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Actuaries tap into projection odds

Projection rates could be presented in the form of odds which would mean more to the UK public, suggests The Actuarial Profession&#39s input into the FSA review of projections.

TAP says simple percentages appear to cause confusion in the minds of a big number of consumers, arguing that succinctness, clarity and relevance in the computation of projected values before and after costs should be the key element of any projected figures.

It says a possible way of illustrating projected returns could be using odds showing, for example, that a £5,000 investment in a basket of UK equities with a gross average annual rate of return of 8.75 per cent has a one in 10 chance that its final value will be more than £8,400 over a five-year term.

This would be compared with a UK deposit account, where the same amount has a one in 10 chance of reaching £6,160 over the same period.

TAP looks at a number of possibilities for the future of projection rates, including a total ban on their use, restricting companies to providing information as to current valuations or options for invest-ment choice. It says this would focus an investor simply seeking to accumulate capital on the nature of the underlying investment.

TAP also says a sound argument could be advanced for varying the required rates depending on the risk rating of the underlying investment. It believes this should be a subject of consultation and discussion in the development of any new rates.

The report says: “It is quite the time to consider possible different approaches to the presentation of projected values. Percentage returns, gross or net, probabilities, even percentages, all seem to be quite misunderstood by more of the population that might have been thought.”

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