- The FCA is considering changes to the rules for projections used by pension tools and modellers, as part of its Discussion Paper 24-3, which examines how the FCA’s regulatory framework may need to evolve to better support consumers
- Pension projections provide savers with an illustration of how much they could eventually receive from their pension savings based on contributions, duration, and charges
- AJ Bell urges the FCA to expand the scope of the review to include a broader examination of all the projections pension savers receive throughout their pension lifetime
- The FCA sets rules for projections provided when someone first takes out a pension, and during its lifetime via tools and modellers
- However, the DWP is responsible for the framework for projections given in annual statements (statutory money purchase illustrations) and, eventually, the Pensions Dashboard
- The FCA’s Discussion Paper also examines making transfers more efficient while protecting consumers, as well as whether the regulatory framework for SIPPs should change
Rachel Vahey, head of public policy at AJ Bell, comments:
“The FCA is right to look at changes to the rules for pension ‘projections’ so they become more relevant, understandable and readable through an app, rather than always via a PDF.
“Projections should be a key piece of information for the pension saver, showing them how much they could receive from their pension savings based on contributions, duration, and charges, in turn helping them to keep on track to realise their long-term pension goals. But instead, they currently risk confusing pension savers by providing inconsistent information throughout the pensions journey. The FCA and the DWP set different rules for various types of pension projections.
“Instead of tackling one type of projection in isolation – tools and modellers – the FCA and DWP need to work together to fully review all the different projections pension savers receive throughout their life.
“Pension projections will always be an ‘educated guess’ – they can never be entirely accurate, as future uncertainties are inevitable. But regulators need to think carefully about what information people need and how to relay this.
“We recommend building a foundation framework to give essential details to defined contribution pension savers to allow them to compare pensions from different providers. Firms should then be given the flexibility to build interactive tools, adding layers of information and allowing pension savers to personalise the projection to make it more meaningful for their situation.”
The different types of projection
“Projections are given to pension savers at different times during the pensions journey. These show what future pension pots could be worth, and how much income the saver could receive, assuming an annuity is bought.
“The FCA sets the rules – both the presentation and calculation basis – for projections offered by FCA-regulated firms, such as SIPPs. They specify when projections must be provided, such as when a pension is set up or accessed for the first time. These rules also apply to projections given through tools and modellers.
“The DWP sets the rules for projections given in annual statements where the pension pot has not yet been accessed (also known as uncrystallised funds). The layout and information shown on the annual statement differs depending on whether the pension is part of a defined contribution automatic enrolment scheme. The DWP will also use broadly the same calculation basis for projections shown on the Pensions Dashboard.
“However, the FCA sets the rules for annual statements for pensions in drawdown – in other words where the pension pot has already been accessed (also known as crystallised funds). The FCA and DWP set different calculation bases, including different growth rates and different future rates of inflation. On top of this, the DWP assumes that pension members won’t take tax-free cash when they take an income, whereas the FCA projections include this assumption.
“This can paint a confusing picture for pension savers as the projections they receive at different times could be calculated on a different basis, throwing up spurious results.”
