The Society of Actuaries has confirmed that the assumptions used to calculate DC projections (known as Statements of Reasonable Projections or SORPs) will be amended with effect from 1 April 2016.
The main changes to be made are:
- A reduction of 1% per annum in the rates of investment return which may be assumed prior to retirement.
- A reduction of 0.5% in the assumed rate of price inflation.
- A reduction of 1% per annum in the interest rate which may be assumed for the purchase of pension on retirement.
The reduction in projected pension is particularly significant for those who have less than 5 years remaining to their normal retirement age. Under existing regulations, the pension amount is calculated based on a long term annuity rate using an interest rate of 3%. Under the new regulations, a current market annuity basis must be used for those who are within 5 years of their normal retirement age. Market annuity rates are currently based on historically low interest rates resulting in a lower pension amount.
Trustees will need to consider carefully how any possible changes are communicated to members. There is a risk that some members may perceive the reduction in their projected pension as being due to some other factor (e.g. an increase in charges rather than a change in assumptions).