Parallel universe (or multiverse) is a theory which suggests that many worlds and realities can exist at the same time. It has been a popular subject in fiction because the concept surrounds a question we ask ourselves all the time: “What if I made a different decision?”. The multiverse that pension projections, i.e. forecasts of retirement income, are living in is quite similar. There are currently two main sets of rules, universes if you’d prefer, which outline decisions and assumptions that providers need to make when they do a required forecast. These are FRC’s AS TM1 and FCA’s COBS13. Their rules are not entirely the same, and providers need to follow the right rules depending on where the forecast is provided, e.g. on a statement or digitally. Therefore, the projections you receive from the same provider could be different online and offline, even if they are made on the same day. (It’s different again for retail investments outside pensions.) Making it even more complicated, under each set of rules, there are also options that providers can take into account, for example the assumed growth rate. These are all permitted and there is no right or wrong to it – after all, it is a forecast of the future and providers can only simulate one possible scenario in one universe at a time. However, this makes it immensely difficult for consumers to compare and make use of the projections they receive, especially to decide which pension provides better return and their total potential income in retirements. It is simply not possible to compare projections made in a world where dogs bark, and those made in another one where dogs meow.
This could soon cause a huge risk of consumer harm because pensions dashboards will put all projections based on different assumptions into one place. Customers will naturally try to add up the values they see to understand their overall potential retirement income, without knowing these values are not actually comparable. In preparation of dashboards, the FRC’s recent consultation proposed a solution that aims to fix the inconsistency problem, at least part of it. It proposed a massive reduction in options that providers can pick during a projection under AS TM1, and a new set of fixed assumptions, including growth rates predicted based on volatility, that providers will be following.
However, as many in the industry have pointed out, the methodology is flawed because predicting future growth with past performance is dangerously wrong as a concept to be instilled into consumers. It implies that future returns will be higher in volatile funds without associated information about the risks. And it is likely to be overly optimistic or pessimistic depending on recent market activity.
While inaccurate projections could be fixed by making further adjustments, a flawed financial concept will lead to poor consumer decisions and will be difficult to fix. Some actuaries in our membership even said they may not be able to sign off such a value that fundamentally mislead customers and are very concerned that they would be compelled to do so in the future.
The work we have seen so far also unfortunately focuses heavily on (arguably spuriously accurate) consistency within AS TM1 rather than tackling the structural inconsistency issue. Providers will still need to follow FCA rules when doing projections outside of dashboards and statements, for example on their apps. These projections will continue to use different assumptions from AS TM1. The FCA has given no indication that it will follow the FRC’s proposed method, and we suspect that they will not. Therefore, while consistency across projections made using AS TM1 might improve, there can still be issues if consumers try to compare projections off and on dashboards and statements.
Perhaps most importantly, AS TM1 is not the right projection methodology for dashboards. Projection methodologies used by similar fintech services are usually much simpler so they can accommodate personalisation and real-time projections. User research[1] has already demonstrated a demand for projections that can answer more “what if” questions, e.g. what if I change my level of contribution or my retirement age. Projections on dashboards should use this as baseline and aim to provide immediate and tailored projections. DWP’s proposal for providers to return an old AS TM1 projection, potentially from 12 months ago, is clearly not the right answer to consumer needs and expectations. If similar interactive and real-time projections are to be provided using AS TM1, a lot more data points will be required from providers because of its complex nature and that is simply not practical either. We have therefore long been proposing that dashboards should be responsible for doing ‘ready reckoner’ type of projections using accrued pot values. Many online retirement projection calculators, including MoneyHelper’s, are already providing similar services. If this is not possible in the short term, pension value data on dashboards should be exportable to these calculators to provide further personalised insights.
Pensions dashboards and simpler benefit statements will encourage customers to compare the projections they receive, creating an urgent need to consider a unified projection regime for all pension communications. This revision of AS TM1 attempts to solve the wrong question, and then provides the wrong answer. Still, we hope the consultation will open discussion on how the regimes might be aligned to bring us one step closer to giving customers truly comparable projections. They cannot continue to be everything, everywhere, all at once.
[1] https://www.abi.org.uk/globalassets/files/publications/public/lts/2022/britain-things-pensions-dashboard-report-jan-2022.pdf