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.”