Regulations have required that all members of money purchase pension schemes must be sent a Statutory Money Purchase Illustration annually of the amount of future pension that might become payable to them under their scheme in “real” terms. A key feature of the illustration is the rate by which a member’s pension savings are projected to grow each year until retirement. Currently this is 7% per annum, a so-called “intermediate projection rate”. Lower and higher rates are also included for illustrative purposes. This means that someone in their 20s who earns £30,000 and saves £2,000 a year into a workplace pension can expect to have a retirement pot when they reach 68 of £540,000.
However, the FSA, in an attempt to give scheme members more realistic expectations of retirement income, is proposing that the current range of projection rates of 5%, 7% and 9% be reduced to 2%, 5% and 8% respectively. So under the new “intermediate projection rate” of 5 per cent that firms will have to use from 2014, the pension pot in the example above would now be valued at just £335,000. The change means that the member’s predicted pension income will fall from £10,400 a year to £6,430 a year, a drop of 38 per cent.
More realistic figures
Whilst this change to growth rates with undoubtedly surprise many scheme members when they open their next statement, the FSA said that it is pushing through the change to give people a more realistic view of what their investments will be worth.
The change will not reduce a member’s actual savings, it will simply show that their pot will not grow as much, so their pension will be smaller. The idea behind it is to stop members being given a false impression of their anticipated pension at retirement.
David Hosford, Head of Pensions at Pitmans LLP, comments: “While many may indeed be shocked by the big reduction in the projected value of their pension pot, a scare now is much preferable to a scare upon retirement. These new lower growth rates will allow for scheme members to plan for their retirement on much more realistic figures. While not everyone will be in a position to increase pension saving in these troubled times, at least savings decision can be better informed.”
The FSA said that a central rate of 7 per cent is “inappropriate” given the current economic uncertainty and many pension experts have welcomed the new figures and are pleased that savers will now receive a much needed “reality-check”.
The new projection rates are set to come into force in April 2014 but pension firms will be able to comply with them in any promotional literature from April 6 next year.