Question and Answer Document in relation to changes to Pension Illustrations from 6 April 2014
Why do we adjust pension projections for inflation?
Many clients historically received annual Statutory Money Purchase Illustrations of the future value of their pension savings. This is discounted by an assumed rate of future price inflation to show what the future buying power of their savings might be.
The FCA wanted to bring any illustrations of future values into the same environment for the consumer. This was to provide a common approach to the way in which the future value of a client’s pension savings is shown. It also highlights the potential savings gap between the retirement income they aspire to - and the buying power their current savings might provide.
From 6 April 2014 - future projected values of pension savings, and the benefits that could be bought from those savings, have to be discounted at a rate of 2.5% a year to reflect assumed price inflation.
The FCA requirements required this change to be applied only to personal pension and stakeholder pension contracts (including SIPP contracts) in which clients are still accumulating their savings. There were no mandatory requirements to implement these changes for other types of pension contracts, including those where capped or flexible drawdown are being used. Nor were the changes to be applied to other forms of savings contracts such as ISAs and Collective Investment Accounts.
Old Mutual Wealth implemented these changes from 6 April 2014, including changes to the Old Mutual Wealth SIPP, administered through AJ Bell. We also made these changes to a wider range of pension contracts than those mandated by the FCA. This was to ensure that Old Mutual Wealth clients whose pension savings are made up from a variety of historical contracts, will receive projections showing a consistent approach to the calculation of their future value.
Did these changes apply to all pensions?
The FCA requirement to implement these changes only applied to personal pensions (including SIPPs), and stakeholder pensions - in which a client’s pension savings are still building up.
The changes were not required for any other forms of pension, including personal pensions where clients are already using capped or flexible drawdown (although the non-drawdown elements would still be in scope for inflation adjustment).
Additionally, there was no requirement for inflation-adjusted projections to apply to final salary pension schemes and non-pension savings such as ISAs, collective investment accounts, bonds or life products.
What Old Mutual Wealth pension contracts do these changes apply to?
We know that many clients with pension savings would have built those savings up using a range of different pensions. Accordingly, we have decided to implement inflation-adjusted projections across a wider range of pensions than the FCA has mandated.
This will ensure that clients will receive projections on a consistent basis for the majority of Old Mutual Wealth pensions, including the Collective Retirement Account.
The following table summarises the pension contracts (and for the Collective Retirement Account and Old Mutual Wealth SIPP, the benefits within the contracts) on which inflation-adjusted projections are applied.
|Old Mutual Wealth Pension
||Products where inflation adjusted projections will apply
|Old Mutual Wealth Executive Pension Plans
||EPS,EP1-6 and Old Mutual Wealth Professional ERA
|Old Mutual Heritage Freestanding AVC Plans
||FS1-4 and Old Mutual Heritage Professional ACA
|Old Mutual Wealth Personal Pension Plans
||PPS,PP1-6, PPS,PRB,SPA and Old Mutual Heritage Professional PRA
|Old Mutual Wealth Trustee Investment Plans
||TI2/TI5 and TI6
|Collective Retirement Account
||All illustrations including clients where capped and flexible drawdown options have been exercised, including drawdown reviews.
|Old Mutual Wealth SIPP
||All illustrations where clients have an element of uncrystallised pension savings available. Not applied where all pension savings are in capped or flexible drawdown.
Do illustrations show only the inflation-adjusted value of a client’s pension savings?
Different providers will apply these changes in different ways; some elements are regulatory and others are left to providers to determine. Old Mutual Wealth’s approach to the implementation of these changes will be to show the projected values of benefits as follows:
- The projected fund values will be shown only as an inflation-adjusted value. (The regulations require that, where inflation adjustment is required, only inflation-adjusted value should be shown)..
- Contributions being made will be shown both with and without inflation adjustment.
- Income withdrawals from the Collective Retirement Account will be shown both with and without inflation adjustment.
In this way, clients can see contributions and/or income withdrawals in actual and inflation adjusted terms. This will, for example, avoid the potential confusion of seeing only the inflation-adjusted values for future contributions, which will be different from the actual amounts being paid.
Which illustrations does this apply for?
This applies to pre-sale illustrations, any existing business illustration and, for the Collective Retirement Account, also includes annual and statutory re-basis reviews for clients using capped drawdown and from 6th April 2015 flexi-access drawdown reviews which will include all pre 6 April 2015 flexible drawdown clients whose accounts automatically convert to flexi-access drawdown from 6 April 2015.
Won’t the inflation adjusted projection values on low rates of return from a client’s pension portfolio produce negative returns on the illustration provided?
Yes. That will be the outcome from any projection on the low rate. This may need to be explained carefully to clients, who may simply think that their investment is losing money. In terms of inflation-adjusted values, it will be reflecting a valid message to clients i.e. that low actual rates of return will fall behind inflation and mean a real loss in the value of savings.
I’ve got a projection from another pension provider for whom I am looking at the suitability of a transfer to the Collective Retirement Account. How will you be able help me analyse the transfer value?
As part of our on-line, pre-sale illustration system you can input the projected value of the client’s non-drawdown pension on any one of, or all three, growth rates. The comparison will be against the inflation-adjusted value of the existing provider.
When inputting the growth rate used by the existing provider, the growth rate should be that applying to the inflation-adjusted illustration. This will normally be the growth rate presented in the illustration. This will allow a critical yield to be produced showing the rate of return required, over and above inflation, to deliver the equivalent value, taking account of the proposed investment portfolio and any adviser charging to be linked to the proposed Collective Retirement Account.
What is the maximum age to which a Capped Drawdown projection can be illustrated?
Under the new requirements, the FCA requires providers to illustrate a table of income withdrawals and surrender values to age 99. Illustrations for the Collective Retirement Account will show the values at the end of the year in which the client reaches 99. The same requirements will apply to flexi-access drawdown illustrations from 6 April 2015.