Aegon and LCP have issued stern rebukes of the Financial Reporting Council’s proposals for calculating pensions projections for the dashboards, with Aegon arguing that the FRC’s preferred methodology would “damage the whole intention behind dashboards”.
The FRC is consulting on its proposed methodology, which would see pension projections for the dashboards based on historic fund volatility. The consultation was due to end on May 5, but has been extended until May 31, reportedly to allow the FRC to address concerns about and drum up support for its proposals.
Aegon has previously praised the FRC’s intentions regarding measures to create consistency in calculating estimated retirement income, but has now criticised the move to base projections on historic fund volatility, on the grounds that it would be “extremely difficult to explain to members”, and therefore defeat the stated object of the dashboards — to boost member engagement.
Steven Cameron, pensions director at Aegon, said: “We’re deeply concerned about the FRC proposals to change the methodology behind pension projections to be based on the historic volatility of a fund’s performance.
We’re deeply concerned about the FRC proposals to change the methodology behind pension projections to be based on the historic volatility of a fund’s performance
Steven Cameron, Aegon
“The FRC is seeking greater consistency in the projection rates used by different pensions appearing side by side on dashboards.
"While it’s important that projections for the same pension appearing in different places such as dashboards and yearly statements match up, every pension an individual has will be invested in different funds and can be expected to generate different future returns.”
Cameron acknowledged that there might be “technical logic” behind the FRC’s proposals, but countered that “a volatility-based approach will be almost impossible for most people to understand. This would be at odds with the [Financial Conduct Authority’s] new consumer duty, which seeks assurances from firms that customers understand communications”.
He added: “We want pensions 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.”
Having praised the goal of finding consistency in calculating estimated retirement income figures, Aegon has now also criticised the FRC’s proposals to project unlisted assets at a real growth rate of zero.
“The government is keen for schemes to invest more in unlisted, illiquid assets, believing this offers greater diversification and may generate higher returns, as well as boosting economic growth,” Cameron continued.
“Returns on individual unlisted asset are hard to predict and the paper proposes using a zero real rate of return. But if schemes start holding some unlisted assets within their default funds, projected values would be lower than if all invested in listed stocks and shares, discouraging such investments, contrary to government objectives.”
He added that Aegon does agree with proposals for a consistent approach for “turning projected funds into an estimated retirement income”, and offered up single life annuities as a proxy.
“While drawdown is now the most common approach, annuity rates offer a ‘proxy’ for illustrating a sustainable income and it’s important that the form of annuity used in dashboards and yearly statements match up,” Cameron explained.
“We believe the most meaningful approach would be to use single life annuities, which increase in line with inflation.”
LCP warns of ‘perverse’ results
LCP joined in the criticism, warning that the FRC’s proposals could produce “perverse and unrealistic” results that could “confuse the public”.
The consultancy pointed out that, though the FRC’s proposals to look at historic volatility would see funds with a volatile recent past produce a higher estimated growth rate than funds with a less volatile history, bond yields have seen much recent volatility despite traditionally being seen as a lower-risk asset class.
Equities, meanwhile, have been through periods of stability, despite often being regarded as the more volatile asset class.
This combination could have the “perverse” consequence “that pension funds largely invested in equities may be projected to have relatively low growth rates in future, while derisked funds largely in bonds would be projected to have relatively high growth rates”, it said.
LCP is calling on the FRC to rethink this approach to allow schemes to project based on standardised assumptions for future growth for each main asset class.
“If equities were expected to grow more than bonds, then this method would allow schemes to project on that basis, whereas the FRC approach could give the opposite — and more unrealistic — result,” it suggested.
Annuities make slow comeback as retirees look for income certainty
After a decline in annuity sales following the pension freedoms, the market seems to have levelled off with purchases accounting for around 10 per cent of total market share, according to the Pensions Policy Institute.
David Everett, partner at LCP, said: “We welcome the drive to standardise assumptions about the growth of pension funds, especially in the context of the introduction of pensions dashboards.
“But the proposed method of standardisation could have perverse consequences, with assets generally thought of as higher risk being projected at unrealistically low growth rates, while 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.”
At present, the new rules are slated to be in force from October 2023.
The FRC has been contacted for comment.
