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At Standard Life, we want our advisers and their clients to feel confident that our investment solutions are designed to deliver outcomes in line with their expectations and that the information we provide is accurate, up-to-date and in line with industry standards.
A recent update to the ‘Actuarial Standard Technical Memorandum 1 (ASTM1)’, prompted us to set-up a project to review and update the methodology and assumptions used to calculate Statutory Money Purchase Illustrations (SMPIs) i.e. the projected funds and pension figures in Annual Benefit Statements.
From 1 October 2023 the new SMPI rules on how we estimate pension fund value and income in retirement in annual pension benefit statements come into force. Annual statements issued from October will include the new ASTM1 projected pension fund and income values. They will also signpost www.standardlife.co.uk/assumptions for more information on the changes.
What is ASTM1?
ASTM1 is a technical document that sets out the methodology and actuarial assumptions that should be used when calculating SMPIs.
What is an SMPI?
An SMPI is an illustration of future projected pension benefits, in monetary terms, that could be payable for end clients/plan holders together with a projected fund value. ASTM1 sets out the methodology, including growth rate assumptions on investments and basis of pension benefits that can be used.
Why are these changes being made?
In February 2022, the Financial Reporting Council (FRC)* published a consultation paper to propose amendments to ASTM1, with the aim to produce more consistent, comparable results across Defined Contribution (DC) pensions and to make the projections more suitable for a dashboard environment. The FRC has taken feedback and developed ASTM1 v5. One of the key changes to ASTM1 is in relation to the projected growth rates on investment funds.
*The FRC is an independent regulator responsible for regulating auditors, accountants, and actuaries.
What impact will this change have?
As a result of this recent update, projected growth rates on investment funds used within the SMPI calculation routines will change, impacting future projected fund values for end clients/plan holders in Annual Benefits Statements.
To be clear, this change will not impact actual fund value, unit holdings or performance, it is simply a change to how we calculate projected returns.
We have reviewed our largest 30 funds based on these changes and as a result, two will see growth assumptions rise, 14 stay the same and the remaining 14 reduce. Changes to some of our key funds are set out below:
| Fund | Previous Growth Rate | New Growth Rate |
|---|---|---|
| Sustainable Multi-Asset (PP) Pension Fund (CCHD) | 5.5% p.a. | 5% p.a. |
| Sustainable Multi-Asset (AP) Pension Fund (DDNA) | 5.5% p.a. | 5% p.a. |
| Standard Life Sustainable Multi Asset Growth Pn (LPNL) | 5.5% p.a. | 5% p.a. |
| Standard Life Sustainable Multi Asset Pre Retirement Pn (CEMH) | 4.5% p.a. | 3% p.a. |
| Standard Life Sustainable Multi Asset At Retirement Pn (PLND) | 3% p.a. | 3% p.a. |
| Standard Life Managed Pension Fund (FA) | 5.5% p.a. | 5% p.a. |
| Standard Life Property Pension Fund (FM) | 4.5% p.a. | 1% p.a. |
When will this change happen?
The FRC have confirmed the changes will apply from 1 October 2023, all SMPI’s after this date will be calculated using the updated methodology and assumption rates.
What will the impact be on the SMPIs in Annual Benefit Statements?
Up to 1 October 2023, we calculate how much a plan holder’s pension could be worth at retirement using a growth rate. We set this rate based on how we expect the funds to perform over time.
From 1 October 2023, pension providers will use one of four future growth rates for each fund the member is invested in, these are: 1%, 3%, 5% or 7%. If a member is invested in a range of funds, we may then use a composite of that rate to project the fund (e.g. the member is invested 50% in a 1% fund and 50% in a 7% fund, the overall growth rate applied to the projected fund is 4%).
The FRC sets projected future growth rates based on how much and how often the price of the investment funds has changed over the last five years i.e. based on volatility.
The move to volatility-based setting of growth assumptions rather than a method-based approach has generated challenges from the industry that projected growth rates could move significantly.
What does this mean for clients/plan holders?
Projected pension fund values – If the new growth rate is lower than the rate used last year, the projected fund value at retirement provided in Annual Benefit Statements could be lower when compared to last year’s figures.
If the new growth rate is higher than the rate used last year, the projected fund value at retirement provided in Annual Benefit Statements could be higher when compared to last year’s figures.
Projected pension income values – Annual benefit statements also include projected pension income values. In line with ASTM1, from 1 October all pension providers must use the same set annuity assumptions to calculate projected income values. The set assumptions are:
- annuity payments will not increase
- annuity will not be paid to any dependant on death
- guaranteed for five years
- no tax-free lump sum is taken
For most clients/plan holders there will be no noticeable difference as most statements already use these assumptions.
How will we support advisers and their clients?
Annual Benefit Statements and other relevant documents will include a URL web link giving clients access to more detailed information on the changes and why they have been made.