Pension forecast alignment could confuse savers
New proposals designed to standardise pension forecasts could confuse savers about how much they might get in retirement.
According to provider interactive investor, the now-closed consultation from the Financial Reporting Council (FRC) could lead to further inconsistencies in pension projections.
The consultation is designed to align forecasting standards with the soon to be launched Pension Dashboards illustration standards.
Under current rules, a statutory money purchase illustration (SPMI) provides an annual statement to pension savers, showing how much their benefits are worth today and how much they could grow by retirement age.
These forecasts often result in different figures to those provided under Financial Conduct Authority (FCA) rules, when someone first takes out a pension.
While aligning forecasts shown in Pension Dashboards, the latest FRC proposals would not align these two sets of standards for the same pension projections.
In response to the FRC consultation, interactive investor is warning that continuing with a siloed approach appears to contradict a promise made by the Department for Work and Pensions (DWP) in 2020 to address this inconsistency and to “identify the most appropriate ownership of the assumptions going forward.”
Interactive investor believes a joined-up approach between the FRC and FCA would be most helpful to pension savers.
They also suggest in their response to the consultation 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 historical market performance. Current forecasts suggest we could be entering a ‘lower for longer’ growth market.
However, the provider 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 introducing Pensions Dashboards, which will bring together all of someone’s pensions in one place and display estimated retirement income illustrations.
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.”
Remember, in reality, life is unpredictable, and change is certain, so your lifetime financial forecast has to be flexible and created in collaboration with your trusted wealth planner.
At Wells Gibson, we help our clients consider all the options, who can benefit and avoid clients making the wrong decisions, at the wrong time and for the wrong reasons.
For more information, please get in touch with a member of our team.
