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FSA mandates inflation-adjusted projections for pensions

FSA Front Door 480

Providers will be required to show customers the impact inflation could have on investment returns despite concerns the move could lead to a drop in pension sales.

The new rule, which will apply to generic and personalised pension illustrations for both personal and stakeholder schemes from April 2014, is being introduced by the FSA after research conducted by the regulator suggested customers found this approach easier to understand.

The FSA says several respondents to the consultation raised concerns pension sales could suffer as a result because they would appear to be worse value than products where illustrations are based on nominal returns.

The regulator will attempt to mitigate this concern by introducing a rule requiring companies to publish a statement about the effect of price inflation on other savings and investment products.

Drawdown providers will not be required to publish inflation-adjusted projections, although the FSA hints it will investigate whether this should happen in the future.

The FSA says: “For some consumers, the gradual shift from pension to drawdown increases the need to take account of the future impact of inflation consistently.

“However, for others, where the drawdown illustration is used for comparison with a conventional annuity or another drawdown contract, the future impact of inflation is less relevant.

“Given the various uses of the illustration, we do not want to mandate inflation-adjusted illustrations without further investigation.

“However, we have decided to enable illustrations on an inflation-adjusted basis to be provided voluntarily.

“This approach will provide more flexibility for firms and, in particular, will enable them to provide illustrations on a consistent basis for vested and non-vested benefits.

“We accept that this approach will limit the ability to compare one drawdown contract with another or with an annuity. But we think the cost of mandating inflation-adjusted drawdown illustrations at this stage is not justified.”

Aegon regulatory strategy director Steven Cameron says: “We are concerned that customers are just not ready to understand the meaning they should draw from real projections and in particular understanding what a negative compound growth rate actually means.

“We need to make sure customers are aware that even just keeping pace with inflation is a benefit to the customer. Unless this is carefully communicated a lot of customers will not be aware of this.”


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Great news for software companies, not so good for life offices, platforms and of course the poor old client who will end up paying the bill in the long run.

  2. The FSA does not listen and it does not learn. People keep their statements one year the growth assumption is x but then its y. Then its inflation adjusted and then it’s something else.

    Jo public looks at his illustrations over the years, scratches his head and bins his pension so he can invest in things he does understand.

    When will these myopic muppets stop fiddling with the system instead of solving Keydata, Harlequin et al…where people lose real money?

  3. I think people might be afraid that customers are quite ready to understand what a negative compound growth rate is, Mr Cameron.

  4. Nail on head Simon ,they fiddle with the minor non issues and miss the big ones ,then blame and charge the IFA community for their error lack of vigilance ,knowledge and understanding of the profession they regulate.Outstanding work as always oh and a Knighthood at the end.

  5. Simon Webster very well put and totally agree.

    The FSA should concentrate on its main mandate which is to protect consumers from unregulated sources of advice or products. They should hang their heads in shame that they allowed Harlequin and other unregulated sources of information and producesto operate for so long.

    The FSA has a simple mandate which it seems to ignore and that is to educate the masses on financial awareness. I would like to have an FSA spokesman explain how making illustrations more complicated and harder to understand fulfils their mandate of financial awareness.

    The general public need a simple concept to understand and that is that they require as much lifetime savings as possible. Until the regulator switches emphasis to simple concepts it will never fulfil its basic principles of protection and education.

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