Pension projections will be substantially reduced as a result of changes to assumptions on annuity rates and investment returns proposed in a consultation launched by the FSA and Financial Reporting Council today.
Projected values of men’s annuity rates will fall by between 10 and 17 per cent as a result of the combined effect of new rules on mortality projections that reflect increased longevity and reduced rates resulting from the ECJ ruling on gender underwriting. Any increases in rates women might have seen from the ECJ ruling will be wiped out by the new mortality projections says the FSA, with the youngest women’s projections up to 8 per cent lower.
The intermediate projection rate for investment returns will be removed from 7 per cent to 5 per cent and the adjustment for tax-disadvantaged products will be cut from 1 per cent to 0.5 per cent under the proposals, which are the subject of a short consultation that closes in four weeks time.
The regulator also proposes to increase the span of the explicit flanking rates either side of the intermediate rate from ±2% to ±3%, and to change the wording of COBS 13 Annex 2 R 2.4 from saying that providers should use its standard rates, but revise them downwards where appropriate, to saying that providers should always use appropriate rates, subject to the maxima represented by its standard rates.
Earlier this year the FSA made rules that introduced the mortality basis proposed today for pension TVA assumptions. The FSA says that in the feedback to that consultation, respondents urged it to introduce the same basis for KFIs as soon as possible.
The FSA says that during discussions with insurers during 2011, it became apparent that they had not reached any conclusions on how gender equal rates would be determined in practice for annuity pricing. Even now, amongst industry practitioners, there are expectations that annuity pricing may be volatile in the months following implementation of the ECJ ruling, it says. But the FSA says it became clear during discussions that insurers expect future pricing practices to be based on a blend of male and female rates, and not simply to reflect the most conservative approach.
We estimate that the total one-off costs for the industry would be around £7.9m. Feedback from the organisations we contacted suggested that the total ongoing costs would be one-fifth of this at £1.6m.
Some individuals may be deterred from purchasing a pension contract if they perceive the benefits to be poor value for money, which may reduce new business for pension providers. There may also be a similar reduction in the number seeking advice on pensions, which could impact on advisory firms. On the other hand, lower illustrated benefits may
encourage consumers to focus more on the impact of charges and increase the pressure on providers to reduce these.
There is also a chance that the reduction in illustrated benefits may act to encourage consumers to increase their pension savings to prevent their intended retirement income from being reduced. Advisers, in particular, could use this opportunity to review levels of pension savings with their customers, with a view to increasing contribution levels.
Jim Sutcliffe, Chairman of the FRC’s Board for Actuarial Standards, says: “Millions of people receive Statutory Money Purchase Illustrations every year. These illustrations contain important information about how much people have already saved towards their pensions and what they might receive at retirement. The assumptions used for future returns need to be justifiable and reasonable.”