UK - Thousands of people in money purchase pension schemes are in for a shock next year when new actuarial rules reduce their expected retirement pots by more than half.
The Department of Work and Pensions (DWP), in partnership with the Institute of Actuaries, has come up with a plan to change the way growth rates for defined contribution pensions are calculated which will strip out inflation and lower the sums expected because they will be expressed in today’s money.
The DWP hopes to lay regulations mid-March and have the Statutory Illustrations of Money Purchase (SIMP) in operation by April 2003. The exercise was intended to have been completed by this April but the process was delayed.
From next April money purchase arrangements will be faced with a single growth rate projection of 4.5%, rather than the existing three possible rates of 9, 7 and 5%. Anyone basing their retirement pot on the old style 9% growth rate could find their projected pot cut by more than half.
Peter Tompkins, chairman of the Pensions Board of the Faculty and Institute of Actuaries, said: “The problem is that the 5,7 and 9 [figures] give you telephone numbers at retirement and that’s not what people want. What people want to know is how much am I going to get in today’s terms ... They will see a different number. It will be a smaller number. It will be a realistic number. The problem is that today’s numbers aren’t realistic.”
He added: ”The message that’s trying to go through there is that people should think, ‘I should be saving more.’
Assuming a 30-year-old man started paying £100 a month into a stakeholder style personal pension, the fund value he would have expected at a growth rate of 9% would have been £219,000 - but calculated using the 4.5% figure that retirement pot would shrink to £83,000.
Similarly, a man who started up such a pension at age 40 would see his retirement fund projection shrink from £92,000 to £47,000 and a 50-year-old man see his fall from £33,900 to £23,600.
At the moment, when a consumer elects to take out a pension policy the Personal Investment Authority (PIA) requires the pension provider to calculate three examples of the growth of their retirement pot using nominal rates of 5% and 9% and a figure in between, usually 7%, - representing low, medium and high investment risks. Inflation is currently included as a part of these PIA figures.
However, the new figures will be presented in today’s terms - projected forward at 7% and discounted at 2.5% to work out what a pension would buy in today’s money. This is roughly consistent with short-term Bank of England forecasts issued last week.
On the PIA projections, Tompkins said: “The hope is that we can get the FSA to have a very similar basis and reform theirs so we’ve got virtually the same basis. We’d like to have a position where we have one central basis which everyone uses.”
The SIMP calculations will eventually form part of the information that goes into pension statements [combined forecasts] which the government hopes will encourage people to save for their retirements. The statements will combine state pension income projections with any private provision amassed in order to offer a picture of what money a person can expect to retire on.
Critics have said that SIMP should show both monetary and real value projections, provided it is made clear that both are only examples and actual growth achieved by the product could be higher or lower.
A Department for Work and Pensions spokesman said: Money purchase illustrations, along with our combined pension forecast initiative, will significantly improve people's knowledge of their pension position. They are then better placed to make informed decisions
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