Industry raises concerns over FRC’s pension projection proposals

Experts from across the pensions industry have raised concerns over the Financial Reporting Council’s (FRC) proposals to change pension projection methodology for pensions dashboards.

Responding to the FRC’s consultation, which closed yesterday (31 May), pension professionals warned against the introduction of new rules that would base the projected growth of individual’s pensions on historic fund volatility.

Aegon pensions director, Steven Cameron, said the firm was “deeply concerned” about the proposals to change the methodology and that while it was important that projections for the same pension appearing in different places matched up, “every pension an individual has will be invested in different funds and can be expected to generate different future returns”.

“While there may be technical logic behind the proposals, we believe a volatility-based approach will be almost impossible for most people to understand,” he continued.

“This would be at odds with the FCA’s new Consumer Duty which seeks assurances from firms that customers understand communications.

“We want pension dashboards to be truly ‘game changing’, with every aspect designed to be engaging, useful and easy to use for pension savers. Introducing such a complex concept could put people off using dashboards completely, instead of a hoped-for boost in engagement.”

LCP partner, David Everett, agreed, stating that while the consultancy welcomed the drive to standardise assumptions about the growth of pension funds, the proposed method could have “perverse consequences, with assets generally thought of as higher risk being projected at unrealistically low growth rates, whilst lower risk assets could be assigned unrealistically high returns”.

“The proposed approach is likely to produce unrealistic and confusing results and we call on the FRC to opt for the much simpler and more intuitive approach which we have set out,” he added.

AJ Bell head of retirement policy, Tom Selby, warned that the dashboards project risks getting “unnecessarily tied up in knots” over the plans to reform growth projections.

“The thinking behind the FRC’s plans to base projections on the volatility of someone’s underlying investments is to build consistency into the system,” he said.

“In striving for this aim, they risk delivering an unwanted hat-trick of bringing in changes that will be of zero benefit to savers, layer complexity into an already complex system and become a costly nightmare to administer.

“The plans also risk creating perverse outcomes. For example, someone with their entire portfolio invested in one highly concentrated, high-risk (and therefore volatile) fund would likely be projected a higher return than someone with a well-balanced, diversified portfolio.

“This feels like an odd message to be pushing to savers, many of whom presumably will be engaging with their pensions for the first time.

“What’s more, the FRC’s approach, if adopted, will mean savers viewing two different pensions via dashboards could potentially see two different growth rates. This will inevitably create confusion, particularly among those who are relatively new to saving and investing.”

Association of Consulting Actuaries Pension Schemes Committee chair, Peter Williams, added: “The proposals on accumulation rates are radical, and we think that they can create problems of understanding for individuals and significant additional work for fund managers in many cases.

“The proposals can also create anomalies when, for example, bond funds prices are volatile.

“On balance, recognising that the Statutory Money Purchase Illustration will be indicative only, we would prefer an asset-class based approach, which is the approach most schemes adopt currently.”

Pensions Age has contacted the FRC for comment.

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