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The &#39real&#39 thing

The start of the new tax year served as the deadline for product providers to adjust annuity rates within statutory moneypurchase illustrations to reflect new mortality tables, as laid out in CP134.

At first sight, the adjustments seem small, with the estimated total cost of implementation amounting to £22m, according to the ABI.

But CP134 deserves closer scrutiny to assess the full implications for providers and the wider adviser community. We have been working with a number of providers to help them implement these chan-ges and make sure they conform to the new guidelines.

Based on this work, we estimate that the costs of implementing likely changes may be much higher and more far reaching.

CP134 recommends a series of changes (many of which are currently voluntary) which are forcing providers to look much more closely at supplying “real” projections on pension values. These changes, once implemented, are likely to alarm many would-be pensioners because the estimated value of their pensions and annuities will fall quite considerably. The immediate changes are to annuity interest rates.

Illustrations handed out to customers from now on must quote more accurate interest rate levels so that intermediate/middle rates quoted will be nearer the current interest rates, on average, dropping from 6 per cent to 4.8 per cent. These rates will also need to track real interest rates more precisely and can no longer be static numbers as they have been to date.

“Real” expected death rates based on the rising national or regional averages will have to be calculated into the SMPI. In addition, the customer&#39s date of birth as well as desired retirement age is now included for a more precise estimate of how much will be paid in pre-retirement.

Finally, new rates take account of the fact that a pensionholder&#39s living spouse will only get 50 per cent of the value of the annuity in case of the scheme holder&#39s death. The amount needed to cover the spouse&#39s shortfall must also be factored in.

All these changes individually seem small but, taken together, they make a significant dent in the projected value of most people&#39s pensions.

From last month, these new statements will make alarming reading to pensioholders who are, at this stage in the economic cycle, least able to increase contributions.

Providers need to be prepared for a fairly big torrent of abuse into their customer servicing departments and IFAs will also be taking calls.

As if this was not enough of a worry, providers are recommended to do a lot more to improve pension illustrations in the coming years.

The ABI&#39s Raising Standards initiative means that standard text recommendations have to be adopted across the industry for numerous documents, including SMPIs.

In addition, we has been involved in a number of projects involving the future performance of funds under management. The desire for more accurate projections makes calculations harder.

It forces a discussion on what modelling techniques should be used to make these calculations. Currently, SMPIs and most other illustrations are based on deterministic modelling, which essentially means that actuaries set agreed parameters of, say, 6 per cent fund growth, 35 years of paying £X a month with an increase of premium in line with inflation, retiring in a prescribed year and then dying within Y number of years.

But this illustration does not work if wars, stockmarket collapses and other disasters push fund performance off course.

To allow for these sorts of events, a system of modelling called stochastic modelling has to be adopted. Some providers are already looking at this as a means of offering their customers even more accurate projections than the competition.

Inevitably, it means that customers will need to think about paying even more money into their pensions to cover them against events such as as those in the last three years.

Use of stochastic modelling is one way of differentiating illustrations but another is to offer a capability to personalise illustrations more effectively, giving a series of life scenarios based on possible life plans. These could be built into illustrations at point of sale as well as in the SMPIs which must go out annually to all those with pension funds pots worth £5,000 or more.

Many of these changes are recommended in other consultation papers, including CP170, but they do serve to complicate the picture still further, especially when providers and IFAs want these documents to be moved around electronically, as they increasingly do today.

Although projections and SMPI changes do seem many and various, there is some good news. Some specialist technology providers have spent years steeped in the world of projection modelling, automatic collection of data and calculation of returns.

Some are able to lay out SMPIs and other projection documentation in such a way that it can be printed and issued to entire customer bases at annual review dates without a hitch or undue human involvement. Expertise is at hand and can be quickly tapped with providers and IFA firms which often need to move fast to remain compliant or want to be ahead of the pack.

With the arrival of open-architecture-based systems, component toolkits built using XML and other internetbased standards for moving data from one place to another without compromising it, it is now relatively simple to push this information via the internet as well.

The technology is there but have providers and IFA firms, with all the other changes going on across the industry, got the time to call in the experts to get the job done?

In the meantime, there is a real risk that the SMPIs that people pick up off their doormats in the coming months are non-compliant and, worse, will be confusing and unhelpful to those reading them.

Whatever happens, providers and IFAs will remain busy updating customers of the implications of the information they are sending out.


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