The Pensions Puzzle

“The Pensions Puzzle – Why Efforts to Manage Performance Expectations Could Reduce Savings”

Inflated consumer expectations can spell trouble for even the most trusted of organisations. And, as a sector with more than its fair share of reputational issues, the financial services sector needs to work particularly hard to demonstrate that it is delivering on its promises.

With this in mind, the Financial Services Authority (FSA) recently announced that the projection rates used in pension statements and marketing literature should be lowered to a more realistic level. From 2014, savers will be shown the current value of their pension and what it will be worth if it grows by 2 per cent, 5 per cent and 8 per cent each year. This will replace the current illustrative rates of 5 per cent, 7 per cent and 9 per cent.

The logic behind this reduction seems sound – if people are promised a pot of gold but later find they’re without a nickel, they will be understandably miffed and occasionally outraged.

But will this lowering of expectations have the desired effect; will consumers still be happy to invest in a pension that promises more modest returns? For those already sceptical of the value of saving for retirement, a lower pension value that is already being eroded by inflation and fees is hardly irresistible.

More importantly, what is the FSA’s true motive for this move? Does it simply want to protect consumers from over zealous promises, or does it want to protect providers (and itself) from accusations of mis-selling. Given the rough ride pensions have had in recent years, the avoidance of another selling scandal must be high on the FSA’s wish-list.

Interestingly, pension projections at whatever level will soon be superseded by reality. The first generation of employees with defined contribution pension plans will retire over the next five years. If a recent report by Aegon is to be believed, barely a sixth will achieve their target retirement income. It is the experiences, and likely disappointment, of these new pensioners that are most likely to colour younger generations’ perceptions of retirement saving, not the projected returns marketed by providers.

If the FSA and Government really want to provide prospective savers with a realistic outlook, they may simply need to point them in the direction of a few of these disgruntled retirees. While the hope may be that a reality check will prompt a significant increase in pension contribution levels, there’s a real danger that it could actually put people off altogether.