It is an article of faith for providers: pension illustrations are merely an indication of what a client’s pot might be worth at retirement. They are neither a promise of future value nor a comparison tool, and they are most definitely not advice.
Such projections must factor in the impact of inflation and three different – but equally hypothetical – growth rates. There are valid actuarial reasons for this, of course. No one can be certain what the real returns of a varied portfolio will be over a decades-long timeframe, so it makes sense to give a range of possible scenarios.
Unfortunately, though, this results in long-winded illustrations that have marginally less impact on clients than a wet lettuce. The reality is that, on receiving their annual pension statement and its accompanying projections, most clients will do no more than glance at it before stuffing it in a drawer and forgetting about it.
The formal name of such calculations – statutory money purchase illustrations – gives a clue as to who such calculations are for. The whole process smacks of box-ticking rather than actually helping the client.
Among the sea of caveats and small print that accompanies these documents, pension companies might as well add: “We’re sending you this because we have to, not because we want to – or expect you to do anything about it.”
Call to action
But what if pension projections were a call to action rather than inaction? What if they showed whether the client is on course for their desired pension income?
An illustration that flags up a likely shortfall to a client not saving enough into their pension is much more likely to get their attention and spur them into action.
A client who realises their pension savings are not on track to produce the income they had hoped for is likely to ramp up their monthly contributions or, more importantly, spur them on to consult an adviser.
I am not proposing a change to the SMPI formula but rather the addition of a simple, practical page that makes it clear to the client if their pension is on track or not.
Here is how it could be done. Before the SMPI is produced, the pension provider would ask the client a few optional questions about when they plan to retire and how much income they want to receive. This could be done at the application stage, when the client is also asked for their intended retirement age.
The provider would then use this information to show how the client’s projected pension income measures up to their aspirations. Then – and this is the controversial bit – it could suggest how much more the client would need to contribute in order to achieve their target income.
Of course, this assumes the client only has one pension and, clearly, providers should not be encroaching on adviser territory. But neither should they blithely stand back without flagging up if a client might be able to make their pension savings work harder.
A moral duty
I would argue pension firms have a moral duty to warn a client on course for an inadequate retirement income, and that this is just as important as their statutory duty to tell them what their pot might be worth when they retire.
And I am not alone in saying the current way we illustrate likely pension growth needs an overhaul. Earlier this month, a poll by AJ Bell found 61 per cent of advisers felt pension key features illustrations do not adequately explain to clients the charges they will pay and the benefits they will receive from the product they are investing in.
Last year, the Financial Advice Market Review called for pension suitability reports to be made clearer and more accessible. The scope of the FAMR should now be extended to include pension illustrations and how to make them more useful documents for clients.
The pensions industry is not known for moving quickly or as one. But if we seize the initiative there is a valuable prize at stake: better service, more practical, actionable illustrations for clients and the prospect of extra business for advisers.
With rising inflation set to eat into real returns this year, the industry has a duty to help clients keep their retirement savings on track. We should start by making annual pension statements more about customer service than compliance.
Matthew Rankine is a director at Liberty Sipp