McCloud to delay LGPS progress on pensions dashboards

The dashboards, which will require schemes to provide information around estimated retirement income and accrued entitlements, reached the next stage of progress over the summer with a consultation on data standards.

Although the project has widespread support, it is a massive data administration headache for the whole pensions sector, but particularly so for LGPS funds, which already have an increased administration workload.

For defined benefit schemes, the effort needed to comply with the Pensions Dashboards Programme requirement to provide an estimate of the annual income the individual might receive in retirement, in today’s money terms will be significant.

It will probably take two to three years for LGPS funds to perform the calculation scenarios and for members to understand their options and make any elections

Doug Heron, Lothian Pension Fund

For active members, prospective annual retirement income will be calculated from their latest annual statement, using current earnings. Deferred individuals will see their annual pension at the date of leaving uplifted to include any inflation-proofing that has already been amassed.

“Although the data exists to calculate this for each member, most schemes do not hold their data in a way that could currently support this,” Gary Cowler, partner at Aon, told Pensions Expert in April.

Double ‘headache’ for LGPS admin teams

Currently, LGPS funds are having to deal with the McCloud reform, which remedies historic age discrimination in public sector pensions and will apply from April 2022.

This project requires a huge amount of data collection, backdating pension calculations and changes to ongoing administration processes, systems and communications. Some actuaries say it could affect almost half of the LGPS membership.

Jeff Houston, secretary to the LGPS Advisory Board, said: “The pensions dashboard on its own without McCloud would have been a challenge, because we’d have to go back to look at all of our records and check if they are good enough to go on to the dashboard.”

Barry McKay, fund actuary at Barnett Waddingham, added there is a “huge amount” of work for LGPS funds to sort out their systems and data collection as a result of McCloud, and it will be important to get members’ benefits right before providing information to the dashboards.

In response to the Pensions Dashboards Programme’s call for input on data standards, the Local Government Association stated that if an estimate of benefits to normal pension age must be provided to the dashboards, this would require a “significant amount of software adjustments and testing”.

This could take as long as two to three years given the work that funds will already have to do for the McCloud reform, the response stated.

Doug Heron, chief executive at Lothian Pension Fund, said the pensions dashboards project is a “much-needed solution” to help savers, but noted the added workload as a result of McCloud.

“It will probably take two to three years for LGPS funds to perform the calculation scenarios and for members to understand their options and make any elections,” he said.

Mr Heron stressed that these “are vital steps before a single benefit illustration can be provided to the dashboards, and dependencies on software suppliers to the LGPS and those hosting the dashboards add a further complication”.

“Putting member interests first calls for a focus on quality and not speed of response to the dashboard requirements,” he argued.

Benefit estimates to become mandatory

Under existing disclosure regulations, it is optional to include estimates of benefits to normal pension age in annual benefit statements. Some LGPS funds provide active members with projections, while others just provide an accrued statement, according to Virginia Burke, senior consultant at Aon.

Mr Houston said: “It is technically very difficult to do a forecast on the career average revalued earnings scheme introduced in April 2015, because that involves trying to calculate what the member’s pay is going to be every year between now and when they retire.”

He added that while the dashboards project is a “brilliant concept”, it is important that information is useful and makes sense to the individual.

He said: “We just need to think very carefully how those forecasts are going to be done and on what basis. There is no use making a regulation at the end of all of this that says every scheme must do a forecast if doing it doesn’t make any sense.

“Is there information that we’re currently sending to individuals every year in statements that could usefully be fed into the dashboards as a starting point — rather than undertaking a massive exercise and re-engineering information? That would allow more time to see what people find useful and learn what we could usefully do to give them more information.”

The devil is in the detail

Experts argued that it is important to address these challenges, especially given LGPS funds’ workloads.

Alison Murray, partner and head of actuarial at Aon, said: “Until we have the detail of what’s required, it’s very difficult to start making any changes to the software or calculations. It is very important the LGPS has a strong voice in discussions in relation to active members given it is still open to new members.”

Ms Burke added that once the details are known, funds should be given a “lead-in time to prepare properly”.

An agreed solution is needed for the pensions dashboards that requires minimal disruption to administrators, according to Matt Dodds, director at ITM.

“It is possible that expected retirement income projections, such as estimates of benefits to normal pension age, can be provided without disrupting the coding of already complex administration platforms.”