Projection rates are pension nightmare
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The projection rates that pension providers are now using for cash and fixed-interest funds vary by as much as 1.5 per cent, making it a “nightmare” for advisers to compare products, according to O&M Systems.
The firm has hit out at the FSA for failing to produce guidance on acceptable projection rates after clamping down on the area.
Last year, the FSA repeatedly warned pension providers to stop using the standard 5, 7, 9 per cent growth rates to project for cash and fixed-interest funds, demanding that each provider should make and justify their own growth rates.
Most providers have now declared their fund-specific rates but there is a huge variance among them, making it harder to compare funds.
For example, mid-growth projection rates for a pension product investing in the M&G corporate bond fund vary from 6.75 per cent with Prudential to 5.25 per cent with Standard Life.
This means that for a £50,000 investment over 25 years, the fund value would vary by a third, assuming a 1 per cent charge.
Director Graham Miller says: “With no specific guidance on rates being issued by the FSA, there were always going to be differences between rates used in the market. However, a 1.5 per cent difference in the mid-growth rate for the same fund was completely unexpected.
“Almost every provider has a different rate and there is no consistency across the market. This will be a nightmare for IFAs to understand. If they get a quote from two providers, they are going to get massively different projections. Guidance from the FSA would not have gone amiss.”
An FSA spokeswoman says: “We have provided firms with a strong base for determining appropriate projection rates for their products.”
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Readers' comments (19)
Stanley Kirk | 12 Aug 2010 3:42 pm
This is as a result of dreadfully muddled thinking. The primary purpose of projections is to compare the difference that charges make and that becomes impossible if providers are using different growth rates. The FSA need to realise their mistake and act quickly.
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Anonymous | 12 Aug 2010 3:46 pm
The FSA have created confusion and difficulty for IFAs, clients and even themselves! Their statement suggests that they seem to have totally missed the point.
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Jeff | 12 Aug 2010 3:54 pm
Absolute nightmare!
There has to be consistency across the board for IFAs to have meaningful data without having to read lines and lines of explanatory notes, paying out for analysis software which in itself seems to be required by the FSA in order to advise on pension switching, but is flawed by the information provided by the providers based on guidance given by the FSA….
No one looks at the projections in terms of the actual values these days – just whether one is higher than the other, given the premium paid and applied to the underlying charging structure.
Just put it back to a standard 5,7 & 9% please Mr FSA and help us do our job.
Thanks.
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Chris Neil | 12 Aug 2010 4:38 pm
An example of the FSA comletely out of touch with reality. They have been criticalof IFA's proceedures when advising on pension transfer and now just confuse matters even more.
Revert to a standard 4,6,8 and leave it to advisers to advise on the possibility or otherwise of the asset class being used actually providing these returns.
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Jim Turner | 12 Aug 2010 4:50 pm
I blame the product providers for not thrashing this out with the FSA and among themselves. We're almost back to the situation we had years ago with projections for With Profit contracts; because of the variance between product providers the PIA decided on standard projection rates! Do providers and the FSA really undersatnd the IFA's requirements?
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Leslie Sharpe | 12 Aug 2010 5:03 pm
This was always going to cause a problem. Both consumers and advisers, through FSA guidance over the years, have used illustrations to be able to contrast and compare products prior to making a selection.
FSA were absolutely correct in expecting firms to use more appropriate growth rates. It is not fair or correct and is very misleading to project cash or fixed interest funds using the same growth rate assumption as equity funds. However, failing to provide sensible guidance or, as has been done before, stipulate more appropriate growth rates has simply served to confuse the consumer even more. Now that commission bias has been removed, we can all sit back and watch as one provider or fund manager uses significantly different projection rates to 'appear' better than a competitor. Is that in any way clear, fair and not misleading!
As advisers have the ability to ask the providers and fund managers to supply illustrations at a growth rate of their choosing, as long as it is reasonable of course, I can foresee advisers, at least those of the same firm, requesting illustrations at the same growth rates in order to achieve consistency for both their own and their customers comparison purposes and to provide their customers with clear, fair and definitely not so misleading information so that they can both make informed decisions.
Good luck.
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Leslie Sharpe | 12 Aug 2010 5:03 pm
This was always going to cause a problem. Both consumers and advisers, through FSA guidance over the years, have used illustrations to be able to contrast and compare products prior to making a selection.
FSA were absolutely correct in expecting firms to use more appropriate growth rates. It is not fair or correct and is very misleading to project cash or fixed interest funds using the same growth rate assumption as equity funds. However, failing to provide sensible guidance or, as has been done before, stipulate more appropriate growth rates has simply served to confuse the consumer even more. Now that commission bias has been removed, we can all sit back and watch as one provider or fund manager uses significantly different projection rates to 'appear' better than a competitor. Is that in any way clear, fair and not misleading!
As advisers have the ability to ask the providers and fund managers to supply illustrations at a growth rate of their choosing, as long as it is reasonable of course, I can foresee advisers, at least those of the same firm, requesting illustrations at the same growth rates in order to achieve consistency for both their own and their customers comparison purposes and to provide their customers with clear, fair and definitely not so misleading information so that they can both make informed decisions.
Good luck.
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URGH!?!? | 12 Aug 2010 5:05 pm
... why not have industry 'standards' as 0%, 1%, 3%, 5%, 7%, 9% & 11% - should cover all aspect ... and nothing in between (ie no .25%'s or .5%'s allowed!!)
Gives you 6 to choose from 'covering' most AtR growth rates ...
Then fine any provider failing to adhere to the system - in much the same way they fine IFAs for breathing in the wrong way/place/time ...
Your thoughts??
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Monsieur Reynard | 12 Aug 2010 5:31 pm
This has nothing to do with providers not "thrashing it out" with the FSA - when they tried to do so the FSA issued not very veiled threats of the consequences of not taking action that the FSA considered appropriate. Two representatives of the FSA were castigated at an AMPS meeting for the lack of prescription and at their apparent total lack of understanding of the implications of their dictat.
This debacle is entirely of the FSA's own making, and appears to be the result of political manoeuvering by certain individuals at the FSA to show how tough they can be.
Unfortunately what they've managed to prove is just how out of touch with reality they are, and how they are totally incapable of anticipating the consequences of their actions. The solution remains desperately easy - just change the standard projection rates downwards by 2% points. The change would have implemented within weeks, provided consistency across the Industry, and still allowed IFAs and their clients to make valid comparisons.
If they can't get the simple and easy things right, what hope for any significant changes that they try to introduce?
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Anonymous | 12 Aug 2010 5:35 pm
Why not go to the pension consultants and ask what rates they use for each asset class for their stochastic modelling. They would be independent and are updated as needs be.
Either that or ban projections
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