Brace yourself for more pension woe
According to the FSA, they are going to have to assume their investments will grow more slowly than they are expecting. But just what difference will this make, and why do they have to do it?
The changeThe change is being recommended by the FSA, which says pension providers shouldn't be able to do their projections based on investments growing at 7% a year. It now says they should assume growth of somewhere between 5.25% and 6.5%.
This would have a very striking effect, and according to Tom McPhail of adviser Hargreaves Lansdown, will mean a 25 year old could see their projection cut by almost a quarter.
The report, produced for the FSA by PricewaterhouseCoopers, concluded that having a 7% projection couldn't be justified any more because the miserable economic outlook means investments just aren't set to grow at anything like this pace.
Nasty surpriseBy assuming this level of growth in order to provide a projection, pension companies are therefore convincing us we're in a far better pension position than we really are. It means we're lulled into a false sense of security, and fail to do enough to prepare for our retirement.
In recent years the returns have been woeful, and the average real return on shares in the last five years has been a loss of 1.5% a year - which is going to come as a nasty surprise to millions of pension investors.
In fact, recent changes have led some commentators to suggest that these proposals don't go far enough, and that projection rates ought to fall further. McPhail said: "Regulators have been consistently behind the curve in setting investment projection rates going right back to 1980s."
ConsultingPeter Smith, head of investments policy at the FSA, said: "It is crucial that projection rates are set at a realistic level so that investors are not misled. We are seeking views on the range of rates so investors receive a reasonable indication of what they can expect from their investment." The FSA will now consult on changing the projection rate.
Of course, the change will help people have a more realistic idea of their retirement income. However, the concern is that it may also be hugely off-putting for new savers, who may work hard for the first few years to put a little aside, and be astonished by how little they will get in retirement in return.