Pensions Bulletin 2022/06
Our viewpoint
17 February 2022
- FRC consults on proposed changes to Actuarial Standard Technical Memorandum 1
- FCA consults on pensions dashboard rules for contract-based pension providers
- Irish pension remains protected on bankruptcy
FRC consults on proposed changes to Actuarial Standard Technical Memorandum 1
On 14 February 2022 the Financial Reporting Council set out proposed changes to its technical memorandum that governs how statutory money purchase illustrations (SMPIs) are undertaken. This consultation has been driven by the ‘estimated retirement income’ needs of money purchase benefits that will be returned on pensions dashboards.
In particular, the proposals standardise the accumulation rate assumptions and the form of annuitisation at retirement in order to ensure consistency between illustrations from different providers and between different types of pension. Looking at the proposals in more detail some key points are set out below.
Accumulation rate assumptions
A fund’s accumulation rate is to be taken from one of four volatility groups the fund could potentially be placed in, with its actual placement being determined according to the volatility of the fund’s monthly returns over a 5-year period (as measured by the standard deviation of these returns).
The greater the volatility on this measure, the greater the assumed accumulation rate. A Group 1 designation results in an assumed accumulation rate of 1% pa (likely to be used for cash funds), whilst 7% pa is the rate used for a Group 4 designation (likely to be used for most equity funds).
A fund’s volatility will be recalculated each 31 December and its group designation moved as necessary, but only if the fund falls within the new group by more than a 0.5% corridor.
The accumulation rate selected will be reduced as the plan approaches retirement, in line with the anticipated de-risking (eg “lifestyle” strategies), but only where these changes are programmatic, or where there is an established practice of switching having been made.
With profits funds will have their volatility measured by reference to their unsmoothed asset returns, with a potential adjustment if the accumulation rate is lower than the level of any guaranteed return. Unquoted assets will be assumed to have a 2.5% pa accumulation rate (ie in effect the CPI assumption). Pooled funds will have their volatilities measured by reference to the overall fund and not take account of volatilities exhibited by any sub-funds.
If a member is invested in more than one fund, the projection works by reference to potentially a number of accumulation rates.
Annuitisation assumptions
None of the projected fund at retirement will be assumed to be taken as tax-free cash and so all the projected fund will be annuitised – on the basis of a level annuity without attaching spouse or partner benefits. The discount rate for the annuity will be taken from fixed interest gilt yields on the previous 15 February. Mortality will remain unisex, continue to reference core values in CMI mortality projection models but the base table will be updated to reference the experience of pensioners in the period 2015 to 2018.
However, where the illustration date is less than 2 years from the retirement date an annuity rate must be used which is consistent with that available in the market (with no lifestyle or health adjustments), provided that it is no more generous than the provider’s own annuity rates (where applicable).
Other considerations
Illustrated pensions will need to be expressed as annual amounts. The 2.5% pa inflation assumption is to remain unchanged.
Consultation closes on 6 May 2022 and the intention is that the new version 5.0 of AS TM1 will apply, from 1 October 2023, to all future SMPIs and money purchase estimated retirement income illustrations on pensions dashboards.
Comment
The big idea in this consultation package is that of setting future accumulation rates by reference to past volatility of returns and so removing any judgment in rate setting. It will be interesting to see to what extent this suggestion is supported. The annuitisation approach is also a change from current practice.
The proposals, once finalised, will require some work to be undertaken by SMPI providers in relatively short order. However, this is not the radical overhaul that it could have been, with for example the volatility work likely to be undertaken outside any projection engine.
As to the bigger picture, these reforms were expected as the current regime could have given rise to potential confusion and the possibility of inappropriate outcomes when a number of estimated retirement income projections for the same individual, from different pension pots, are lined up together on the dashboard. As such, the reforms are welcome and, some may say, are long overdue.
FCA consults on pensions dashboard rules for contract-based pension providers
On 11 February 2022 the Financial Conduct Authority launched its proposed rules for contract-based pension providers to interact with pensions dashboards. This follows the launch, on 31 January 2022, of the DWP’s consultation on regulations that are mainly concerned with how occupational pension schemes should interact with pensions dashboards (see Pensions Bulletin 2022/04).
The FCA’s proposals are as a result of the duty placed on it by the Pension Schemes Act 2021 to make rules requiring FCA-regulated pension providers to provide and facilitate the provision of information about personal and stakeholder pensions to pension dashboards.
Under the FCA’s proposed rules, pension providers must, by 30 June 2023:
- Complete connection of their personal and stakeholder pension schemes (including SIPPs) to MaPS’ digital architecture in line with MaPS connection, security and technical standards and having regard to MaPS guidance on connection
- Be ready to receive requests to find pensions that have not crystallised (ie pensions from which benefits have not yet been taken), and search records for data matches
- Be ready to return view data to pensions dashboards
A three-month window is envisaged ending on 30 June 2023 during which providers will undertake all necessary pre-connection steps.
Some very small providers will be able to elect for a later implementation deadline of 31 October 2024, so long as they notify the FCA by 30 April 2023.
The FCA consultation closes on 8 April 2022 and the FCA intends to publish finalised rules in autumn 2022, to come into force on 31 March 2023.
Comment
The FCA’s proposed rules complement the DWP’s proposed regulations and as a result cover very similar ground to the approach proposed for occupational pension schemes. For example, each provider is to be allowed to determine its own criteria for matching and the ‘value data’ that must be returned is the same as that for occupational pension schemes.
The FCA’s proposed timetable for connection by 30 June 2023 – just 16 months away – is a further indication that the pace of development of dashboards is expected to be very rapid this year.
Irish pension remains protected on bankruptcy
After a provisional ruling in the High Court (see Pensions Bulletin 2020/04) and a referral to the European Court of Justice (see Pensions Bulletin 2021/48), the High Court has now confirmed that all a member’s rights in an Irish pension scheme should be excluded from the bankruptcy estate.
The case involved an Irishman who had made substantial contributions to an Irish pension scheme before coming to live and work in the UK. He became bankrupt whilst in the UK, and the High Court provisionally ruled that his Irish pension was not available to help pay creditors (as it would not be if it were a UK-registered pension scheme).
The European Court of Justice supported the ruling, provided there was not an overriding reason relating to the public interest that the funds should be available to creditors. If there was such a reason, the means of implementation should be appropriate to ensure the objective it pursued was achieved and did not go beyond what was necessary to achieve it.
The High Court had to decide whether it needed to allow any such reasons to be tried (none having been raised to date). After examining, amongst other things, the relationship between the ECJ and national courts, it concluded that it did not and so found in favour of the individual.
Comment
Once the ECJ had supported the original ruling it seemed unlikely the High Court would need to change the original decision. So, this individual’s Irish pension benefits are now being protected as if they had been held within a UK-registered pension scheme.