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Mind the gap

The Government has an objective of providing individuals with the information for them to plan for their pension provision. The Department of Work and Pensions, together with the Faculty and Institute of Actuaries, has established a new common basis for all pension providers to give illustrations to their customers.

This will be used for compulsory annual projections for all money-purchase pensions, and is called the statutory money purchase illustration (SMPI). Pension providers are obliged to introduce these illustrations for their customers by April 2003.

In a complementary exercise, the FSA has launched a consultation process with a view to achieving consistency between FSA-regulated illustrations and the DWP-enforced SMPI.

In Consultation Paper 134 (Pensions Projections), the FSA proposes that from April 2003 there will be a requirement for the provision of a single real pension projection in the key features document.

In addition, the basis for the current low, medium and high monetary projections will change to encompass two-dimensional mortality tables.

Both these proposals require significant changes to contract engines, illustration, point of sale and other new business systems.

Combined and composite pension statements

Separately, the Government has announced the combined pensions statement where an individual citizen&#39s private pension details are combined with their state pension (basic state pension, graduated pension scheme, Serps, state second pension), to give a more complete picture of their potential pension provision on retirement.

There are already pilot schemes where state pension details are published to the pilot companies and the data integrated on to one statement.

The wider rollout of the combined pension statement will require all pension providers to integrate the state pension details with the private pension details they hold.

To meet the Government&#39s long-term vision of a composite pension forecast, providers will have to collaborate to consolidate multiple private pension details into a single document for individuals.

The industry has a long way to go to meet these objectives. In many cases, providers do not deliver any form of future illustration with the annual pension statement and will be generating one for the first time.

In other cases, systems are in place but will need to be modified to meet the new regulations. There are a number of issues that providers and others have highlighted if SMPI is to be introduced on time. These include the time and cost, the ever-changing regulatory environment and introducing the new technology required to make personalised information available to the consumer.

But despite the Industry&#39s lack of readiness, the Government is determined to press ahead, as this quote from the spending review of July 2002 indicates it is proposing “investment to enable the development of composite pension forecasts – with the aim of bringing together information on all a person&#39s pension entitlements, accessible over the internet, and allowing savers to work out what saving more could mean for their income in retirement. This will be an important component of the strategy that the Government will set out in the forthcoming Green Paper”.

The technology to make an online service or portal is available and the DWP has seen demonstrations of how private pensions, the state pension and company final-salary schemes can be put online into a single view.

We are now calling on the pension sector – providers, distributors, trade bodies and interested consumer groups – to work together in a collaborative model to make the composite pension forecast hap- pen. The initiative cannot be owned by one organisation, it has to be a collective effort and the Government has to take the lead.

As well as the obvious benefits to the consumer of having all their pension information available online, the financial adviser will have a set of interactive tools to help them model different pension outcomes for their clients.

It is widely recognised that individuals are not saving enough to retire with their required level of pension income.

In the UK, the so-called annual savings gap amounts to £27bn and to close this gap will require a 54 per cent increase in the amount being saved.

In order to engage customers, and potential customers, financial advisers and pension providers need to improve communication and provide the information and tools to enable individuals to plan for an adequately funded retirement.

This will help people identify their personal savings gap and take some action. Only when people can see the effect of different retirement ages and varying contribution levels, will they realise they need to invest more in their pension to ensure a comfortable retirement.

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