More than 10 million workplace pension holders face losing up to a third of their predicted retirement savings thanks to low growth in certain pension investment favourites.
Pension consultancy Lane Clark and Peacock (LCP) warned savers to look 'under the bonnet' of their pension, as a new report from the legal firm and Interactive Investor found falling equity and bond returns could leave final pension pots worth tens of thousands less than originally predicted.
When employees sign up for a workplace pension, the scheme often provides them with projections of how much their pension pot could be worth based on how well the scheme's investments are likely to perform.
However, LCP found that the way schemes communicate this information to savers' was not always clear, and under current guidelines, projections for identical products could vary.
In addition to this, falling growth rates over the last decade mean that the projections given to savers ten years ago are now highly unrealistic- meaning that millions of people could be on track for devastating pensions shortfalls.
Savers' over-optimistic expectations of stock market returns only compounded the issue, LCP found. Partner Dan Mikulskis said:
When we look at our investments, we tend to ask how have they performed, but the more important question is often how well they perform.
Future stock market returns are one of the most debated areas in investing. The truth is no one knows for sure. Commonly used assumptions right now expect annual returns of around 5-6% per annum, for stock markets, over the long term and much less for bonds. But our survey shows that 40% of individuals expect more than this.
The report found that in 2012, an average earner in their 20s making minimum contributions (8%) could have reasonably been given a predicted value of £131,000 for their final pension pot.
However, due to falling returns in the bonds and equities markets, their final pot is only likely to be worth £81,000 - more than a third less.
To make up the shortfall, that person would need to step up their contributions to 12%.
Head of Pensions and Savings at Interactive Investor, Becky O'Connor, said:
This report highlights the impact of lower forecast investment growth on pension pots and the profound implications for the generations of workers whose retirement pots are fully exposed to the fortunes of global markets, without many even knowing.
Lower for longer' investment growth could mean the difference between scraping by and being comfortable in retirement, but the impact of stock market performance on retirement outcomes may be poorly understood.
Now we live in a potentially lower growth world; this needs to be reflected by recommendations for higher minimum pension contribution amounts.
The report also identified inconsistencies in the way that projections are reported due to contradictory guidelines from the city watchdog FCA and pensions industry regulator, the Financial Reporting Council (FRC).
This means that savers will received different predictions at different times based on different assumptions.
While the FCA rules that 'starter packs' must include a low, middle, and high projection for expected returns, the FRC instructs schemes to provide the 'best estimate' in annual statements, leaving investors with 'considerable flexibility about the assumptions they use to make these predictions.
Dan Mikulskis, partner at LCP, said:
We've entered an age of responsibility, where more and more people have now become investors, responsible for their own financial security. Looking under the hood of investment products and asking questions like: 'How much of my assets are invested in stock markets? How much in bonds?' is vital.
The industry needs to step up and do better to help investors be realistic here, getting past the jargon and sales guff to help produce tools that help savers understand how their money may grow and the impact of things like inflation and fees over the long term.
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