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FSA confirms plans to cut pension projection rates

FSA Skywards Tower 480

The FSA has confirmed plans to cut the projected investment returns pension providers must use when providing illustrations to customers.

The change, which is based on recommendations from PricewaterhouseCoopers, means projection rates will be cut from 5 per cent, 7 per cent and 9 per cent to 2 per cent, 5 per cent and 8 per cent.

The new rates will come into force from 6 April 2014, although firms will be able to comply voluntarily from 6 April next year.

The change comes despite industry concern that the approach will result in providers undervaluing potential investment returns.

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. As a client I’d much rather receive a projection that potentially under valued the potential end value than over estimated and gave an over confident postion of what I can expect my future returns to be.

  2. At 2% most providers will show a loss. This will be an excuse for a client not to save in a pension and possibly not to save at all (which would not be a desirable outcome for the client or the state benefits system).
    Does anyone know if NEST be obliged to issue compliant illustrations including the R&D loaded costs?
    Most of us would agree that we do need to calibrate down client expectations but I can’t help thinking that in the same way that illustrated return rates at 15% in the 90’s was misleading for future expectations so is 2%.
    I wouldn’t be at all surprised if most clients do not actually understand their illustrations even if you take them through it. The main issue preventing clients signing up for pensions is not future growth rates but the very poor annuity rates and the future lack of access to advice for regular premium payers…

  3. RegulatorSaurusRex 1st November 2012 at 1:27 pm

    They just don’t listen do they?

    Cloth ears on as per usual, getting ready for the Xmas booze up and here they are waffling about projection rates that simply cannot happen. Misleading the poor consumer (and advisers) seems to be their prime objective.

  4. Tom, it’s the maximum rates that are reducing; these are still subject to Asset Allocation growth rates termed as ‘appropriate’. See PS12-17 (3.9). Only 25/63 providers can do this. Comparator does it for all providers & wrappers not just SIPPs, for consistency.

  5. Important issue – average clients were put off pensions following the “real value of income illustration” When the growth rates reduce, they will be further put-off pensions. Normally this isn’t an issue because we give the balanced guidance.
    This won’t happen in the future because we won’t be there.
    The old 13%pa indexed illustration was a massive motivator for young pension buyers and if we’re honest it did more good than harm.

    Reality,, Joe Public clearly can’t handle reality because it’s induced apathy. Without face to face education there will be huge Nest opt-outs, from employees that think you can get 4% from a bank a/c and property grows by 10%pa.

  6. Gambling man would make a bet that 2013 and 2014 growth will be artificially very high.
    5 years of stored up growth will make illustration change 2014 look very strange.

  7. No market can be accessed for free so trading costs will always be a reality. Market return and the trading investor return is broadly the same as the total expense ratio. Costs are a reflection of costs!

    With an amc of 1.5% and an adviser fee of 0.5% a 2% projection will tell a client to put his/her money on deposit and not bother. Perhaps it would be best to abandon all projections?

    In return lets have some disclsure on deposits.
    Of course the cost of a deposit account is the difference between the borrowing rate and the lending rate i.e. the banks profit.

    So what is the difference? The difference between these rates and the rate banks charge each other is a full 2 percentage points of profit on fixed rate mortgages.*

    This would massively increase if average overdraft rates were also factored into the above equation. How reasonable do you feel your deposit rate charges are now when you take your savings interest returns and deduct this from the profit the bank is making on your money?

    Consider overdrafts are at an all-time high of 18.97 per cent and at the same time savings rates are at an all-time low with the average cash Individual Savings Account at 0.41 per cent.

    If you apply the same disclosure regime to deposits as the FSA applies to Investments the bank would need to disclose a massive 18.06% annual management charge.

    Compared to this Financial Products are cheap!

