The cost of index-linked annuities for 2023-24 statutory money purchase illustration (SMPI) dates will be around one-third lower than for 2022-23 SMPIs. This is because gilt yields have risen sharply since last year, as confirmed by the publication of the mid-February 2023 gilt yields. As a result, projected pensions in SMPIs with 2023-24 illustration dates will be around 50% higher, all other things being equal.
This leap contrasts with very little change in annuity costs between 2021-22 and 2022-23 illustration dates. However, the large reduction in the price of annuities will not be reflected in schemes with 2022-23 SMPI dates (such as 31 December or 5 April) until next year.
Most schemes have, to date, provided illustrations on the basis of a pension which pays 50% to the spouse on the member’s death and that has index-linked increases in payment. Statements issued on or after 1 October 2023, however, will need to assume single life, non-increasing pensions following a change in the rules governing SMPIs. This change alone will approximately halve the annuity costs and almost double the pension illustrated. When this is combined with the change in yields, the annuity costs will be reduced by approximately 65% and the pension illustrated would be approximately 2.8 times higher, all other things being equal. While this may make annuities look attractive to members, it does also reflect changes in inflation and interest rate expectations that affect the value they offer.
Providers and trustees should consider this impact and how best to convey the changes that affect their members. They may also wish to consider supplementing the SMPI with additional information:
Most individuals with defined contribution (DC) pots must receive SMPIs showing projected pension benefits using annuity rates based on rules published by the Financial Reporting Council in AS TM1. These annuity rates use gilt yields at 15 February each year for illustration dates in the following tax year.
