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Shock therapy may not be the cure for ailing pension savings

The impact of nearly 10 million people discovering their pensions are worth up to 60 per cent less than expected is set to challenge the industry.

The Department for Work and Pensions plans to make it compulsory from April 2003 for money-purchase pension scheme members to receive an annual statement showing the benefits they will receive at retirement.

But the proposed combined benefit statements are on course to give the 9.4 million people in money-purchase schemes a rude awakening.

According to the actuarial working party set up to decide how the illustrations will be calculated, the figures will be only 40 per cent of what people have been led to expect from point-of-sale documents using FSA projection rates. This is because, unlike the FSA figures, the DWP illustrations are based on real rates of return including inflation.

The FSA suggests people should not be too alarmed by the differences, pointing out that its point-of-sale projections are aimed at showing the effect of charges on a policy rather than any guaranteed benefits.

Spokeswoman Jackie Blyth says: “We cannot change our projection rates until we have consulted with the industry on it but we do want consistency with the DWP. The main reason for projections at point of sale is to help people understand what the effect of charges is. No projections show what you will definitely get.”

The FSA projections are set to be the subject of consultation in April, once the DWP working party has put together its proposals.

A DWP spokesman says: “Consistency with the FSA point-of-sale documents is very important and we are working with the FSA to produce consistent results before introducing the illustrations.”

While policyholders may be in for a shock when they discover the true value of their pension expectations, some people in the industry say it is for the long-term good.

Clerical Medical pensions strategy manager Nigel Stammers says: “The ultimate benefit is a more realistic view for planning purposes, going by real-value figures adjusted for inflation. This is for longer-term good and may be a step in closing the savings gap.”

But some IFAs expect few consumers to be aware of the difference. Richard Jacobs Pensions & Trustee Services director Richard Jacobs says: “Ninety per cent of people in money-purchase schemes have no idea of the value of their expected benefits in real terms. Most quotations given at point of sale are totally meaningless. If people did understand the quotations and the benefits they would get, no one would be paying less than £100 into a plan.”

Working party chairman Stewart Ritchie points out that a significant number of people in money-purchase schemes do not receive FSA projections in the first instance. Many have projections provided by consulting actuaries instead.

But the confusion these statements could induce is causing considerable concern and many in the industry believe they may serve to shock people out of saving altogether.

Jacobs says: “After being ahead of the pension game in this country, we are just at the point of going into the reverse. Yet again, consumers will just view the pension industry as just being in a big mess and this will give them another reason to turn away.

“The reality of stakeholder is that no one has confidence in the pension industry. If people are going to see projections at less than half the return they were expecting, people will just not continue to bother.”

Scottish Life also voices concerns that these statements will give advisers and providers a very difficult job in encouraging new savers. Head of communications Alasdair Buchanan says: “The reality of this is that it might make it more difficult to persuade people to take steps and demotivate people who are already saving.”

Communication is obviously going to be key to ensure consumers are not misled by the information they receive in the statements.

Stammers says: “For someone who has recently taken out a pension plan based on current projections and then on first renewal sees a 60 per cent drop, they are going to wonder what on earth has happened. The industry is going to have to do a lot of explaining.”

Skandia senior group marketing manager Peter Jordan says: “It is really down to how the information is presented. We are in a low-inflation environment and equity returns are being pegged back. If it is all kept in step with inflation, it should not be a massive issue.

“As quotation rates are dragged down, as long as targets are brought down in line with reduced wage earnings, people should not panic. But the Government seems concerned with frightening the life out of people who are not necessarily committed to loading up with pensions.”

Questions are now being raised about all illustrations and whether the FSA will have to bring its projections on to the same basis for all products.

Buchanan says: “The FSA has got to look at all illustrations and the impact of the DWP basis for all products. If there are different basis for different products, it might suggest one product is better than another.”

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  1. Jackson Osbourne 6th December 2010 at 5:47 am

    The reality is that even if you squeezed the rich until the pips squeak that doesn’t go anywhere near filling the gap.

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