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Where the industry is going wrong on pension projections

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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 

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. If you have a system that represents the classic problem of Garbage In Garbage Out, it cannot be cured by inserting more garbage. I am afraid that adding the variable of the client’s expected retirement income is more garbage.

    Someone opening a pension at say age 30 has no idea what their expected retirement income will be. Or worse, they might think they know but they are wrong. They could start a job on a salary of £27,000 and insert the standard retirement income of £18,000 – but over ten years their salary could double as they gain experience and that standard retirement income will become woefully inadequate. This is just an example – over the course of a pension accumulation period there are so many variables that it is impossible to guess what someone’s desired retirement income will be. Plus the pension provider will have no idea what the client has saved in ISAs and other non-pension assets.

    So at best, the statement of whether the client’s pension is on track will be meaningless. At worst, it will be misleading. Most people’s income rises as they get older – hence an adequate retirement income rises as they get older. If the target income is not updated, the illustration will say they are on track to receive a good retirement income when they are not.

    Of course the client could always recalculate and update his target income each year, but if he is engaged enough to do that he is unlikely to need this indicator in the first place. It does not make sense to provide an illustration for the sake of one person who will interpret it correctly when it will confuse ten who won’t. Particularly when the one person who will interpret it correctly will work it out for themselves.

    Scrap them.

  2. The principle issue is that with assumed inflation and the factoring in of charges, even ‘middle growth rate’ assumptions of cautious investments can look pointless given the growth rates now assumed – and therefore the client reaches the ‘informed’ decision it’s not for them whereas the worrying reality is that it perhaps is for them, they just don’t sufficiently comprehend the nature of the future value of money.

  3. Why don’t pension projections reflect what the intention is I.e beat inflation (net of charges). So a typical illustration would be:-
    1. Inflation 1.00% growth 1.10%
    2. Inflation 2.0% growth 2.2%
    3. Inflation 4% growth 4.40%.
    Let’s be realistic, we will have years of low inflation, not the heady days of inflation & interest rates of +10%

  4. I have been stating for 20 years investment backed illustrations are not fit for purpose. They have been used to support claims stating the rates where to high though and the client was mislead. Solution, there is not one and there in lies the problem. No one knows what the future holds.

  5. They really are a waste of time, effort and very confusing to every client. They have always been as useless as an ashtray on a motorbike, other that to show what the plan and advice charges actually are. As we are not going to get them scrapped, the FCA really need to go back to the drawing board and decide what should be on there that will actually be of value a client and have that and only that on the illustrations.

  6. Waste of ink FCA.

  7. The most confusing thing about today’s illustrations (I find) are the inflation-adjusted projected funds. In days gone by, illustrations used to show non-inflation-adjusted funds, the benefits (potential income levels) from which could be set against a projected final annual earnings figure. That methodology made much more sense both to me and to my clients.

    And I still don’t really understand why a higher the level of potential investment growth meant that it was mandatory to assume a higher level of inflation. Over the past few years, that relationship has gone completely out of the window.

  8. Agreed with Sascha K’s comments. Might I add that such an illustration will clearly assume an annuity purchase in order to benchmark against a target retirement income, but how does that make sense given “Pensions Freedom”?! It’ll simply confuse the clients further. Pension providers should be directing concerned clients to see IFAs and there needs to be some form of Government subsidy for the lower income clients to pay for financial advice.

  9. I cannot believe it’s taken so long for this to be highlighted. The current format ofpension illustrations is a Joke and has deteriorated hugely over the last few years. Today’s terms are useful but should also include actual monetary amounts too just like they used too.Growth rates are a little too low in some fund scenarios and no tax free cash at retirement and an index linked annuity too with useless spouse assumptions make the final product only fit for fire lighting.Shame on the FSA and a spineless industry for allowing this to happen. Oh and by the way let treat customers fairly…..,really?

  10. These projections are the wrong way round. They should show what premium is required to meet the clients 50%/70% of current salary adjusted for inflation at 2,4,6% (say). Wouldn’t that be more useful?

  11. Aren’t projections based on FCA driven assumptions?

  12. The projections are really a waste of time and only show the situation for that particular product and funding case. What clients really appreciate is advice from the adviser and a forecast of where they might be at given dates in the future, using information and assumptions that is useful to them personally, taking into account all of their assets. The inflation adjusted figures are of no use to man nor beast, just another assumption to muddy the water and mainly used by some as a sales tactic to try and get clients to increase their savings. You also have to take into account the reality of LTA and show how the output may be taxed to get a real feel for what is being achieved. Isn’t this called financial planning, something we all do as advisers???

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