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Real statements
Pension statements are set to change. Ian Naismith discusses the intiatives that are likely to impact future statements

Very few people of working age have any idea of how much their pension will be. Some believe – rightly or wrongly – that their employer’s scheme will give them a decent level of income, while others have a misplaced confidence that the state will provide for all their needs. And an increasing number are simply paying part of their income into a pension arrangement, and hoping it will be enough. But will it? The need to provide individuals with understandable information about their prospective pension has been recognised by both the government and the pensions industry.

This has led to several initiatives, which will transform the information individuals receive each year in future. Although the changes should help a lot in the longer term, there is a risk of confusion when clients first receive the new statements. It is therefore important that IFAs understand what is happening, so that they can guide clients through them. Here we outline the likely changes to pension statements arising from four initiatives: stakeholder pensions; raising Standards; statutory money purchase illustrations; and combined pension forecasts.

Stakeholder pensions
Stakeholder pensions will have an important influence on future statements, both directly and indirectly. The direct influence comes through regulations for yearly statements sent to stakeholder policyholders. These go well beyond the legislative requirement for personal pensions, which is essentially a statement of total contributions and current transfer value. Stakeholder statements will include details of all contributions paid, of the policy value at the start and end of the year, of investment gains or losses and of charges (initially as a percentage, but ultimately as a monetary amount).

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There are currently no proposals to extend these requirements to other types of pension, but that could come later. The first stakeholder yearly statements should be produced in April 2002. The indirect influence of stakeholder is in the illustrations incorporated in the decision trees. These illustrations are very different from those used for other products in that they show values in real (inflation-adjusted) terms, and only one growth rate is used rather than the normal two or three in other illustrations. Illustrations on yearly statements for money purchase pensions will operate on a similar basis, and it may well become the standard for all illustrations. Some issues this raises are outlined below.

Raising standards
Raising Standards (also known as Project SALTR) is a major initiative by the Association of British Insurers (ABI) that aims, among other things, to significantly improve the clarity of communications with policyholders. The first companies to be accredited under the scheme will be announced in October of this year. As well as making immediate changes to key features and initial illustrations, they will commit to meeting new standards for statements within a year. These will include using clear layouts and easily understood text, and providing specified information in a set order. The information includes transfer values this year and last year, a full current valuation (split by investment funds where appropriate), details of payments into the plan during the year and an illustration of possible benefits. It will mean that policyholders will receive clear and consistent information from all providers who are accredited under the scheme.

Statutory money purchase illustrations
The other two initiatives will be driven by the Department for Work and Pensions (DWP – formerly the Department of Social Security) under the banner of The Pensions Service. Statutory money purchase illustrations will require pension schemes (including personal pension and stakeholder schemes) to provide each member who has money purchase benefits with a yearly statement illustrating what their pension could be. This was originally to be a legal requirement from April 2002, but has now been put back to April 2003. As with stakeholder decision trees, these illustrations will be in real terms, and at only one growth rate. A group from the Institute and Faculty of Actuaries are working with the DWP to develop a basis for doing the calculations.

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This is now at the second consultation stage. The basis initially proposed was very complicated, but there have now been some simplifications. However, the calculations are still likely to be more complicated than ones used for illustrations at present. A key consideration with these illustrations is how consumers can be helped to understand the uncertainty in the amount of pension they may get. This becomes a particular issue when only one figure is being given. Consumers may naturally assume that this figure is in some way guaranteed, or at least very close to what they will get. In fact, with uncertainties about both future investment returns and the level of annuity rates, the final pension could be very different from the one illustrated. Very clear warnings about this will be needed.

A second issue is what assumptions should be made about the future, including investment returns. Illustrations in real terms tend to ignore the difference between price inflation and earnings inflation, which can be considerable over time. If the growth rate used is based primarily on the return above price inflation for instance, 4.5 per cent a year, the final pension could be a disappointment if the individual had previously calculated what it might be as a percentage of final earnings. There are therefore significant issues with statutory money purchase illustrations, and these will have to be addressed in the consultation. However, to the extent that they will give clients a much more realistic view than at present about what their pension might actually be worth, their introduction should be welcomed. They should encourage pension contributions at a level that will enable individuals to prepare adequately for their retirement.

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Combined pensions forecasts
The final piece in the jigsaw is giving consumers an indication of what their total pension, state and private pensions combined, might be. It is already possible to obtain an estimate of state benefits from the government, but take-up of this service has been very low. The government is therefore very keen that pension schemes and providers should provide the whole picture in their statements. Legislation has been passed to overcome the data protection issues and individuals will be given the opportunity to opt out. A pilot project is being run with a small number of schemes and providers, and the government hopes this will rapidly be extended to others.

The initiative is voluntary but major players will be encouraged to become involved quickly, and the aim is that 15 million consumers will be receiving these statements by 2005. These forecasts are in real terms and statements will show separately basic state pension, state second pension, including SERPS benefits, and private pension. Information on state pensions will be provided electronically by DWP to the scheme or to the provider. This initiative is welcome because it will help consolidate information the consumer receives. The main concern is that anyone who has policies with several different providers could receive a statement from each of them that includes an allowance for state pensions. There is therefore a danger that people could add them all together, and end up counting the state pensions several times.

Issues for IFAs
In the short term, it is important for IFAs to be aware of what is going to happen. However, their main involvement will come when clients start to receive the statements. They are likely to be looking for help, particularly because the numbers and layouts will be very different from what they are used to. IFAs will have a vital role in consumer education, and in ensuring that the pitfalls highlighted above are avoided. With many people realising, perhaps for the first time, how much more they need to save for their retirement, there will be significant new business opportunities to go with the inevitable workload.

Ian Naismith is head of marketing and sales technical at Scottish Widows

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