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Lower pension projections will give savers "more realistic" estimates of investment value, says FSA

Pension providers must reduce the projected growth rates displayed in pension statements from 2014 in order to give savers a more realistic estimate of the value of their savings, the regulator has said.06 Nov 2012

The change is included in a new policy statement (31-page / 563KB PDF) from the Financial Services Authority (FSA). The new projection rates will come into force from April 2014; however, firms will be able to use them in marketing materials from April next year.

Pension statements currently provide an estimate of what the estimated value of an investment will be if it grows by 5%, 7% and 9%; with 7% known as the "intermediate projection rate". After the change, the rates required by the FSA will be cut to 2%, 5% and 8% - with 5% as the intermediate projection rate. Investments that do not receive tax advantages, such as investment bonds, will display projected rates of return at 0.5% below the standard rates.

The FSA consulted on the changes earlier this year following an independent review by the accountancy firm PriceWaterhouseCoopers (PwC). According to the statement, its rates have "changed little" since the mid-1990s despite a requirement that providers use "appropriate rates" where its standard rates overstate the investment potential of a product.

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF) said that the new lower rates would provide a "reality check" for savers.

"We are in a low growth environment and have been for some time," she said. "It is pointless letting people hope for high returns that might never materialise. The revised rates are still estimates and are not a promise of what the pension will look like. The best way for people to manage that uncertainty is to give their savings a regular MOT to see how they are faring."

However pensions law expert Carolyn Saunders of Pinsent Masons, the law firm behind, warned that the changes could discourage potential pension savers.

"The FSA is stuck between a rock and a hard place," she said. "Whilst it is important to make sure that savers are not misled into believing that their pension pots are worth more than they actually are, there is a risk that the lower forecasts combined with the impact of investment charges will discourage many from pensions saving - just at the very time that the Government is seeking to encourage more pensions saving as part of its auto-enrolment initiative."

The policy statement also updates the mechanism used when a pension scheme member transfers savings from an occupational pension scheme to a personal pension plan, following a consultation earlier this year. The transfer value analysis (TVA) rules govern the comparison between what benefits the scheme member will receive from their employer's existing scheme with those that could be provided by the new arrangements. The new rules, which also take account of the growing use of the consumer prices index (CPI) as a measure of inflation rather than the retail prices index (RPI) 'hard-wired' into many defined benefit schemes, take effect from 1 January 2013.

"The rules on pension transfer value analysis are designed to make sure that anyone considering switching out of a defined benefit pension is not given a false impression of the alternative benefits being offered to them," the FSA said in a statement. "Consumers will benefit from these new requirements and also from the amended projection rates, as both reduce the risk of consumers being given information on the potential benefits of investing in a life or pensions contract based on inappropriate assumptions."