The steps to shorter, simpler Standard Annual Statements
Building on the 2017 review into Automatic Enrolment, the latest area the Government have launched a consultation on is how to deliver simpler annual pensions statements (1). The aim being that they are shorter, more straight forward and ‘have information that is easy to understand and will help members plan for the retirement they want’ (1).
The Standard Annual Statement is a two-page template that standardises how workplace pension schemes tell defined contribution (DC) members about their pension pot (2).
The consultation will focus on 3 key areas:
- The principle of having shorter, simpler statements and how to deliver its adoption through voluntary and mandatory approaches
- Presenting information on costs and charges that can help members identify what they have paid for their pensions
- Ownership of the guidance on the assumptions used in statements and how they can help members identify if their savings are on track (1)
Adopting simpler statements
In the modern workplace, workers are much more likely to have more than one workplace pension pot over the course of their career from many different providers (1). Each year, workers therefore receive a ‘number of statements from each of their providers which may be inconsistent in length, language and style’ (1). This ‘inconsistency makes it difficult for individuals to compare multiple statements’, get an overall view of their current pension pots and what they have paid for them, as well as future planning and taking meaningful actions based on the statements (1).
Simpler statements are a logical step towards continuing the momentum of automatic enrolment and pensions engagement. Whilst providers are investing in such developments, this is happening in silos with no standardisation across organisations (1).
Of course, a standardised approach across the board is a no-brainer, and I’m in full support of encouraging better awareness and understanding of pensions, and healthy financial planning practices.
But despite being ‘designed to be something just about any UK scheme can use’ (2), as my good friend Henry Tapper writes, ‘The DWP are not exactly forcing this down the pensions industry’s throat’ (3). As mentioned above, the consultation looks to assess the pros and cons of both voluntary and mandatory approaches to adoption. If the approach is not mandatory, what’s the point? We’ll end up in the same situation we’re in now, potentially with even more inconsistency across the market. As Henry writes ‘it seems absurd for us to go through this consultation without making compulsion the expected outcome’ (3).
It’s got to be mandatory to be meaningful change.
Costs and charges
As of 2018, the consultation summary reminds that ‘Trustees are required to publish information on the costs and charges for each arrangement and fund in which members are invested’ (1). This is alongside ‘other relevant information, such as illustrations of how those charges compound over time, the trustees’ assessment of value for money (VFM), and details of the funds’ default strategy’ (1). Currently schemes are required to signpost this in the annual statement via a ‘weblink’, and ‘members can request a copy of the information where it is unreasonable for them to receive it electronically’ (1). The question is do we as members look at VFM? and as employers do we, who have skin in the game, encourage that scrutiny? It’s foolish to think employers choose a workplace pension and then walk away. The cost to the salary bill and prospect of employee relations damage if things go wrong (as they did at NOW pensions) should be encouragement enough to focus on VFM too.
Since 2018, the Government have been encouraging providers to present member-level charge and transaction costs information directly on the face of their annual benefit statements (1). For the purpose of the consultation, they have therefore proposed to ‘amend the disclosure regulations to require relevant schemes to include member level charges and transaction cost information in pounds and pence on the annual benefit statement’ (1). This does not include non-workplace pensions at this time (1).
Reading between the lines of the consultation summary, you can tell the Government have a preference to keep things just to the weblink. Their justification is that it gives members further detailed contextual information and allows for comparison. But on an already complex form, who can pick this out amongst the other competing messages?
They do reflect that the most engaged members will still look online for the more detailed information and see the benefit of sharing costs and charges in a simple way (particularly as members ‘have the right to know how much money they are paying, as with other financial products which do not deliver a guaranteed return’!) but to me there’s still a hint of reluctance to do so (1).
In my mind, it’s got to be there on the face of the form, plain and simple. Even if it’s an average or overview, this whole process will fail as an engagement exercise if it’s not. A pension is the only product you’ll ever buy that the ‘salesman’ cannot tell you how much it will cost you and suggests you’ll have to wait 40+ years to find out!
Guidance and tracking savings
The key considerations to improve the simplicity and comparability of the information in the annual statements are:
- DWP owning the assumptions underpinning the annual benefit statement – instead of the Financial Reporting Council (FRC)
- A mixture of statutory guidance and regulation being used to set out assumptions
- Aligning assumptions for the Statutory Money Purchase Illustration (SMPI) with those set by the Financial Conduct Authority (FCA) for Key Facts Illustrations (KFIs), except where we identify good reasons for taking a different approach.
So, a (predominantly) standardised set of assumptions (if imposed as a mandatory requirement!) across the board – now that’s something I can definitely get behind! Members would actually be able to effectively compare their multiple pension pots successfully, so I ardently hope this makes it through into the implementation recommendations. However, it will be interesting to see the backlash from providers given that new calculations could affect how prosperous members are under their schemes.
Consultation closes on 20th December 2019, and as always, if you’re eligible to have your say – please do!
(1) The consultation document – https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/843756/simpler-annual-benefit-statements-consultation-2019.pdf
(2) The new statement’s own website – https://www.annualstatement.co.uk/
(3) Henry’s blog – always full of excellent articles and thought-provoking posts so please do bookmark it! – https://henrytapper.com/2019/11/01/sabs-in-the-back-the-ministers-last-hurrah/#comment-136552