UK - Workers are being confused by over-inflated pension projections when they join a money-purchase scheme, Aon Consulting claims.
False projections could mean fund values for new members of defined contribution schemes are being overstated by an average of 70%.
Aon claims the problem arises because the FSA’s “new joiner illustrations” of 5%, 7% and 9% do not take inflation into account. But when enrolled in a DC scheme, a growth rate of 7% – taking inflation into account – is used to calculate the statutory money purchase illustration.
As a result, new scheme members only become aware of the “much lower” inflation-linked pension fund projections after joining – which can be up to one year after taking out a pension.
Aon Consulting head of research Simon Martin said: “This anomaly will understandably shock many new members to defined contribution schemes.
“The FSA must act to require common assumptions in all fund projections around money purchase schemes, both before joining and throughout membership.”
Buck Consultants head of technical services Kevin LeGrand agreed.
He said: “While such inconsistencies exist there will always be confusion – which will give employees even less confidence to invest in the system.
“The point of the statements is to forewarn people, not to confuse them or discourage them from saving.”
These comments come just weeks after experts revealed that SMPI statements on their own would be confusing for the majority of savers – and that the costs of educating DC members would have to be addressed by employers.
Martin urged the government to remove the confusion over SMPIs and give employers the green light to give advice.
He said: “Current FSA regulation prevents employers from giving advice on pensions.
“This is a menace and a hindrance and prevents good employers from properly assisting members to understand the scheme and their options.”
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