I couldn’t blog about the pension dashboard without doffing my keyboard cap to Richard Smith who I feed to but who is much better at feeding back. Here for starters is a post from a couple of months that got me thinking what I’d be thinking if I was to be a pensioner at USS and saw my pension on the dashboard.
I use this as an example because all the talk at USS , its employers (UCEA) unions (UCU) and its members is about the amount of annual increases (pay rises in retirement) that will be dished out by the fund. On the employer’s side there is a wish for them to be paid out on a “what we can afford” basis – known as conditional increases (some would liken it to CDC). Nest’s default (for 14m of us) will also have the increases Nest can afford to pay (Paul Todd calls it a type of CDC).
But as far as I can see , USS and Nest’s projected income on the pensions dashboard will be the same as all the DC schemes that have no intention of delivering projections other than as SMPI. SMPI – or statutory money purchase illustrations , are quoting a level annuity as what you can expect but this is not what you’ll get from Nest or USS or from workplace CDCs for that matter.
What all these schemes (DB, DC and CDC) are doing is showing the first year’s pension on a like for like basis. But level pensions are not the same as “real” pensions. Real pensions are the ones that go up every year. Some will go up by RPI , some by CPI and one goes up with a triple lock!
My actuary, Chris Bunford, tells me that half of the value of a CDC pension is in the increases offered before and in retirement to the pension promise that we’ll show (I assume) as a SMPI or Estimated Retirement Income (as the Dashboard calls it). Whatever CDC offers isn’t guaranteed like the increases of USS (though this could change if they go “conditional”). The guarantees within DB schemes differ from full RPI to caps on increases of as little as 2.5%. In short the issue of pension increases you are getting, how secure they are and whether you get them at all, is all ignored by the SMPI.
Imagine the State Pension without not just a triple lock but any kind of increase! Imagine DB plans where the increases had been stopped (I know some private DB schemes tried to reduce liabilities by getting members to swap increases for cash incentives or bigger pensions but this is now frowned upon). Imagine how much easier for insurers and other DC providers to show off their pensions when they are offering level pensions which can only be obtained by buying an insured annuity!
To sum up, I am worried that the Pension Dashboard, in ignoring increases will be accidentally confusing people into thinking all the pensions shown to people are level and have no increase or conversely helping people to think that all their pensions are triple locked! I am sure there will be people who get confused both ways!
If all the pension dashboard was, was a “tracing service” then the question of income and of increases could be disregarded, but the dashboard has chosen to show everyone’s pensions (or pots turned to SMPI style pensions) would be irrelevant.
But that’s not what’s going to happen and if we want people to do any kind of thinking about what they’re going to get not just year one, but year 5, 10, 15, ….30 on from years one then we’ve got to explain increases.
Increases are a pension issue, not a “pot” issue, but we are now thinking of DC as a pot turned into a pension, CDC is a pension bought on the day of contribution and increased each year till death , the same works for DB, everything on the dashboard will be explained as a pension.
The Danes have struggled for many years running a dashboard that shows level pensions. Now they’re shown going down whenever there’s inflation. We have inflation almost every year! Here’s how it looks (thanks again to Richard Smith)
Its the turquoise box that goes down – as it represents a level pension like what we see on SMPIs