FRC consults on AS TM1 pensions dashboards changes

The Financial Reporting Council (FRC) has launched a consultation on proposed changes to the Actuarial Standard Technical Memorandum 1 (AS TM1) to reflect the new environment that will exist once pensions dashboards are in place.

The consultation, which is running until 6 May, is seeking views on proposed amendments to AS TM1, the majority of which are the result of the intention for the provision of estimated retirement income (ERI) on pensions dashboards.

The AS TM1 specifies the assumptions and methods to be used in the calculation of statutory illustrations of defined contribution (DC) pensions, and is reviewed regularly by the FRC.

Whilst the FRC acknowledged that leaving AS TM1 unchanged would minimise provider work, it argued that the resultant ERI projections would not provide savers with consistency in projections from different providers, which could raise concerns about validity.

It also warned that allowing inconsistency in the ERIs carries reputational risk for pension and dashboard providers, as well as government and regulators, as it is likely that inconsistencies would be publicised and undermine public confidence.

“Although these risks do exist under the current regime, they are brought to light by the introduction of pensions dashboards,” it stated.

“For these reasons, we consider it essential that dashboard ERI projections are prescribed in such a way that any two providers projecting identical funds for identical members should calculate identical ERIs."

In particular, the assumptions used in the ERI projection include the accumulation rate and the terms on which the fund at retirement is converted to an income.

AS TM1 currently allows providers some flexibility in determining both the accumulation rate used for projecting fund values, and in the form of annuitisation chosen, although FRC has proposed that both of these should be prescribed for dashboard ERIs.

It also warned that inconsistencies between dashboard ERIs and projections on statuory money purchase illustrations (SMPI) statements may undermine confidence, proposing that the set of assumptions for ERIs used in dashboards and SMPI statements be aligned to avoid confusion.

Version 5 of AS TM1 therefore looks to update the assumptions to be made for SMPIs and also provides the assumptions to be made when ERI is illustrated on the pension dashboards.

It is expected to be effective for all SMPIs and ERI illustrations on dashboards from 1 October 2023, with industry to then roll out the new AS TM1 in statements and dashboards, as SMPIs are produced between October 2023 and October 2024.

Commenting on the plans, FRC executive director of regulatory standards, Mark Babington, said: “The FRC is pleased to play a part in such an important government initiative which will transform the way people engage with their pensions.

"It is vital that the illustrations displayed are meaningful to individuals. The proposed changes to AS TM1 are essential to ensure it remains fit for purpose in the new era.”

Indeed, the proposals were also highlighted as an "important common-sense approach" by Aegon head of pensions, Kate Smith, who suggested that "greater consistency of illustrations will hopefully aid an individual’s understanding of the size of their DC pot at retirement".

“The new rules will start to apply to statutory money purchase illustrations and ERI illustrations on dashboards over a year from 1 October 2023," she continued.

"By the time pension dashboards ‘go live’ to consumers in mid-2024 they will see greater consistency of ERI illustrations, but this may not be achieved fully until October 2024.”

The Investing and Saving Alliance (Tisa) head of retirement, Renny Biggins, also welcomed the proposals from FRC, emphasising the need to achieve better consistency across the pension framework, to increase consumer engagement, trust, and confidence.

"The pensions dashboard will help us move closer to achieving these outcomes," he continued.

“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.”

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