On 14 February 2022 the Financial Reporting Council (FRC) published a consultation on the actuarial standard TM1 which specifies the assumptions and methods used for calculating statutory illustrations  of money purchase benefits. 

The FRC is proposing to align the set of assumptions for the provision of Estimated Retirement Income on pensions dashboards and Statutory Money Purchase Illustrations (SMPIs).  The principle behind the FRC's changes is that any two providers projecting identical funds for identical members should calculate identical estimated retirement income.  This is not the case currently, as the current version of TM1 allows providers some flexibility in determining both the accumulation rate for projecting fund values and in the form of annuitisation chosen.  The FRC proposes that the new version of TM1 will take effect from 1 October 2023.  The consultation runs until 6 May 2022.

Accumulation rate assumptions

The FRC proposes to prescribe four different accumulation rates for different funds according to volatility, ranging from 1%pa to 7%pa.  Funds will be placed in a volatility group according to the volatility of their monthly returns over the past five years.  Returns will need to be recalculated annually to decide whether the fund needs to be switched to a different volatility group.  Where a scheme holds unquoted assets, the FRC proposes that the value of the asset as displayed on the pensions dashboards should be the same as the latest available valuation and that the asset value then increases in line with CPI indefinitely.

Where schemes apply "lifestyling", ie switching the member's fund to less volatile investments on the approach to retirement, the FRC intends to specify that accumulation rates are reduced in line with anticipated derisking as members approach retirement.  It also intends to specify that target date funds should follow an approach consistent with a lifestyling arrangement.

Annuitisation assumptions

The FRC proposes that TM1 will no longer allow flexibility in the choice of annuitisation assumptions.  It proposes that illustrations should not include a tax free lump sum on retirement and should assume a level annuity without attaching spouse or partner benefits.  Annuitisation assumptions used for statutory money purchase illustrations must be the same as those used for pensions dashboard illustrations.  The FRC also proposes that TM1 will prescribe a discount rate based on a fixed interest gilt yield for the purpose of annuity projections where the illustration date is more than two years from the retirement date.  It also proposes changes to the mortality assumptions that must be used.

Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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