Earlier this month, the FSA reduced the intermediate projection rate used by providers selling pension products from 7 per cent to 5 per cent. The FRC has taken a different approach, removing the 7 per cent cap on rates of return that can be used to project pensions when members get their annual pension health check through Statutory Money Purchase Illustrations (SMPIs).
Will Aitken, a senior consultant at Towers Watson, said: “People producing SMPIs are required to think about the returns that can be expected on the member’s funds and must choose a rate of return that is justifiable. In the past, 7 per cent has sometimes been used as a default answer; this change should serve to take that default away rather than give a green light for people to choose bigger numbers. NEST – which is to become a large-scale provider of SMPIs – argued against giving providers ‘tacit permission to anchor to a given upper rate of return’ and that view has prevailed. Providers will be required to document their reasoning and have been reminded that reintroduction of a maximum rate is an option that the FRC has up its sleeve in case it does not like what it sees.”
A bigger review of SMPIs?
Paragraph 2.38 of the FRC’s consultation response says: ‘We are working with DWP on a wider review of SMPIs as part of the DWP’s review of disclosure regulations. We understand that DWP expect to consult on this in the new year’.
Will Aitken said: “With millions of people being enrolled into DC schemes for the first time, this is a perfect opportunity to take a proper look at what they should be told about how their pension is performing and what it might deliver. For example, should projections still assume that the whole pot will be used to buy an annuity when nearly everyone takes a tax-free lump sum? Never mind differences between SMPIs and FSA point of sale projections – what about differences between SMPI projections and the real world?
“Increasingly, members are able to access real-time information about the health of their DC accounts online or via smartphone apps, so expecting them to focus on a snapshot taken several months before the letter is posted looks like a very 20th century solution. SMPIs will only be one part of communicating with DC members but the challenge is to give them information that tells them something about their options and the risks they face as well as a best estimate of where they stand.”
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