Better late than never – the Regulator finally forces some semblance of reality on pension forecasts
by Dr. Ros Altmann
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And what about annuity risks – investment returns are only one part of the picture
After charges, new return forecasts may make pensions look paltry
We won’t restore confidence by painting overly rosy picture
Misleading customers undermines confidence: For far too long, pension investors have been given a false sense of security by forecasts that suggested they would receive much larger pensions than were realistic. It is understandable that those wanting to persuade you to part with your money will give you an optimistic picture of their products, but customers lose confidence if they realise they have been misled. Why has the Regulator taken so long to address the mis-match between forecasts, expectations and reality?
More realistic – lower – assumed returns: From 2014, the projections need to be based on lower – and more realistic – investment return assumptions of 2%, 5% and 7% – which are likely to be closer to what markets will deliver. Currently, return assumptions of 5%, 7% or 9% have misled pension investors into believing their pension funds will be worth far more than turns out to be the case. This has lulled many into a false sense of security and led to large disappointments at the point of retirement.
Where has the Regulator been for the past few years? Why is this only changing in 2014? We know that pension funds have simply not been able to deliver these kinds of returns, net of charges, so we need to be more realistic.
Investors believe the ‘experts’ know best: Investors have tended to rely on the ‘expert’ forecasts – which had full regulatory approval – because they do not consider they know enough about how financial markets work and want the ‘professionals’ to help them. But, in fact, they have been let down by false promises. This does not serve the industry well – it undermines confidence.
Investors do not understand investment risk: In reality, of course, investment forecasts and pension projections are just guesswork. Most people do not understand this and have no idea about investment risk. The reality is that they need to keep checking how their pension funds are doing, what fund they may expect and make adjustments along the way.
Give your pension savings a regular check-up: A regular review of pension investments is essential, if people are to have a better chance of planning properly for their later life and avoid nasty surprises that seem to be hitting so many retirees at the moment. Indeed, with a 2% return assumption, the impact of charges could make bank accounts look more attractive.
Annuity projections just as important as investment returns: The use of investment return forecasts is only one part of the picture when predicting future pensions. In fact, the size of the pension fund at retirement does not tell you what your pension prospects are. To provide an income, most people will need to buy an ‘annuity’, which means giving their pension assets to an insurance company in return for a promised lifelong pension income. Annuity rates have plunged in recent years, as they are tied to gilt yields and this means that someone with a £50,000 pension fund today would receive much lower pension income than someone who had a £50,000 pension pot in the past. Annuity rates have plummeted by more than 30% just in the past couple of years, so it is important that pension investors understand the risks of annuity purchase, as well as of investment returns.
Regulator must ensure people receive realistic picture of pension prospects: All in all, pensions are complicated and ordinary investors need help in understanding pension reality. The Regulator knows that there is a significant asymmetry of information between the buyers and sellers of pension products and it is certainly about time the authorities ensured that people have as fair a picture as possible of the reality of their future income prospects – and are encouraged to keep checking what they may be on track to receive.