New proposals could see pension projections double

The Financial Reporting Council (FRC) has proposed a new standardised method, where pension schemes and providers will have to use the same universal process when projecting pension pot values for retirement.

Currently, pension providers use different projection methods to project what your retirement fund may look like several years down the line, with this set to change.

The FRC is consulting on the set of standard assumptions that every pension company will have to use and are expecting them to take effect from October 2023. 

Why are the FRC looking to update pension projection methods?

The new proposals come following recent data collected by the FRC that showed pension companies’ assumptions for yearly real returns on equities (i.e. how much they grow each year above inflation) varied wildly, ranging from 4% to 7%. Essentially, two people on similar pensions plans but with different providers could see a variation of nearly double the projected value.

The proposed standardised method would be based on the volatility of a fund’s performance during the previous 5 years.

Up until this point, pension providers have had a great amount of freedom when making their assumptions and projections about future investment growth. However, there have been growing calls to standardise these assumptions along with the need for pension savers to see all of their pensions on a single dashboard, known as the pensions dashboard.

With the pensions dashboard launching next year, the new proposals are expected to provide more consistency for pension savers. The online platform will allow savers to see all of their pension pots in one place. It is hoped that the proposed reforms will help reduce confusion for new users by keeping similar projections consistent across providers.

For more information on planning your retirement, be sure to check out our pensions guide.

How could this impact your retirement plans?

As a result of the FCA’s proposed changes, millions of savers in the UK may find that after the planned roll-out date of October 2023, their pension statements see significant alterations to bring them in line with the new standardised method. This will be especially apparent for younger pension savers, whose projections stretch the furthest to retirement age.

While the consistency across pension providers will undoubtedly be less of a headache for many, some analysts have voiced concerns that a standardised one-size-fits-all method could be misleading to some specific portfolios. For example, savers with their entire portfolio invested in a high-risk and volatile fund would be projected to get a higher return than someone with a well-balanced, lower risk portfolio, even though the former may be far more likely to lose value.

How we can help

With the new changes from the FRC possibly influencing your pension projections, it’s more important than ever to manage your pension pots carefully.

If you’d like to find out more about how to navigate these potential changes, or are simply interested in finding out more about how you can best plan for the retirement you want, why not give us a call on 0333 323 9065 or book a free non-committal initial consultation with one of our chartered advisers to find out how we might be able to help you.

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Note: This article is intended for general information and should not be taken as individual financial advice. A pension is a long term investment. The value of investments can fall as well as rise, you may not get back what you originally invested.

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