SPP warns dashboards figures will need to be illustrative

In a report published on Monday, the industry body makes a series of recommendations to the Department for Work and Pensions and the Pensions Dashboards Programme on how estimated retirement income calculations should be approached from the beginning of the project rollout.

Since one of the design principles for dashboards set out by the DWP was that they will initially be used only for presentation purposes, the dashboards will not then be able to calculate projected pensions. The responsibility is therefore placed on providers and schemes to supply an ERI for each member.

These calculations will be especially difficult in DB schemes, where for active members prospective annual retirement income can be calculated from their latest annual statement using current earnings. Deferred individuals, on the other hand, could see their annual pension at the date of leaving uplifted to include any inflation-proofing that has already been amassed. 

This change in mindset from quotation to illustration is essential for the dashboards to work for both members and schemes

Society of Pension Professionals

Dashboards should present current date benefits calculation

The SPP report – compiled by the SPP’s Administration Committee, made up of representatives from several large corporate pension companies – identifies four main types of ERI: at leaving, at current date, projected and adjusted, and projected to retirement.

While admitting that none of the calculations are perfect, the SPP has dismissed the first and third option, since they are “figures as a date either in the past or in the future”.

The industry body’s preferable approach would be at current date, since it is readily available for active members and is almost always quoted on their benefit statements.

For deferred members, the same option is also a reasonable approach where pensions increase in deferment broadly in line with inflation, even though it will need significant investment, as this is not something that happens in practice, the report stated.

However, where pensions increase in deferment at a rate other than in line with inflation, the at current date method can be misleading and schemes should be permitted to use projected to retirement calculations.

Schemes will need discretion to adopt this method “where relevant and where they have the capacity to do so. It should not be mandated”, the report noted.

The SPP is also in favour of not including future accrual benefits in the figures presented in the dashboards, since for active members, for example, these calculations “rely on sweeping assumptions about the continued existence of the scheme and the individual’s membership, and can be easily misunderstood”.

“Excluding future accrual would be a clearer indication of what has already been earned and cannot be taken away, as well as being simpler to produce. It would also not fall in value when a member leaves the scheme,” the report stated.

Dashboards data will be illustrative

Besides the risks brought by automation of data, which will be needed for schemes to calculate deferred members benefits under the chosen at current date method, there are other issues that mean the data presented by dashboards cannot be considered an accurate quotation, the industry body argued.

The report acknowledged that typical schemes have different retirement ages for different tranches of the benefit, as well as different pension increases and guaranteed minimum pensions, alongside other structures such as temporary pensions, step-ups, transferred-in credits, which cannot be reflected in a simple ERI.

“In straightforward cases, which will cover tens of millions of records, the ERI may be 100 per cent accurate or very close to accurate. But in complex cases, which could cover millions of records, it will not (and cannot) be,” the report stated.

As a result, the SPP warned that the figures presented in dashboards will be illustrations, with suitable caveats and warnings being “therefore essential whatever ERI is produced and shown”.

The report continued: “The dashboards cannot be about calculating accurate benefits, it needs to be about providing something helpful, and a pension at leaving notionally (and approximately) revalued to a current date is helpful as an illustration, even if strictly speaking it does not exist.

“This change in mindset from quotation to illustration is essential for the dashboards to work for both members and schemes.”

The SPP also noted that in cases where the ERI is known to have substantial shortcomings, schemes or administrators must have the discretion to return “ERI not available”, rather than supply a figure that is misleading.

Recognising the approximations that may be required, administrators should be permitted to aim for reasonable and helpful illustrations rather than accurate calculations, the industry body said, since in many cases the figures will only be used for dashboards purposes.

“If their own circumstances mean it makes sense to produce accurate calculations that they can reuse in day-to-day administration, then they are able to and encouraged to do so. But they should not be required to do so,” the report added.

Coverage to increase over time

Despite making a set of recommendations, the SPP noted that all decisions need to “to link closely to the liability model”, since schemes, providers and administrators will only be comfortable publishing figures – particularly approximate, incomplete and theoretical ones – when they understand their liability in relation to these.

The industry body expects that the approach detailed in the report “should be achievable by industry, although it is still expected that coverage will need to increase over time, as individual schemes and providers will not all have the capacity to prepare everything in advance”.

Finally, the SPP stated that the chosen approach to ERI should “be adopted with the express intention of not reviewing it for a number of years, so that schemes have the certainty that their investment will be time well spent, can focus on improving the prevalence of ERI, and can avoid the rework of producing an ERI that will be overtaken in the short term by a subsequent decision”.

Paul McGlone, the SPP’s immediate past president, said: “We remain very supportive of the pensions dashboards, and it is extremely helpful that the timescales for delivery are becoming increasingly clear.

“However, other aspects of the dashboard rollout remain unclear and ERI is one particularly under-defined area.

“Our proposals on the calculation of ERI for DB schemes aims to encourage informed debate as part of the dashboard rollout, and lead to an early and definitive decision by the DWP and PDP on the methodology and scope involved.”