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Gap on returns means FSA may cut projections

The FSA could be forced to cut projection rates for with-profits policies over concerns that life offices could be attracting new investors by overstating likely future performance.

Independent research conducted on behalf of Money Marketing reveals that typical with-profit policies – calculated using the average asset allocation of all available products – are returning far more to investors than their underlying asset performance warrants.

Although this smoothing effect is integral to with-profits, the FSA is believed to be concerned that the deficit bet-ween declared bonuses and returns is increasingly creating a drag on performance as life offices attempt to replenish depleted reserves.

As companies have to use projection rates of 4, 6 or 8 per cent, the FSA is believed to fear that new investors are unaware that their policy is unlikely to match the projected performance or deliver the bonuses they may have been expecting.

This view is supported by the research, which shows the average policy – invested 54 per cent in equities and 46 per cent in fixed interest, property and cash – needs its equity element to achieve 7.25 per cent growth to deliver a 6 per cent annual return. In reality, equities in FTSE 100 have fallen by around 30 per cent in the last year.

To address the problem, the FSA may scrap the 8 per cent projection rate or lower all three – its rules state a reduced rate of return must be used if companies believe the figures are overstating a policy&#39s potential – but it says no decision has been made.

Spokesman Rob McIvor says: “Projection rates are something we are keeping under review. If we feel there is a need to revise the rates, then we will do so.”

Bestinvest deputy managing director Jason Hollands says: “I can imagine there will be pressure to reduce them. Projection rates are a perennial problem for all investments.”

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