Annual SMPI ‘snapshot’ of pension projection weird and confusing
DC schemes should give more thought to how benefit statements are calculated
12 May 2017 - Estimated reading time: 2 mins
DC pension income predictions are likely to shock members this year as they could be between 8% - 20% lower than they saw last year, leading pensions and benefts consultancy, Hymans Robertson warns. As members receive their SMPIs for 2017/18, schemes have a duty to provide context, reassurance and guidance through their communications. Otherwise there is a risk that members will have knee-jerk reactions and be put off saving.
Statutory Money Purchase Illustrations (SMPIs) have been required by the DWP and issued annually to members since 2003. They illustrate the pension a DC member can expect to retire with based on inflation linked annuities.This year the income predictions are due to be significantly lower than when SMPIs were first introduced, primarily caused by the increasing cost of guaranteeing a pension via an annuity
The potential fall in projected benefits by between 8%-20% this year compounds a far greater change since 2003. Hymans Robertson’s calculations show that a 25 year old earning £25,000 p/a in 2003 and contributing 4% of their salary (rising to 10% by retirement), with this contribution matched by their employer, would have expected to receive a pension of 70%-80% of their salary upon retirement. Bringing the same example forward to today would only see them expecting to receive 20%-25% of their salary at retirement. This is a reduction by more than half and highlights the need to provide additional support and context for members, if they are to make informed decisions.
Paul Waters, Partner and Head of Guided Outcomes, Hymans Robertson, comments:
“It has long been our view that SMPI projections represent little more than a snapshot in time and fail to accurately communicate the context for members to make the best financial decisions for their needs. They are rarely read and often misunderstood.
“With the number of DC schemes growing and representing an increasing proportion of savers it is crucial we accurately and sensitively convey how funds grow over time and how they can be used to finance retirement. Members have a range of options at retirement and SMPI statements do not reflect this.
“Younger members need help understanding the level of income they will need in retirement and are they on track. Older members need help in understanding the new flexibilities that are available to them. SMPI statements do neither. A different approach is needed, backed up by technology that can deliver the level of personalisation and simple messaging required. We do this through Guided Outcomes™”
Nick Throp, Founder of likeminds, employee communications agency comments:
“As pension decisions become more complex and increasingly unique to an individual’s specific circumstances, clear communication is essential. Pension scheme trustees have a duty to communicate this information carefully to provide a full explanation of what these numbers mean to members over the long term.To rely purely on the numbers risks disengaging members from their savings habits when it is widely accepted that the vast majority are already not saving enough.”