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FSA warns again on cash projections

The FSA has threatened to take action against pension providers if they do not stop using standard projection rates for cash in a second industry warning.

Money Marketing revealed in August that only three providers – LV=, Standard Life and Legal & General – were using lower projection rates despite FSA condemnation of firms overstating potential returns in its pension switching report in December.

In its latest warning note to providers, sent out last week and seen by Money Marketing, FSA director of conduct risk Dan Waters says including a caveat next to 5,7 and 9 per cent standard projections, as some providers have been doing, is not good enough. It follows a remin-der from the Association of British Insurers that firms must meet their “obligations under conduct of business rules”.

In the latest letter, Waters says: “You must comply with the requirement to revise the standard rates downwards where a product is unlikely to achieve returns in line with these rates. This notice rescinds any existing individual guidance that you may have received permitting you to use the standard rates with a caveat.”

The FSA will conduct a further sample review next year to ensure that firms have changed their practice.

An FSA spokesman says: “We are going to come back and look at this and if at that stage firms are still failing to comply, we will take appropriate measures, potentially enforcement action.”

An ABI spokesman says: “It is for individual firms to make their own decisions on projection rates that are realistic, based on the nature of their individual products and circumstances. Firms also need to ensure they can justify their decisions to the FSA.”

informed Choice managing director Martin Bamford says: “It is misleading to use standard rates to project to a client in cash or fixed interest in terms of what they are likely to get.”


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. Hi Kate.

    Can you ask Transact if they are going build greater flexibility into their pension projections so that we can produce like for like illustrations.

    Based on this article we can expect an increasing number of providers to use basis different from 5%, 7% & 9%.



  2. Further to the last – this was sent in error.

  3. Why stop at Cash? At least it makes something…

    Providers for years have been quoting 5%, 7%, and 9% on With Profits that haven’t made any Bonuses.

    Surely equally misleading?

  4. I am all for realisitic projections on one condition and that is at least one of the rates shown matches standard projection rates. As the projection is not designed to show probable returns but the impact of charges at a given rate of return to use totally diferent rates of return makes comparision impossible.

  5. Most decent advisers have ALWAYS told their clients to ignore the projections completely. They have always been meaningless – they only serve to help to highlight the difference in charging structures between one company and another – – so a single figure would be enough for this.

    I am surprised the FSA are concerned about unrealistic projections for pensions. Realistic projections, especially given in real terms, would put off most people from investing into pensions in the first place. That would put a ‘nail in the coffin’ for the government scam that pensions make sense for most people when, in fact, they don’t generally make sense for the lower paid due to the onerous tax and benefit regime for people post retirement.

  6. You must be joking 29th October 2009 at 12:01 pm

    Personally, I don’t think the FSA are going anywhere near far enough here (which makes a change for me!).

    The whole concept of projections is flawed and misleading and, in my mind, doesn’t comply with TCF in the slightest. Who in their right mind would give someone a projection detailing what future funds may be IF a totally unrealistic set of assumtions are achieved?

    Can anyone give me an example of ANY asset class that has produced exactly the same return year after year? I thought not!

    Projections are based on mathematics, which is a science, investment based on sentiment which, last time I looked, didn’t fall in the science catergory – thats why people don’t get BSc’s is sentiment!

    It’s quite rediculous in the “outcome” based world of TCF that one of the statutory documents given to a client is probably the most misleading thing they will receive in the whole advice process!

    Yes, we still need a means of colculating teh efefct of charges and thus a basis for the RIY as Trevor states, but that should be the end of it – no projections, no illustrations, no more misleading figures!

    And whilst I’m having a little rant about RIYs, here’s a thought for everyone to chew over…

    Why don’t banks have to produce RIY figures for deposit accounts?

    As an industry, we’re all scrutinised in respect of the effect of charges and margins on anything that’s done, but when it comes to a simple deposit account the poor old client is suffering a RIY of approximately 4 to 5% a the moment – makes active funds seem extremely cost effective!

  7. I am all for realisitic projections on one condition and that is at least one of the rates shown matches standard projection rates. As the projection is not designed to show probable returns but the impact of charges at a given rate of return to use totally diferent rates of return makes comparision impossible.

  8. What are projections good for? An indication, which may or may not be achieved, in other words good for nothing. The current investment arena is running riot with growth. If someone had invested 6 months ago into equities they would be sitting on a sizeable return, but will it continue; I doubt it.

    I dont believe projections should be used to show future returns Do bank or building society deposit accounts show a projected value for someone investing £100,000 in a term deposit compared with an instant access account-no they dont.

    The FSA needs to get in the real world. IFA’s probably are switching clients holding quite a lot in the current economic climate which may include a large proportion in cash. The days of buy and hold are dead.

    Lets not forget what has happened to sterling since the crash and what that has done. The saddest victims are folks on fixed incomes, who worked, scrimped, and saved for a lifetime to ensure they’d have enough to live on in retirement. Suddenly, the nest egg they thought would provide a comfortable life is barely enough to keep body and soul together. What did a projection do for them?

    Any way you look at it, this kind of currency devaluation is like government-sponsored theft.

    Like a burglar who slips undetected into your home and picks up your spare change — every night, 7 days a week, 365 days a year.

    Unfortunately, the majority of savers and investors don’t have a clue. They don’t believe it can happen … that it is happening right now. John Maynard Keynes said it all 79 years ago: “By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.”

    This, unfortunatley is the likely outcome not this year or probably next, but the day will arrive,

  9. Deterministic illustrations are largely worthless.

    An adviser may present an illustration to a client with an explanation like: “What you actually receive back will depend on how the underlying investments perform, but here’s what you might get if investments were to grow at 5% a year, 7% or 9% a year.” And how many advisers have then had the client stare at the figures and say blindly, “I’ll have the 9% one please”?

    Stochastic models are imperfect, but at least help illustrate a range of outcomes, based on chosen investment categories. Much more needs to be done in the field of presentation materials and tools to help explain financial returns, risk and reward to clients to enable them to make more informed decisions.

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