Following a report from PricewaterhouseCoopers (PwC), commissioned by the Financial Services Authority (FSA), the rate that the FSA use to predict the investment return for people pension pots is likely to be cut.
Currently the FSA set an annual rate of 7% per year which pension companies use to predict the final value of an individual’s pension pot. However, the report indicated that this is actually too high and is misleading customers. It went on to suggest that the rate should be set between 5.25% and 6.5%.
If the rate is to be cut by 1% to 7% this would effectively translate to cutting the final outcome of a 25 year olds pension pot by almost a quarter. Anyone with a defined contribution pension which is based on the stock market should expect an annual statement predicting a much lower return on their investment.
According to the PwC report, since 2007, the actual return on UK equities was −1.5%. At the same time, the variability of the amount of return an investment will give is now much wider than in the previous decade.
The report argued that the projections about the future value of property was too optimistic and that the expected return on government bonds should also be cut in half. The report predicted that economic growth was likely to be around 1% in the short term, but be about 2.25% over the next decade and a half.
Peter Smith from the FSA said: “It is crucial that projection rates are set at a realistic level so that investors are not misled. Today’s independent research indicates that our maximum projection rates should be reduced. We are seeking views on the range of rates so investors receive a reasonable indication of what they can expect from their investment.”
Some companies have already changed their method of projecting the future return on private pension investments.
Whilst the current rate is based on a mix of 67% equity and 33% non investment, some have started to use asset specific projection rates. These look at the actual bonds, shares and property held in a savers pension fund to project a more realistic return on their investment.