FRC confirms AS TM1 pensions dashboards changes

The Financial Reporting Council (FRC) has confirmed changes to the Actuarial Standard Technical Memorandum 1 (AS TM1) to support consistent and reliable pension illustrations for defined contribution (DC) pension scheme members.

The changes include standardising the accumulation rate assumptions and the form of annuitisation at retirement, with the FRC previously undertaking a consultation on the proposed amendments.

The new standard was highlighted by the FRC as “a major step change” to increase consistency between pension projections once they start to be provided to pensions dashboards from October 2023.

AS TM1 will continue to apply to the Statutory Money Purchase Illustration (SMPI) statements that individuals receive each year, with the Department for Work and Pensions (DWP) also intending for AS TM1 to determine the illustrations of DC pensions shown on pensions dashboards, from October 2023.

The FRC confirmed that it received a “wide-ranging response” to its proposed changes, with industry experts having previously warned against the introduction of new rules that would base the projected growth on historic fund volatility.

In recognition of the concerns raised by industry, the FRC confirmed that it has taken a number of actions to amend the proposed method to address implementation challenges and provide clarity on how the proposed volatility approach is intended to be implemented.

In particular, it made amendments to the approach to allow, in limited circumstances, funds to be classified as volatility group 3 where volatility cannot be reasonably or meaningfully determined.

The FRC also removed the requirement to consider market-based annuity rates for illustrations produced within 2 years of retirement, in recognition of the fact that only a small proportion of individuals will take an annuity.

The council explained that a number of these amendments are also expected to help "significantly reduce implementation costs", after this was another area of concern identified by respondents.

However, although the FRC acknowledged that there are challenges around communicating the volatility approach to users, it considered it “sufficient and more effective to communicate the concept of the classification of funds based on the level/categories of risks rather than the mechanics of the calculation".

The council confirmed that it plans to work with the pension providers, and with the Pensions Dashboards Programme, to support the communication of these changes to users.

"We believe that this approach will best support the objective of providing the public who will use pensions dashboards with consistent and reliable information," it stated.

Given the significance of the changes, however, the FRC confirmed that it will continue to engage with providers as they implement the changes ahead of the effective date, and will review its guidance in light of the findings of this engagement.

FRC executive director of regulatory standards, Mark Babington, stated: “The development of a consistent and reliable pension projection is a major step-change which will help users better understand their pension projections and to plan for their retirement.

“From the extensive engagement with stakeholders and industry it is clear that there is overwhelming support for projections to be consistent across different pension plans.

“The FRC looks forward to continuing to work collaboratively with pension providers and other stakeholders ahead of the standard being effective from October 2023.”

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