Good to keep it simple – but it needs to be right!

We live in an increasingly complex world, so there’s a lot to be said for simplicity. We’re all for making information accessible and simple. But sometimes simplifying isn’t always the right answer. Take the Pensions Dashboards as a case in point. Out for consultation at the moment is the question of how to calculate an Estimated Retirement Income (ERI) for Dashboard purposes.

[Dis]connected

While it makes sense that the results from a DC calculation on a Dashboard are on a common basis with DC schemes, as things stand, the calculation differs, which means that individuals would get two different figures. For all of us, but especially those with an existing low level of numeracy, this is not good news!

The whole premise of the Dashboards project is to connect people with their pensions; trust in the accuracy of the numbers served up is central to this.

It gets harder when you look at calculating Defined Benefit (DB) ERIs. Unlike with DC, where there is a statutory requirement to produce an estimate each year, there’s no such requirement for DB.

The ability to calculate an ERI or indeed any estimated pension depends on data quality and how good the system is at running automated calculations. Smaller schemes often rely on manual processes running on spreadsheets. The best equipped schemes will have automated most, but often not all calculations. Some are too hard to do and too expensive to automate.

The dilemma for many DB schemes without the ability to automate calculations is how to tackle the problem. Do you bite the bullet and spend a lot of money to run an ERI for each member ? Or do you wait until a view request hits then turn around a number within 10 days, which is the SLA?

Simply [not] the best

The current Dashboard consultation includes  a proposal that would involve simplifying the basis of the ERI calculation. To estimate a retirement income accurately means applying the correct factors to each tranche of benefits. The proposal suggests a broad brush approach, by simply using a rate of inflation on the accrued pension.

The rationale is that this simplified calculation will make it easier for DB schemes to generate a number. But … I have some issues with this approach:

• Firstly, many calculations will fail because the underlying data isn’t good enough. Changing the calculation basis won’t help.
• Secondly, a simplified basis still requires a calculation; it’s not clear if there would be a significant saving in a simplified approach. The DWP admits this is a concern.
• Lastly, and perhaps most importantly, the ERI will almost certainly be incorrect. You could argue that, if it’s calculated in line with the legislation, it complies with requirements, so the scheme is off the hook. But consider these points:
  • The simplified value may conflict with a number supplied by the scheme direct to the member.
  • Given that pension schemes members aren’t typically actuaries, you can’t seriously expect them to read or understand the nuances of how the number has been calculated. They’ll take it at face value and ‘bank it’.
  • Whilst the ERI on the simplified calculation basis may comply, as a trustee I’m deeply uncomfortable in suppling a number that’s not as accurate as it should be.

In conclusion, yes, of course we are striving for simplicity, but we must always ensure that the information we provide to our members is correct!