Home > News > 2003 > February 2003 > Statutory Money Purchase Illustrations
Statutory Money Purchase Illustrations
Chris Potts from the Amersham office describes the new Statutory Money Purchase Illustrations that come into force this April
From 6 April 2003, annual illustrations of the prospective pension must be given to scheme members or policy holders of most approved pension schemes providing benefits on a money purchase basis. The supporting legislation is The Occupational and Personal Pension Schemes (Disclosure of Information) Amendment Regulations 2002.
The main principle behind the legislation is to help individuals plan for their retirement and encourage long term savings.
In practice, the illustrations will normally be issued with the annual benefit statement which is already required under existing disclosure regulations.
It is the responsibility of the trustees to ensure that statutory money purchase illustrations (SMPIs) are provided. Most trustees of money purchase schemes should be fully aware of the new requirements. However trustees of defined benefit and small self administered schemes (SSASs) may need to check whether they are also caught by the legislation.
Defined benefit schemes providing money purchase additional voluntary contribution (AVC) arrangements, either within the scheme or via a third party provider, will have to provide SMPIs. Some traditional AVC providers, such as building societies may not be changing their computer systems to produce the SMPIs. Additionally, they may not hold sufficient personal information about the members to process the calculations. Trustees will need to check with their administrators to ensure that the SMPIs will be produced.
Similarly, any other benefit provided on a money purchase basis, such as transferred in benefits, underpin guarantees and, potentially, ex-spouses granted membership under divorce settlements, will also be affected. With regard to underpins, these may need special advice from the scheme actuary to judge whether the underpin is likely to affect benefits at the member's normal retirement date.
SSASs that exist under circumstances where not all the members are trustees will also require SMPIs.
For schemes caught by the legislation, there are some exceptions relating to individual members under certain circumstances. Notably, members with funds valued at less than £5,000 at 6 April 2003, with no actual or expected contributions after that date, may be excluded. Another exception is members within two years of normal retirement date.
The calculation basis is defined in Technical Memorandum 1 which has been prepared by the Institute and Faculty of Actuaries. The pension illustration must be prepared in "real money" terms, allowing a direct comparison of the illustrated pension with the member's present day income and cost of living.
Most elements of the calculation are prescriptive, such as the annuity basis. However, there is some flexibility to allow for the individual's personal circumstances, such as marital status, future contribution and contracting-out status assumptions. Investment returns may be adjusted to reflect the scheme's investment strategy subject to a growth rate capped at 7% per annum.
Two regulatory bodies are involved in the implementation and policing of the new legislation as it bridges both the retail and private sector of pension provision. Pre-emptive communication is always a big issue when introducing major changes to benefit statements and the FSA and OPRA have sensibly joined forces to produce an explanatory leaflet available at a nominal cost for issue by providers and trustees.
Current financial market conditions will mean that the first round of SMPIs will show fairly low illustrated pensions (unless the stock market makes a remarkable recovery over the next few months). Exactly what effect this will have on individuals attitude to pensions saving in general, and money purchase products in particular, is uncertain. Meanwhile, administration teams are bracing themselves for a surge of enquiries. Hopefully, good communication will reduce the amount of enquiries and encourage individuals to maintain or increase their level of savings for retirement.
Chris Potts, February 2003.