This means that new personal pensions key features illustrations must now show inflation-adjusted growth figures and use new projection rates of 2 per cent, 5 per cent and 8 per cent. The effect of charges and reduction in yield information are now to be based on the new and lower intermediate percentage of 5 per cent.
However, inflation adjustment is not yet mandated for transfer value analysis reports, income drawdown or annuity illustrations . That said, the Financial Services Consumer Panel’s response to this change advocated extending real-term projections to all these illustrations in due course.
Naturally in the industry itself, there have been loud objections to inflation-adjusted illustrations. One key criticism is the fact that neither of the key changes detailed in PS13/02 is being forced on Isa and general investment account product illustrations, creating an uneven illustrations playing field at a time when personal pensions are already under the cosh.
Furthermore, the fact that the new low flanking rate is 2 per cent and the inflation adjustment percentage pushes figures down by around 2.5 per cent (it is calculated as 2 percentage points above Bank of England base rates) mean that lots of pension scheme holders will be seeing negative growth projection numbers on KFIs that they receive from now on.
Recent research, found that many consumers simply do not understand inflation. Money Advice Service research published last August also shows there is a good deal of education to do in this area before everyone fully grasps the array of numbers being provided to them in illustrations. One worrying statistic that came out of MAS’ Financial Capability of the UK Report was that 12 per cent of UK consumers think the BoE base rate is currently set at over 10 per cent.
So far so confusing. Explaining why a typical pensions projection has more than halved in value since the 6 April, if compared to the pre-April KFI, this is a grim prospect for advisers right now.
To illustrate the point, we put together a mock illustration for a 50-year old female with an existing pension pot value of £100,000 who is contributing £5,000 a year and has a target retirement date of 70. In this scenario final fund values fall from £460,000 in the pre-April illustration to £206,000. If you look at the new intermediate projection rate, which was previously 7 per cent and is now 5 per cent, minus the current inflation rate of 2.57 per cent, it leaves just 2.43 per cent ‘real’ growth.
Table 1: Contrast between old and new KFI rules
Illustration for a 50-year-old woman with a £100,000 pension pot contributing £5,000 a year and retiring at 70.
Before 6th April KFI
| 5% growth | 7% growth | 9% growth | ‘Real terms’ | |
| Fund | £336,000 | £460,000 | £631,000 | £282,000 |
| Full Annuity | £19,200 | £32,300 | £52,900 | £12,500 |
| PCLS | £84,200 | £115,000 | £157,000 | n/a |
| Residual Annuity | £14,400 | £24,200 | £39,700 | n/a |
After 6th April KFI
| -048% growth | 2.43% growth | 5.36% growth | |
| Fund | £130,000 | £206,000 | £329,000 |
| Full Annuity | £7,550 | £14,500 | £27,700 |
| PCLS | £32,600 | £51,500 | £82,300 |
| Residual Annuity | £5,660 | £10,900 | £20,800 |
Worse still, if clients fix on the lowest figure (2 per cent minus inflation), growth is currently negative meaning that this lady’s future contributions look like they are being eaten away by a combination of inflation and charges. Her plan is effectively flat-lining.
Table 1 shows the disparity between growth projections pre and post PS13/02 inflation adjustment and growth rate changes for this particular example.
There are real dangers here for advisers already exposed to post-RDR discussions about their own adviser charges, as well as the increasingly unbundled platform and fund manager fees. Tough discussions over pensions illustrations have just become even tougher. Will it inevitably lead advisers to select funds attracting lower charges, but a correspondingly poorer track record; or worse, will it undermine advisers’ ability to command a fee based on a reasonable 1 per cent of the value of the investment?
Will this move push more retirement savings out of pensions for good? Isas certainly start to look even more attractive, partly because they are not exposed to inflation adjustment and the wider spread of growth projection numbers, and limits on Isa-based annual savings continue to rise at a cracking pace.
The danger is clear. This change, running nearly simultaneously with newly enforced charges transparency from RDR; and the March Budget announcement of full access to your pension fund from the age of 55 (from 6 April 2015); creates a heady cocktail which could lead to the most significant decumulation of pension assets in history at exactly the time when more people than ever are reaching retirement age.
My argument is that a reinvention of the pension scheme is long overdue, but let us not throw the baby out with the bath water. Advisers need to help their clients to manage an increasingly complex mix of assets and income streams, which those of retirement age will be drawing on. I believe advisers have a pivotal role to play in helping their clients to manage changing income requirements through much more prolonged retirements. Income may come from a mixture of an annuity, income drawdown, perhaps property lets, Isa savings and the state pension. Inheritance windfalls are much more likely to arrive in the midst of retirement for Baby Boomers and Generation X pensioners after them, complicating financial planning in retirement still further.
I believe all this change presents retirement savings advisers with a massive opportunity to re-engage their customers on the subject.
The Pensions Policy Institute written evidence to House of Commons work & pensions committee (dated 21 April 2012) determined that there are a range of factors that will need to be considered in order to ensure good outcomes from defined dontribution pensions for members. These can be summarised as::
1.When your start your pension: The sooner the better to maximise the time available for the fund to grow, and it is also valuable to minimise non-contribution periods as much as possible.
2.Contribution rates: The more that is added to savings in a pension the greater the likely final fund value will be.
3.The age you plan to retire: The longer the fund has to grow, the larger the fund value will be at retirement.
4.The charges you pay: Minimising the charges also minimises the reduction in annual growth.
5.Where money is invested: The greater the pension fund can grow over a sustained period the greater fund value could be at retirement.
All of these elements are detailed in current KFIs. However, it is now the job of the adviser to present scenarios which drive these key points home. Online pensions calculators now enable people to play with these five key ‘outcome determiners’ and look at overall impact on savings.
Advisers will need to work with providers’, platforms’, or even their own online portal(s), which enable clients to put these calculators to work to determine what they need to save and what they can afford to save. Planning is crucial or we risk continuing the trend to save less and less for retirement even as longevity increases.
Online portals will also increasingly offer views into a full mix of clients’ savings pots. So it will be possible to see them all in one place online and calculate what these pots could generate in income terms in partial and (later) total decumulation.
Natanje Holt is managing director of Dunstan Thomas
Key Points
New personal pensions Key Features Illustrations must now show inflation-adjusted growth figures and use new projection rates of 2 per cent, 5 per cent, and 8 per cent.
There is a big disparity between growth projections pre and post PS13/02 inflation adjustment, which could deter consumers from using pensions.
Advisers need to help their clients to manage an increasingly complex mix of assets and income streams, which those of retirement age will be drawing on.