DC pension providers may be required to change the way they calculate future retirement income on standard projections, under proposals being put forward by the Financial Reporting Council.
The FRC is now consulting on these changes, which are designed to provide greater consistency for consumers when comparing different products. It is hoped changes will be implemented ahead of the introduction of the pensions dashboards.
The key changes relate to the way pension providers estimate future retirement income (ERI) which is used in these statutory money purchase illustrations, and will ensure the same figure is used on both benefit statements and pension dashboards.
The proposals have been broadly welcomed by the industry. Aegon’s head of pensions Kate Smith says: “This is an important common-sense approach as greater consistency of illustrations will hopefully aid an individual’s understanding of the size of their defined contribution pot at retirement date and how much annuity income it could buy.
“The fly in the ointment is that fewer individuals are buying annuities, preferring instead to use income drawdown to provide a retirement income.”
The Investing and Savings Alliance (TISA) head of retirement Renny Biggins adds: “Research shows that a key priority for consumers is knowing their estimated retirement income. This information should appear on the pensions dashboard, which will help substantially increase member engagement and understanding.
“As the dashboard is designed to show a consumer’s entire pension entitlements throughout their lifetime, it is essential that a consistent approach is taken in the calculation and presentation of estimated retirement income to enable meaningful comparisons to take place.
“It is proposed that all firms will need to base assumed investment growth on prescribed growth rates determined by the underlying fund(s).
“TISA welcomes the principles laid out by the Financial Reporting Council, which proposes revisions to statutory money purchase illustrations. If we can achieve better consistency across the pension framework, this will help increase consumer engagement, trust, and confidence. The Pensions Dashboard will help us move closer to achieving these outcomes.
“Retirees must also be motivated and aware of their options in order to use the dashboard. We therefore need to build on existing momentum alongside other engagement and support initiatives, including the development of an enhanced guidance framework within the regulatory regime.
“We look forward to working with the Government and industry to develop the pensions dashboard alongside other long-term, strategic solutions.”
The new rules will start to apply to statutory money purchase illustrations and ERI illustrations on dashboards from 1 October 2023.
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