They say you see the glass either half-full or half-empty. I confess that I often fall into the latter category. Sometimes I can’t see the glass at all. When I get my pension statements to see what my fund could be worth when I retire, I only bother to look at one projection rate – the lowest one. It doesn’t always make for pleasant reading but at least I am under no illusion of what retirement could be like if I don’t stay on the ball.
Unfortunately, the same cannot be said for millions of other people. They are under the illusion that they are on course for a bigger pension than they are actually going to get, thanks to generous projection rates laid down by the FSA.
You can see why Steve Webb has mooted the idea of a guaranteed pension. I suspect he knows only too well that in 20 or 30 years time, millions of workers are going to be disappointed when they clock off for the last time.
The projection rates used by the FSA have been out of kilter with reality for some time. The figures show just how big this disconnect can be.
Over the past 10 years, the Legal & General UK index fund has delivered annualised returns of 4.3 per cent. Other funds have performed far worse.
According to Money Management magazine, returns have been nearer 3 per cent over the past 15 years – half of what is typically projected.
What’s more, a sizeable swathe of funds has not achieved even this.
Money Management’s survey showed that the average with-profits pension had delivered a return of just 3.3 per cent a year over this period.
It gets worse. The average balanced managed fund actually delivered negative returns, falling by 1.5 per cent a year over the 15-year period.
The worry is that millions of people still have their retirement funds tied up in these pensions. But annual statements they receive are still using growth rates of 5 per cent, 7 per cent and 9 per cent to estimate what their future pension will be.
As the figures show, this can make a vast difference. If a £30,000 fund grows by 9 per cent a year over 20 years, it would be worth £124,273 (assuming an annual 1.5 per cent charge).
But if the same fund managed to grow by only 3 per cent, it would be worth just £39,971.
Thankfully, it would appear the FSA agrees and admits that there is a chance that consumers could be misled under the current guidelines.
Following a report from PricewaterhouseCoopers, the FSA says that it is likely to cut its projection rates to between 5.25 per cent and 6.5 per cent, although it will only do this after its obligatory consultation with the industry on the issue. Quite why the regulator wants to sit on the issue is anyone’s guess.
With the clock ticking to the RDR, it needs to get a move on. Just think of all those non-adviser salespeople from banks selling third-rate products based on projected returns they could only dream of achieving.
In the meantime, the regulator should take this damning statement from the report, stamp it on every application form and ensure the customer reads it:
“Lower nominal projection rates, combined with the impact of lower real wage growth, at least in the short term, imply that the future benefits for purchasers of retail financial products could be lower than currently estimated using FSA projection rates.”
Paul Farrow is personal finance editor at the Telegraph Media Group