Can you compare the master trust pensions with what you can do yourself?
Background
AgeWage’s has fully developed its at retirement (“Immediate Pension – IP”) comparison engine. It tells you how the retirement income you are being offered by a mastertrust compares with the best annuity you are being offered.
But most people looking at what’s going to be available will have to make a decision based on a projection, they will have an estimated retirement income (ERI) from the dashboard from October 2026. From then they will have a projection from the provider once a year till then,
Members will have a clear need to compare the potential pension (“Future Pension – FP”) from their current DC pot against different providers. We are now using software that calculates future pots and annuities using the Statutory Money Purchase Illustration methodology (SMPI)
The At Retirement (IP) engine compares the default “decumulation” quote a member could get against the best available annuity in the market. Whether this quote is based on a float and fix drawdown service, a CDC plan or a DB pension there will be three things to consider
- the initial amount payable
- the potential increases on the pension
- the security of the pension for the person who’s saved and potentially dependents.
The annuity quote is fed from an API link with a leading digitally enabled annuity broker using age, gender, postcode and pot size as inputs. A health questionnaire to compare impaired life quotes is being developed. It answers the question ”What’s my best choice for pension now?”
We think this needs to be valued so that members, employers and sometimes trustees, have a way to compare what is on offer compared to an annuity. This is a Value for Money metric and we think it can be simplified to a score out of 100, where simplification is needed.
But we are going further in our thinking. People need to think about their future decision and have a planning version.
We call this a Future Pension comparison
The initial FP comparison tool will be between a member’s SMPI-calculated annuity from their current DC pot against another provider or a future Whole of Life (or Deferred) pension. It answers the question
“Which provider could give me a bigger pension in the future?”
Calculation (the technical bit)
The SMPI regulations (the FRC’s AS – TM1 v5) derives an accumulated DC pot at the date of retirement from the current pot value and (for active DC savings) projected future inflation-linked contributions. The calculation uses the currently invested funds’ volatility ratings to derive fixed percentage growth rates.
The projected future pot at retirement is converted into a single life, level annuity (the “statutory illustration”) assuming no lump sum/tax free cash and a five year guarantee period. (NB: the Oct 2023 update AS – TM1 removed inflation linking and the spouse pension from the statutory illustration).
What this allows a member to do
AgeWage’s comparison tool takes the SMPI statutory illustration, based either on a deferred pot, or with on-going contributions, and compares it with the equivalent offering from another provider or the PSH deferred or “whole-of-life” pension quote.
The member simply inputs the following information into the AgeWage webpage/app – current pot value; target retirement date; provider name; default or funds used; and latest monthly contribution if appropriate.
He or she is then able to work out what is coming his or her way and to compare the amount from their savings provider’s decumulation option, with annuities and eventually – other decumulation options (or shall we simply call them “pensions”?).
We’ll go further than a SMPI approach, allowing people to check out lots of different comparisons depending on what you want. We want to offer more than just a comparison tool, we want to offer a planning tool for those who think in depth about their decision.
Product
A simple, easy-to-use tool that compares a member’s future pension income from their current provider, compared with a Pot to Pension quote from another provider offering them a pension or an annuity. A beta site has already been set up.
Potential SMPI comparison tool use cases
The potential further commercial use cases of the SMPI engine are wide, and could include:
- LGPS, comparing DC pot transfers in against extra LGPS benefits (“transfer in” is allowed in first year of employment).
- Employers wanting to compare their existing provider with alternatives, using an intuitive, member-centric metric.
- Fiduciaries wanting to do this for all members (including those no longer in original employment)
- Using top providers’ default funds, creation of master trust or top 20 league tables
- Potentially D2C, helping members make better accumulation provider choices. (Avoids the need to request individual contribution histories!)
Advantages of using SMPI to calculate future pensions and comparisons:
- Regulatorily compliant, widely used benchmark methodology (ie: not bespoke, so can’t be criticised)
- Intuitive to members: “how much pension might I get from my pot”
- Will produce existing pension quotes similar to those from their provider: therefore reliable/trustworthy (nb: SMPIs are annual, ours will be “live”)
- Methodology consistent with upcoming dashboards Estimated Retirement Income (ERI) predictions: will therefore become the standard for provider VFM comparisons.
- Can be deployed without becoming a regulated dashboard provider (QDPS)
- Can be part of VFM metrics and consistent with current Govt focus
- Can be white-labelled
- Builds on AgeWage’s big idea : it helps members make better choices; offers fund analysis; makes member apps more meaningful
This blog has a strongly technical readership who recognise that work of this kind is low down the priority of most providers. We would welcome input from readers who are familiar with the ideas we are floating and the methodology of SMPI, ERI and the information that members will be getting going forward.
Please drop your thoughts or write to henry@agewage.com if you would like to help us develop the IP (Immediate Pension Value for Money tool) and bring an FP (Future Pension VFM) tool to those who need it as soon as possible.
We think the pension dashboard will be a sound start, but it will need some help – so will the millions who use it!
