Andy Bell: What the FRC can learn from Glastonbury

The youngest and oldest ever headline acts were the talk of Glastonbury. Is Paul McCartney too old to have a pension? Is Billie Eilish too young (for a 401k)? Am I the only one asking these questions?

It is strange where sleep deprivation and a ropey diet take your mind.

As I meandered around Worthy Farm, I found myself marvelling that every corner of society was represented in the 200,000-strong throng. A survey sampler’s dream!

How would the camping masses engage with Pensions Dashboards come the day they finally launched? What would their view be on volatility-driven statutory money purchase illustrations (SMPIs) growth assumptions? If only I had the time and the courage to ask.

The FRC’s proposals will be right up there with the most unnecessary and counter-productive interventions in my time in the industry

Why was I thinking about SMPIs at Glastonbury? Because the Financial Reporting Council (FRC) is proposing an overhaul of the growth assumptions used in SMPIs that – if introduced as planned – will be right up there with the most unnecessary and counter-productive interventions in my time in the industry.

Dashboards and SMPIs

The problems centre on the projected retirement income that Pensions Dashboards will show. Dashboards will use SMPIs to model potential growth of pension pots and show the ‘Expected Retirement Income’ (ERI) those pots could generate.

‘Keep it simple’ is the real lesson to be learned

However, SMPIs are not uniform, with different schemes currently using different growth assumptions – potentially causing confusion if people compare their different pension pots on the dashboards.

The FRC, which sets guidance around SMPIs, wants to change the rules to introduce consistency. Quite right. But it is proposing pension schemes produce growth assumptions based on the volatility of the underlying fund over the past five years. 

The problems

There are some practical problems with the proposals, not least they only refer to funds and completely ignore other assets people now commonly hold in pensions such as shares and bonds. 

However, the bigger danger is that the reforms proposed by the FRC risk causing confusion for consumers and ultimately undermine the core purpose of Pensions Dashboards, which is to help give people a better understanding of their retirement savings. 

The FRC and FCA should use this as an opportunity to introduce a straightforward methodology that could then be used for Pensions Dashboards

Under the proposed approach, the growth assumption for a particular pension pot will potentially be different each time someone looks at a dashboard if their investment mix has changed. Additionally, each pot they view via the dashboard will potentially have a different growth assumption if the investment mix differs between pots. 

The illustration will also differ from the one they were given when they initially started saving in the pension because SMPIs are calculated on a different basis from FCA-regulated point-of-sale illustrations.

Hardly straightforward for people to understand. And for what purpose? 

We all know projections are a very rough guide and these reforms will not increase their accuracy. 

There are so many assumptions made when illustrating future pension benefits – that customers’ investment mix stays the same for the entirety of their pension accumulation, they will retire at the date they say, they take a level single life annuity but no cash, their contributions continue at the current level.

So many – undoubtedly wrong – assumptions. So, why overcomplicate the investment returns assumption? It is arguably the element that is hardest to predict.  

SMPIs are not uniform, with different schemes currently using different growth assumptions – potentially causing confusion

Instead let’s put ourselves in customers’ shoes – as the FCA’s Consumer Duty will require – and ask what would a normal person want from this service? The answer is something that is simple, consistent and easy to understand. 

The FRC and FCA should therefore use this as an opportunity to introduce a straightforward methodology for point-of-sale illustrations and SMPIs that could then be used for Pensions Dashboards. 

This should be based on a single composite growth assumption set by the FRC that all providers have to use, with an explanation that if customers hold lower-risk assets the growth rate may be lower and if they hold higher-risk investments it may be higher. 

I am to music what most festival goers are to Pensions Dashboards. It is fair to say I got a headache trying to work out where to be and when. 

The problems centre on the projected retirement income that Pensions Dashboards will show

Many hundreds of acts performing over 80 stages. Without the navigational skills of Christopher Columbus, getting from one stage to another in anything less than an afternoon is nigh on impossible. 

I would liken what the FRC is proposing to the festival regulator telling Emily Eavis she has to give everyone a personalised Glasto agenda that will suit their musical taste. 

And don’t be surprised if it bears no semblance to reality. ‘Keep it simple’ is the real lesson to be learned.  

Andy Bell is chief executive at AJ Bell