The projection rate for investment returns will fall from 7 to 6 per cent, according to a report published by the FSA.
This will slash the retirement income value of millions of pension savers by more than 23 per cent, according to Price Waterhouse Coopers, who were commissioned to carry out the research. They found that adjustments have not made to the method used by pension and investment funds to indicate the likely return to reflect the ongoing effects of the financial crisis.
Under the current rules life and pensions companies use a system of standardised projections mandated by the FSA to tell savers that their investment will likely grow by around 7 per cent annually. The report suggests the projection rate will fall to somewhere between 5.25 and 6.5 per cent, meaning that returns for millions of people investing in contribution stock market based pensions will see returns much lower than anticipated.
Peter Smith, spokesman for the FSA said “Projection rates must be set at a realistic level, so that investors are not misled.” In the past ten years the actual returns seen by investors have regularly fallen short of what was predicted in the advertising material. The report noted that average return on equities since 2007 was -1.5 per cent; and that variability is currently as high as it has ever been.
Cutting projection rates will make life difficult for pension companies, who are already struggling to convince young people that saving into a pension scheme is important. A previous move forcing reduction in promised returns for endowment mortgages effectively killed the market for this product.
A spokesman for Aegon, one of the UK’s largest pension providers said “while a drop of 1 per cent does not seem like a big move, the perception of reduced value over time could be substantial to a customer. We must, however, remember that projection rates are only a guide to what an investor might get back over time.”.