Insurers could face an exodus from contract-based pension schemes next year following an FCA overhaul of illustrations, experts have warned.
Under changes announced by the regulator in March, providers will be required to show customers the impact inflation could have on investment returns from April 2014.
The new rule, which will apply to generic and personalised pension illustrations for both personal and stakeholder schemes, is being introduced by the FCA after research conducted by the regulator suggested customers find this approach easier to understand.
Insurers have previously warned pension sales could suffer as a result because they would appear to be worse value than products where illustrations are based on nominal returns, such as Isas.
The move to inflation-adjusted illustrations will also see providers required to project a negative investment return to customers for the first time.
CTC Software, a firm that prepares key features illustrations for providers, says the reforms will create a bias towards trust-based schemes which are not covered by the FCA rules.
CTC director Nigel Chambers says: “Contract-based schemes will need to send members a document saying real investment growth could be negative.
“Master trusts do not have to send that document out, so I would expect to see greater opt-out rates in contract-based schemes as a result.”
Technology and Technical managing director Kim North says: “This is going to create a clear divide between contract and trust-based pension schemes.
“Unless a standard illustration regime for all pension schemes is introduced I think we will see a shift away from contract-based schemes and towards master trust arrangements.
“Under these proposals it is possible that different advisers will project different growth rates for the same fund, which flies in the face of the RDR.”