The real story here maybe that the FSA foresees lacklustre growth for the UK over the coming years if not decades.
A scant month after workers had pensions foisted on them the UK Financial Services Authority has issued a policy document stating that it has decided to reduce the intermediate projection rate for pensions from 2014 from 7% down to 5%. This does not affect those remaining few final or average salary schemes though.
This means that when pension firms hand out their paperwork it will show a projected fund growth of less than it does now. The Telegraph’s James Hall puts some numbers to it here. This, the says FSA makes it more realistic given the current economic scenario and not give people an unrealistic expectation of what their savings will achieve.
Whether or not the funds reach that level, fall short or even exceed it will then depend on how the fund is managed. And the projections will then be amended accordingly. So obviously this change by the FSA will not affect how funds perform, just how they are perceived.
But given that over a working life of about fifty years investors will see several booms and busts then that is what expectation figures should be based on. One assumes that the ten year old previous projection percentages were set with that in mind. When you look back into just the recent past you can see how pension funds go up and down with the economy and taxation changes. In 2009 pension funds posted a weighted average return of 14%, but in 2011 we were seeing 4% since 1999.
Many people do though start pensions (much) later in life so a projection over a 50 year pension saving period would automatically have to be misleading and this may be where the problem lies. And it would be confusing to everybody if the figure was changed too often or there were too many of them covering different periods of time.
It is sensible to reduce the official projection figures to give people a clearer and more realistic idea of what to expect. But pensions generally do well when economies do well over the long run (as long as the Treasury keeps its fingers out of the pot!), so to me this is a message that the FSA doesn’t look into the future with that much optimism with regard to the economy when compared to the past.