Pension 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 find 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: “Given the various uses of the illustration, we do not want to mandate inflation-adjusted illustrations [for drawdown] without further investigation.
“However, we have decided to enable illustrations on an inflation-adjusted basis to be provided voluntarily.”
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.”
Quainton Hills Financial Planning director Gordon Bowden says: “If pension providers are going to have to do this then surely banks and building societies should be made to show the effect inflation has on people holding deposits. That way people can see the erosion of their funds in real terms.”