Only a fool would believe their pension projections

Personal finance journalists are all excited by the FSA’s decision to force pension companies to lower the projections they make for pension savers. Up till April 2014, pension companies will be able to use three growth rates for making projections about customers’ pension savings – Low 5%: Medium 7%: High 9%. Like all projections made by anyone in financial services who wants to get hold of our money, these rates were always ludicrously unrealistic.

From April 2014, pension companies will have to lower these rates to – Low 2%: Medium 5%: High 8%. This is supposed to give savers “a harsh dose of reality” as to the final value of their pension savings. Only problem is that these new lower rates are still wildly overoptimistic. The average growth achieved by the pension fund industry over the last 15 years was just 3.4% which is much lower than the new Medium (5%) and High (8%) rates. But we’re now moving into an economic environment where growth is likely to be slower than in the past. And, of course, these growth rates are before the effects of inflation. If we assume inflation will average say 2.5% a year, we’re actually looking at our pension funds achieving real growth of about 1% a year.

A study by the OECD found that “British savers have suffered bigger losses from their workplace pensions in the last decade than virtually every other nation in the developed world”. So why are our pensions such a disaster? High charges and corruption. In Britain we pay about 3 to 5 times the level of annual charges paid by savers in countries like Germany, Australia, Denmark and Holland. Moreover, the British pension industry is thoroughly corrupt with many pension companies “churning” the shares they own – excessive buying and selling – to increase the charges they take from us.  

So, don’t believe all the guff from the FSA bureaucrats and personal finance journalists about the new pension growth rates being a “harsh dose of reality” – they’re not even close.