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A blurry projection

The FSA has gone to great lengths to ensure advisers are taking heed of its pension switching review findings and changing their suitability processes accordingly.

But it seems the regulator is less than fussed that the majority of pension providers have snubbed its warnings regarding overstating potential returns, particularly for cash.

Granted the thematic review concentrated heavily on unsuitable switching advice given by some IFAs. But the fact remains that providers were explicitly told to change their ways yet only three – LV=, Standard Life and Legal & General – are currently using lower projection rates.

As revealed in this week’s Money Marketing, the lack of compliance by other insurers has prompted the Association of British Insurers to send companies a reminder, stating: “The FSA is concerned that illustrations for growth on long-term investment products provided to consumers by firms are not based on realistic projection rates.

“This note is to remind firms of their obligations under COBS rules to show realistic projection rates.”

In the pension switching report, the FSA states: “We were concerned that some providers seemed to us unlikely to be complying with the rules requiring lower projection rates to be used where the standard rates in the conduct of business sourcebook would overstate the investment potential and understate charges.

“We saw cases where the provider used the standard 5, 7, 9 per cent rates of return to project for cash.”

But Axa, Aegon, Aviva, Prudential, Zurich, Clerical Medical, Scottish Widows and Scottish Life are still using the 5, 7, 9 per cent standard projection rates for cash. Meanwhile, the projection rates used by LV=, Standard Life and Legal & General vary from 2.25 per cent to 6.75 per cent. Standard and L&G were using lower projections even before the regulator waded into the debate.

Axa, Aviva and Scottish Widows say they are reviewing the rates they use but Aegon says it has no plans to change.

A spokeswoman says: “We do not currently have any plans to change the projection rates as the vast majority of our customers who invest in the cash fund do so on a short-term basis and we believe it would be misleading to protect on cash relevant rates over the longer term.

“However, we are looking into how we can make this more prominent in our illustrations so customers can clearly understand the assumptions we have used in the projections.”

An FSA spokesman says: “Firms do need to meet our requirements, which have been clearly set out for some time. We are working with firms to make sure they take the necessary steps as soon as possible.”

What are your views? Should the FSA come down harder on providers that have failed to act? Does the fact that some providers have moved on this while others have not pose comparison problems for IFAs? Are projection rates worthwhile at all or will they always mislead the customer?

Let me know your thoughts by clicking on the link below.


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. blurry projections -well
    The playing field is not particularly level as I have come across retirement projections from life companies for existing with profits policies that include the terminal bonus. As the Terminal Bonus is not guaranteed, should it not be the case that they use the fund values for retirement benefit projections? Indeed there have been numerous cases over the years where the figures provided by life offices for legacy plans are often incorrect upon investigation – systems (eh)!

  2. A blurry projection
    I’m not sure I understand what all the fuss is about. How many pension illustrations are based on the assumption that any of the fund will be invested in cash? In the real world (always a tricky place for the FSA), doesn’t virtually everyone investing medium to long term select or ask their adviser to select for them a judicious blend of Gilt, Bond, Property, Equity and maybe Commodity funds? All that’s required is a sidebar pointing out that investments in cash may be expected to yield lower returns, possibly by a significant margin, than those that might reasonably be expected from a properly balanced and diversified portfolio. Job done. Or am I missing something here?

  3. Deja vu….
    LAUTRO all over again, the providers don’t care, the regulators don’t care. Do any of them take the long term view?

  4. A blurry projection
    Given the performance of the average managed funds over the last 5 & 10 years, any projections are a total waste of time.

  5. Misleading Intermediate Underlying Growth Rates
    There needs to be a level playing field across all pension scheme operators – professional advisers will always recommend a diversified investment portfolio which will often include cash and other lower risk alternatives to equities. If some providers breach the rules it makes a comparison for pension transfer purposes impossible. The Aegon pension will always look as if it can produce 7% across all assets classes which is impossible to achieve in the current economic climate. The regulator needs to act now to ensure customers and the advisers that recommend them are treated fairly by big insurance companies.

  6. I agree with AEGON statement
    If we take it a step firther, it is for the adviser to then clarify to the client that realistically if they are currently in cash, ttey should ONLY be focusing on the lower growth rate of 4% and that with the caveat that it is difficult to get ven as high a rate as this on deposits at present. A clearer explanation on the KFI, which ASE have said they are looking at would be wise however, unless lile us, you are an adviser who records the conversation with the client in ordet to be able to evidence exactly what has been said.

  7. Level Playing Field Required
    I work for a smaller provider of SIPP schemes and we lowered our projections to 1, 2 and 3% for projections with large cash holdings. It really isnt fair if our competition are not playing by the rules and this needs to be dealt with asap.

  8. Cash Pension Funds
    Cash could have saved some clients 25-40% of their fund 2 years ago! It is the advisers job to continually advise the client of risk versus return and the clients responsibility to inform the Adviser if their Attitude to risk changes.Product providers systems should be able to incorporate lower cash projections to ensure realistic long term projections.Comparisons should be based upon more than just projections. The FSA should Know this!

  9. Muddled thinking
    There’s some muddled thinking here – an investor wanting to stay in cash until retirement should not be investing in a SIPP. Whatever investments are chosen at outset are, almost by definition, likely to change (if you didn’t expect to use the investment flexibility of a SIPP, why would you choose one over a cheaper product?) An illustration should illustrate the possible returns over the life of the product. I haven’t a clue what the returns might be over the next 5 years, yet alone the next 25 years. 5%, 7% and 9% seem to be as good a range of possible returns to assume as any other. Or does the FSA’s crystal ball allow them to have a clearer view of what each asset class will return? And are they convinced that the same figures should be used irrespective of the prospective term? Fact is, this is a trivial and unnecessary distraction – the FSA would better spend their time addressing issues of poor recordkeeping, lack of reconciliation and inability to demonstrate regulatory compliance at certain administrators.

  10. Sippman
    Well made points…………….. the original article did not pick out SIPPs, it picked out pension transfers, but your points are vlid eitehr way whether it is a PPP, stake or SIPP.

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