Projected growth rates in illustrations are being cut to 2%, 5% and 8% per annum, delivering a supposed cold dose of reality. I can’t really agree.
The rationale for reducing the assumed investment returns is that we have been in a period of very low growth since the financial crisis began and policymakers believe that it is likely to continue. It’s not that I dispute this; nor am I particularly inclined to argue the toss on what exactly the rates illustrated should be. To me the whole thing is an example of learning the wrong lessons.
Millions of ordinary people in defined contribution pension schemes have the same simple questions, questions like “When can I afford to retire?” and “How much pension (income) will I get at my retirement age?” Driven by regulations, pension providers and trustees attempt to answer these questions with illustrations.
I’m not a fan of illustrations, at least as they are currently used (I’ve also blogged on the ways they can mislead consumers and how consumers really decide). Others have retorted that you’ve got to do something to try and show how the fund might grow. Fair enough. But before we do that, I believe regulators and providers/trustees should do members of DC pension schemes – and you, their advisers – a favour and give a straight-forward, honest answer to those simple consumer questions. I’ve managed to get my version down to four words: I don’t know.
If “Sorry” is the hardest word, “I don’t know” might just be the hardest sentence.
It’s not that I’m too thick or too lazy to work it out, I just really don’t know. Nor, unless I’m very much mistaken, do you, your clients, actuarial geniuses or even – with all due respect – the FSA. Not only are investment returns, inflation and annuity rates unknown (not to mention sequence risk), even the “defined contribution” is unknown: will there be pay rises (or cuts), promotions (or redundancy), more (or less) willingness to save in future?
Getting over our immense aversion to admitting we don’t know really would deliver a cold dose of reality. We ought to tell consumers how uncertain the future is. Only then, in my opinion, will they be ready to play with illustration numbers. I’m sure many would also find it much easier to see why they might want advice.