The projections that Corporate Business (CB) provide to its plan members and policyholders is governed by guidance issued by the Society of Actuaries in Ireland and the Pensions Authority. As you may be aware, this guidance is due to change on the 1st of May 2023 which will result in changes to illustrations of projected benefits.
What’s changing
The key assumptions used in a projection of pension benefits are:
- Inflation
- Investment growth
- Annuity escalation
- Annuity discount rate
Below is a table summarising the assumptions changes on the 01/05/2023:
|
Old |
New |
||
|
Investment Growth |
Maximum Investment growth - overall |
4.50% |
5.75% |
|
Maximum Investment growth - equity & property |
4.50% |
5.75% |
|
|
Maximum Investment growth - fixed interest |
1.00% |
2.50% |
|
|
Maximum Investment growth - cash |
0.00% |
0.25% |
|
|
Maximum Investment growth - other assets with insufficient information |
0.00% |
0.25% |
|
|
Inflation |
Salary inflation rate or benefit deflation rate |
1.50% |
3.00% |
|
Premium increases linked to general earnings |
1.50% |
3.00% |
|
|
Premium increases linked to consumer prices |
1.00% |
2.00% |
|
|
Annuity discount |
Maximum interest rate for annuities |
0.50% |
2.00% |
|
Annuity Escalation |
Rate of escalation for annuities |
1.00% |
2.00% |
Implementation
CB plans to implement these changes in two phases.
The first phase will incorporate the changes to inflation, annuity discount rates and annuity escalation rates only. this phase will come into effect on 01/05/2023. The annuity changes will mean that projected annuity costs are reduced. However, the higher inflation rate will reduce the present-day value of future benefits and will make projected benefits look less favourable in present value terms. This will have a larger impact the further an individual is out from retirement.
The second phase will involve updating the growth rates used in the projections. This will come into effect later in 2023 and will result in a higher value for projected fund values. This change will largely nullify the impact of the higher inflation rates on present value assessments.
What is the impact of the change?
The projection assumption changes will have no impact on pension values, the change simply relates to the illustration of projected benefits and the illustration of potential shortfalls of pension income in retirement.
The impact of the change will vary in different scenarios and can have a positive or negative impact on the illustration of projected retirement benefits. At a very high level:
- Projected annuity prices will appear cheaper as the annuity discount rate is increasing.
- Present value assessments of future benefits will be lower as higher inflation erodes the value of future benefits.
- Projected fund values should increase as investment growth rates are increasing.
The degree to which these changes will have a positive or negative impact on the illustration of projected benefits will depend on an individual’s own circumstances.
