BAS TM1 Version 2 signposts need for widespread changes to SMPIs

Dunstan Thomas, the retirement software specialist, is alerting retirement planning product providers that the latest mandatory requirements as well as optional recommendations contained within the Board of Actuarial Standards Technical Memorandum TM1: Statutory Money Purchase Illustrations, published on 22nd December 2011, point the way towards the need to redesign their annual Statutory Money Purchase Illustrations (SMPIs) to make these documents more useful for the millions of money-purchase policy holders that receive them each year. Mandatory changes to SMPI reports need to be available for illustrations run after 6th April 2012.

Mandatory changes relate to annuity calculations in particular. Interest rates which need to be used in calculating annuity rates should be based on new mortality assumption changes. The key change is that the mortality of the member and his/her spouse must be derived from 50% of each of the tables PCFA00 and PCMA00. Mortality improvements must also be derived from a blend of 50% of each of the CMI mortality projections models. Dunstan Thomas is embedding these changes into its Imago Front Office SMPI capabilities but is going further to discuss options for overhauling SMPIs in line with TM1 Version 2 changes.

The Board of Actuarial Standards (BAS) focuses its optional recommendations in four core areas. These are:

  • Managing expectations: BAS wants providers to look harder at ensuring members getting closer to retirement have retirement fund size and growth assumptions which are fully in line with market conditions. They also want them to be able to illustrate changing values if policy holders make adjustments in contribution or retirement date for example.
  • Risk & Uncertainty: providers should consider providing additional information and projections based on real world risks and uncertainties. This might include use of stochastic modelling to calculate fund growth. Stochastic modelling builds in real risks that few anticipate but we can all imagine easily in today’s more uncertain times. It might be possible at the very least to illustrate the impact of a 1% rise in the investment return or interest rate used in calculating the annuity rate for example.
  • Year on year comparison: Providers are encouraged to give members an explanation of any material changes to the new SMPI from the previous year’s illustration. Any changes arising from the abolition of money-purchase contracting-out could be detailed this year for example. If the member did not actually increase their regular contribution last year the effect of this could be noted on the SMPI. This sort of information could serve to educate the policy holder and persuade him to keep contributions up.
  • Asset-level projections: If a member has invested his pension in a number of different funds then providers should consider explaining the different characteristics of each fund; the performance of each over the last year, as well as expectation going forward. In some scenarios it may make sense to illustrate alternative fund choices and show what growth would have been if funds had been put there, again for comparison purposes

The key thrust of TM1 Version 2 is to transition the statutory illustration into an annual review document that explains in a clearer and more detailed way what the customer can expect from his pension and what he needs to do to ensure it delivers to expectation. It needs to become a document which can genuinely be used to support the policyholder’s understanding of what he can expect in retirement.

Natanje Holt, managing director, Dunstan Thomas, said:

“We will be discussing the implications of TMI Version 2 with all our clients in the coming weeks and stimulating them to make design changes so that this key review document becomes much more useful one for policy holders. It is important that SMPI really helps members understand what they have achieved already in terms of saving for retirement and what still needs to be done.”

SMPIs must be sent to all money-purchase/defined contribution pension policyholders annually to help them understand how much each policyholder has saved so far for retirement and what the projected final value is likely to be at retirement.

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