Author

Towers Watson Media

Jacqui Thompson

Consultant

Willis Towers Watson



As members become more engaged and reliant on defined contribution (DC) pensions, the demand for more information will increase in line with the wider choices available. Unfortunately, in practice SMPIs have not kept pace and development has been slow. This is based on historic response to change and a tendency to do the minimum required. Jacqui Thompson considers what can be done to tackle this issue.

The evolution of the SMPI

When they were introduced in 2003, the original key objective of SMPIs was to make individuals more aware of the need for retirement planning by highlighting the projected income from their pensions and so help them to establish how far it is likely to meet their needs and expectations in retirement. The principle of the legislative framework that governs SMPI content was sound.

An issue has been the assumptions used in projections. Members should not be misled or enticed by unrealistic growth assumptions and projections. In order to provide projected values of an individual’s pension at the point of retirement, guidelines set by the Institute of Actuaries (and more recently the Financial Reporting Council) which required more ‘realistic’ growth assumptions and annuity rates were introduced for the purpose of helping individuals understand what their pension was likely to be in retirement.

The introduction of pension freedoms from April last year has increased member choice and removed the requirement to purchase an annuity. Some of this flexibility has been translated into the SMPI guidelines, by allowing SMPIs to be based on level, and/or single-life pensions and/or incorporating lump sums. However, trustees and providers have tended to provide SMPIs without taking advantage of the new flexibility. Many produce communications that could be regarded as stale, rather than enhancing their systems to make SMPIs more appropriate and engaging for members. For a number of providers, this has come at a time when more immediate concerns (such as pension flexibilities, automatic enrolment and product development) were given higher priority.

The impact of being inconsistent

Different providers and trustees are able to use a variety of different assumptions for SMPIs – the possible range can make it difficult for members to compare year-on-year illustrations if they have had a change of employment. 

Some providers (perhaps limited by their systems) use the mid-range assumptions directly from the Financial Conduct Authority’s point-of-sale guidance. This may not be appropriate as this guidance is meant for a specific purpose.

Most SMPIs only provide one illustration i.e. on a single set of assumptions. With the number of variables and extended choice now available, there is an argument for including a range of possible outcomes. If the inclusion of a range of outcomes became ‘best practice’, this would certainly help members better understand their position when comparing year on year illustrations.

IT solutions can help and hinder

The IT systems currently used to produce SMPIs may limit flexibility and may not be equipped to deal with multiple requirements or provide additional information beyond the minimum required under the legislation. Whilst it will be difficult for providers to ensure that all options are taken into account, at a scheme level much can be done to consider member data and provide good indicators to members to ensure individual targets are on track with what they expect at retirement.

Developments in projection software could allow for simple additions, such as being able to quote different retirement ages to enhance statements, providing members with more meaningful information on how much longer they may need to work to achieve a particular income level in retirement. This could, in turn, encourage members to save more and reduce the possibility of a disengaged older workforce that is forced to continue working beyond ideal retirement years.

Further risk

SMPIs should include enhanced caveats for such individuals who can then discuss their specific circumstances with financial advisers
 

SMPIs and online projection tools are most useful for the vast majority of individual members who are unlikely to have any Lifetime Allowance issues. However, for members with larger benefits who could be impacted by the Lifetime Allowance, they can potentially be misleading. SMPIs should include enhanced caveats for such individuals who can then discuss their specific circumstances with financial advisers.

Management and governance information

SMPI membership data can be collected and analysed to provide useful governance information to assist trustees and companies. Trustees have fiduciary responsibilities and the Pensions Regulator has increased its focus on governance of DC schemes, as evidenced in the new DC code of practice, published in July, where a tougher stance is being taken on compliance with governance and ensuring good member outcomes. Companies will want to know whether their employees are going to be able to afford to retire. However, use of information contained within the SMPI is often underutilised by trustees and companies.  A company or trustees that are aware that a significant proportion of employees or members will not have sufficient retirement savings can improve outcomes by proactively encouraging pension savings or reviewing scheme designs.  

Conclusion

In the current climate, it is all too easy to overlook the humble SMPI and focus more on other forms of member communication and product development. With some simple additions, however, trustees may be able to provide members with more meaningful information and increase member engagement.