do not yet have enough information to specify exactly when this will be.” 

 

 

The dashboards could highlight the differences in projection methods used. The FRC said that “allowing inconsistency in the ERIs… carries reputational risk for pension and dashboard providers, as well as government and regulators. It is likely that inconsistencies would be publicised and undermine public confidence in pensions dashboards and in pension saving more widely.” It added that: “Although these risks do exist under the current regime, they are brought to light by the introduction of pensions dashboards.” 

 

To avoid showing a different value on the dashboards than schemes will be showing on their statutory money purchase illustrations, the FRC is also proposing to bring the latter into line with dashboards projections. 

 

The FRC had considered two other methodologies to the one it is proposing but dismissed both as too simplistic. 

 

 

The move to a volatility-based approach for arriving at an accumulation rate is however “strongly opposed” by provider Aegon, which argued that this would be “extremely difficult to explain to customers”. It said that “introducing such complexity could damage the whole intention behind dashboards of boosting member engagement”. 

  

While it was important that projections for the same pension appearing in different places - such as dashboards and yearly statements - match up, every pension an individual has will be invested in different funds and can be expected to generate different future returns, said pensions director Steven Cameron. 

  

Cameron goes as far as saying the FRC’s proposed methodology "would be at odds with the FCA’s new Consumer Duty which seeks assurances from firms that customers understand communications” and that it risked putting people off rather than to engage them. 

  

The provider is similarly concerned over a proposal to project unlisted assets at a zero real growth rate, although it said it agrees there needs to be a consistent basis for turning funds into estimated retirement income. 

  

“Returns on individual unlisted asset are hard to predict and the paper proposes using a zero real rate of return. But if schemes start holding some unlisted assets within their default funds, projected values would be lower than if all [were] invested in listed stocks and shares, discouraging such investments, contrary to government objectives,” said Cameron. 

  

The FRC, the regulator for the accountancy and actuarial professions, is due to be replaced by the Audit, Reporting and Governance Authority during 2023-24.  

 

Steven Cameron

Richard Smith

David Bird