What changes are Financial Reporting Council making?
The Financial Reporting Council (FRC) is changing the approach used to calculate projected pension fund growth rates for all UK pension providers that offer defined contribution (DC) pension plans.
The aim is to enable more comparable results across DC schemes and will come into effect from 1 October 2023.
The change for calculating the future growth rate of funds is outlined in the recently updated ‘Actuarial Standard Technical Memorandum 1’ (ASTM1). ASTM1 is a technical document that sets out the required approach for producing annual Statutory Money Purchase Illustrations (SMPIs) received by members saving for retirement in DC pension plans. You can find out more about the technicalities of this change on the FRC website.
What impact will the FRC change have?
For Standard Life funds, the FRC update will change how we calculate the projected growth rate on investment funds. This will impact the value projected on members’ Annual Benefits Statements. There is no impact on actual fund performance.
Before 1 October 2023, we calculated how much a member’s pensions could be worth at retirement using a growth rate. This rate was based on how we expected the funds invested to perform over time.
From 1 October 2023, all UK pension providers will use one of four future growth rates to calculate what members’ pension could be worth at retirement: 1%, 3%, 5%, or 7%. These rates are set by the FRC and are based on how much and how often the price of a fund has changed over the last five years. This is called ‘fund volatility’.
We’ve 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.
Here are a few of our most popular funds as examples:
- Sustainable Multi-Asset (PP) Pension Fund (CCHD) reduces from 5.5% pa to 5% pa
- Sustainable Multi-Asset (AP) Pension Fund (DDNA) reduces from 5.5% pa to 5% pa
- Standard Life Sustainable Multi Asset Growth Pn (LPNL) reduces from 5.5% to 5% pa
- Standard Life Sustainable Multi Asset Pre Retirement Pn (CEMH) reduces from 4.5% to 3% pa
- Standard Life Sustainable Multi Asset At Retirement Pn (PLND) stays at 3.0% pa
- Standard Life Managed Pension Fund (FA) reduces from 5.5% pa to 5% pa
- Standard Life Property Pension Fund (FM) reduces from 4.5% pa to 1% pa
What does the FRC change mean for your members?
If the new growth rate is lower than the rate we used last year, the pension fund value at retirement shown on your members’ statements could also be lower.
If the new growth rate is higher than the rate we used last year, the pension fund value at retirement shown on your members’ statement could also be higher.
The projected annual income figure assumptions will remain the same for most of your members. These assumptions are:
- Annuity payments won’t increase
- No dependents pension in the event of members’ death
- If the member dies within the first five years, the payments will continue to the end of the five-year period
- No tax-free lump sum is taken
Members' Annual Benefit Statements will include a link to a web page that explains the changes and what these mean for their projected retirement value.