  8. On top of discounting possible future benefits to allow for inflation, factor into all illustrations a 5% p.a. rate for a tax assessable, non-inflation protected annuity at the end of the day (with annuity rates getting even worse by the month and the government doing absolutely nothing to address the problem) and the industry will be saddled with the perfect poisonous recipe for ensuring that even less people will want to lock away a penny in a pension plan. I’m hanged if I would. Brilliant!

  9. It is interesting how the FSA changes the song to suit its own tune.
    The quotation rates were not originally devised to indicate what pension may be available at retirement. They were imposed to a) control the unfettered quotation rates being used by some companies in order to gain business by illustrating ridiculous benefits, and, more importantly, b) to allow a realistic cost comparison between contracts.
    The three rates were to show the effects of contract costs based on an investor’s general attitude to future growth, that is, low fund expectation, perhaps because of lower risk taken, medium return and higher return.
    Now, by implication, the FSA are turning the illustration rates towards an indication of eventual outcome, which every advisor knows is bunkum. Not only is future investment return an uncertainty, but more importantly now, so are annuity rates. Eventual outcomes are not even in the realms of guestimation.
    But not according to the current FSA output. Past performance is not an indication of future performance – except that FSA are now indicating that it might be. If current growth rates are low then they are always likely to be low.
    It is sensible to ensure that the rates used are in the likely ranges of return in order that consumers can compare contracts on a realistic basis. When the Illustration rates were first introduced the lower growth rate for pension contracts was 8.5% and the higher 13.0%, which would be useless for meaningful comparisons in todays market, especially for more cautious investors.
    But that is what they were used for – comparison of contract costs – not illustrations of possible outcomes.
    But obviously the FSA has totally forgotten this fact. Or is that conveniently forgotten? Control is everything.
    By issuing the current information in the manner they have consumers will be even more convinced that the rates are meaningful in relation to the eventual outcome. Does the right hand of the FSA ever know what the left hand is doing? And is either hand in any way connected to a brain?

  10. I happened to catch a bit of the BBC’s Breakfast TV programme this morning and they were interviewing a pensions expert. On the basis of some survey or other, he seemed to think the two main factors that would encourage people to commit money to a pension plan are stable returns and greater trust in providers. Really?

    I’d thought the two main reasons to be lack of trust in government policy and the annuity (rates) trap at retirement. When did any (conventional) PP provider go down causing any investor losses? On what issues don’t members of the public trust PP providers?

    As for stable returns (which, going forward, are expected to be lower than they’ve been in the past), one cannot help but think of With Profits, on which the FSA has imposed such a relentless assault of reforms that these days it’s all but a busted flush.

    Few would disagree that the way in which life companies ran (and not infrequently raided) their With Profits funds needed cleaning up, but thanks to the FSA’s hatchets and sledgehammer approach, the baby’s been thrown out with the bath water.

    In the interview, the almost inevitable question came up, namely how much should people be setting aside for their retirement?

    Naturally, the interviewee made the important point about starting early but then went on to say that provided you do, you should be allocating about……….16% of earnings! 16%!!?? For someone in their 20’s? I imagine a lot of people in their 40’s couldn’t contemplate 16% of earnings.

    Upon hearing such an estimate, the vast majority of people will, I imagine, simply say to themselves Why bother? I’ll just set aside a bit later on in life into ANYTHING but a pension plan and hope that that, together with my State pension, will provide me with enough to get by once I retire. That’s the reality of how people are thinking, isn’t it? Even if they could afford to, they sure as hell wouldn’t remotely consider setting aside 16% of their gross earnings. On a salary of, say, £25,000 p.a. that’s £267 p.m. + tax relief. It just won’t happen.

    What the industry needs to be campaigning for are for:-

    1. the government to honour the Conservative party’s pre-election manifesto pledge to fix all the damage done to the pensions framework by successive governments over the past 25 years.

    2. Legislative stability instead of the goalposts constantly being moved and

    3. Scrapping of the annuity trap.

    But none of these things looks likely to happen, so all that will happen is that people will be even less inclined than they are now to lock away money into a pension plan.

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