Pension News Calls For An End To Over Stated Pension Funds 2998196

Calls for an end to over-stated pension funds

23 May 2003
Pension fund projections for new members of money purchase schemes are being overstated by up to 70 per cent, according to new research.

Aon Consulting is calling on the government and the FSA to end confusion over pension fund projections and allow employers to give pensions guidance.

Aon wants to see and end to funds using over-inflated pension fund projections to entice new joiners. FSA regulations require ‘new joiner illustrations’ to provide three projections based on interest rates of 5, 7, and 9 per cent, but these are not inflation-linked. As a result, new scheme members only become aware of the much lower inflation-linked pension fund projection once they receive documentation after joining.

Under new Government regulation from April, existing members of money purchase (defined contribution) pension schemes must receive an annual Statutory Money Purchase Illustration (SMPI), which provides a projected fund value in today’s terms based on a single annual growth rate that also takes into account inflation.

However, customers can receive this information up to a year after taking out the pension and the distortions in fund values can be startling.

Under the SMPI, a male born in 1980 earning £15,000 a year who contributes 10 per cent of his pay would receive a projected pension at 60 of £5,540 p.a.

However, as a new joiner he would be quoted a projected value of £23,900 p.a. – an overstatement of 330 per cent.

Simon Martin, head of research at Aon Consulting, commented, ‘This anomaly will understandably shock many new members to money purchase schemes. The FSA must act to require common assumptions in all fund projections around money purchase schemes, both before joining and throughout membership.’

Mr Martin also urged the Government to remove the confusion over the use of SMPIs in the growing number of self-administered employer pension schemes, saying, ‘Research also shows that employees trust their employers far more than the Government to give credible advice on pension matters. Yet current FSA regulation prevents employers from doing so. This is a menace and a hindrance, and prevents good employers from properly assisting members to understand the scheme and their options.

‘Unless the Government and regulators act to remove the confusion on this issue, it will lead to less saving in pensions, not more.’

Written by Editorial Team