The wide disparity in growth rates used in pension fund illustrations risks misleading people going into drawdown without the help of an adviser, research by CTC Software has indicated.
The software and service provider's fourth Annual Growth Rate Survey of pension providers found investors choosing to draw down their pension must contend not only with differences in growth rates used in illustrations provided by similar pension providers but also with different rates from different types of drawdown provider.
CTC commercial director Philip Hodges said: "We recognise differing asset classes should attract differing growth rates but it is concerning the range of different rates being used in illustrations for the same asset class by pension fund providers could be misleading investors."
The firm surveyed 40 insurers and drawdown providers towards the end of last year to discover what percentage growth rates they are using for key features illustrations. The disparity of growth rates used by providers across different asset classes is summarised in the following table.
Summary of growth rates used by providers
Source: CTC Software
CTC Software CEO Nigel Chambers (pictured) said: "One of the core messages the pensions industry still needs to get across is that savings for the longer term need, in substantial part, to be invested in assets that can be expected to provide a real rate of return."
"There remains a distinct lack of understanding among consumers generally relating to the balance between risk and reward and so we need clear illustrations, on a like-for-like basis, to explain funds investing in real assets should accompany, if not replace, cash investments".
A key concern, said Chambers, was that more than half of all drawdown cases are being effected without the involvement of an adviser.
He continued: "When an adviser is doing a comparison between different products, they understand they may be using different growth rates, but if it's someone in the general public just trying to work out which product to buy using the illustration, they don't understand why one company may be using a different projection rate from others.
"People are likely to go for the one showing the higher growth rate being projected even though the fund may be the same - a higher growth rate can hide the fact there are extra costs involved in that product".
According to Chambers, more and more people with define benefit (DB) pensions schemes are exploring their transfer options. Last month, the FCA warned advisers not to execute DB pension transfers without considering where the relocated assets would be invested.
"When analysing a pension transfer it has always been essential to understand the future investments, as these define the charges which must be embedded into any transfer value analysis calculation" said Chambers.
"With differing growth rates and charges from provider to provider, this only leads to added complexity and confusion for those going into drawdown."
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