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Advisers hit out at conflicting provider growth projections

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Advisers have expressed frustration at the wildly differing growth rates used by providers when estimating returns from different asset classes.

CTC Software’s annual market review of growth rates shows the breadth of expected returns produced by 40 insurers, Sipp and wealth management firms.

The FCA tells investment, life and pension providers how they calculate the potential future value of savings. In April 2014 these were set for pensions and Isas at 2 per cent, 5 per cent and 8 per cent for low, mid and high projected returns.

However, the report shows the difference between the lowest and highest mid-rates quoted by providers is typically around 3 or 4 percentage points for each asset class, growing to 5 percentage points for cash.

Advisers say consistency is needed across the market to allow meaningful comparison.

Meldon & Co managing director Mark Meldon says: “Nominal returns have always confused consumers and their advisers. We need to use projected real returns after inflation and we need to be mindful of a difficult few years ahead.”

Meldon suggests focusing on charges instead of future returns.

He says: “The problem is if you are trying to work out standardised project rates for Sipps you’re herding cats and every portfolio will be different unless you use model portfolios. The only thing you can measure accurately going forward is the cost of running the portfolio, that’s a much more meaningful figure than projections.”

David Michael Financial Services managing director David Bunyan agrees providers’ differing stances are frustrating.

He says: “The problem is some providers use FCA standard growth rates and some don’t. It’s more helpful when providers give their own projections because over the long-term it is unlikely returns will match FCA standard figures. It’s frustrating when you’re doing comparison for clients to get different growth rates.”

The survey shows Sipp providers are much more likely than insurers to use the 5 per cent mid-point growth rate as a standard across all asset classes.

Report author and CTC managing director Nigel Chambers warns: “Although this may be understandable at the point of a new business application where no indication of investments has been obtained, it does not seem to tie in with the FCA’s view that a Sipp administrator needs to understand the underlying investments in a client’s portfolio.”

The highest mid-rate quoted by providers was 8 per cent for equity and property, which Chambers adds is “out of step with the market generally”.

He says: “In any customer journey the use of consistent assumptions and calculations can reduce the possibility of late confusion when the formal key features illustrations are produced.

“In a world where there are an increasing number of execution-only clients, with no intermediary standing between the client and the providers, this becomes even more important.”

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Comments

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

  1. Whilst the projected fund values mustn’t be misleading and give the client an unreasonable return expectation, surely it’s the reduction in yield (RIY) figure that is important to reflect the drag on performance due to charges……and this should still be shown by all providers and fund managers?

  2. Isn’t it the case Andy that the RIY is not a fixed figure. It changes with the rate of growth. So you still need a standardised rate of growth to compare the RIY between different providers. I have resorted to creating a spreadsheet where I can input all the product charges of different providers, & then apply a standard growth rate to all providers, to compare projections.

  3. Both are right – RIY does depend on rate of growth and also on term to retirement. Even though the old 5/7/9 projections are misleading for some investment funds, they were the best way of comparing charges – if projection X is greater than projection Y based on the same level of growth and same retirement age, then X is the more cost-effective contract. Not the only consideration, but a very important part of preparing a pension switching file.

  4. Illustrations are bordering on being self defeating – human nature is to look at ‘the middle’ when presented with 3 options – invariably this middle projection assumes perhaps around 2% growth (before inflation of 2.5% or so is factored in) – i.e. a net loss.

    Add to that plan and advice charges and the illustration implies you’re better off sticking it in the bank (which doesn’t have to illustrate their charges, impact of inflation etc etc).

    So those who seek to make informed decisions for themselves are (perhaps unwittingly) comparing apples and pears.

    Illustrations absolutely have a use – RIY as outlined above being one, BUT they are bordering on being meaningless and certainly don’t encourage moving out of cash given that (on first look) you need the higher growth returns to make it potentially worthwhile.

    I’ve said it before and I’ll say it again, I’m all for transparency, but this is another example where transparency arguably distorts decisions.

  5. Except our compliance department says that we can’t simply compare charges, either because the original providers often get them wrong or fail to disclose them fully (and to be fair they are right), or because they simply don’t believe we have the capacity to compare a charge of 1% with a charge of 0.95% + £3 a month for a fund value of X and work out which will cost more over time. And therefore we have to use projections. And often our letters to the clients then have to include “critical yield” figures which we know are nonsense, but we have to tell the client that we must give them to him anyway. Informed!

  6. headbelowthe parapet 17th February 2016 at 3:20 pm

    The methodology that is employed when projecting to a set future date is standardised by AS-TM1 (Statutory Money Purchase Illustrations) from The Financial Reporting Council (FRC). The only variables are charges and assumed growth rates.

    RIY is affected by charges, and also by term if an initial charge is taken (the longer the term the lower the overall effect on the RIY). It cannot be affected by an assumed growth rate – this is because it measures the effect of charges without reference to the growth rate.

    The FCA have stated that they prefer a projection to reflect the underlying asset allocation model, which is quite correct. Helpfully PwC periodically publish a report commissioned by the FCA which sets out reasonable growth assumptions.

    This is not that difficult to understand.

    However, providers with old back books do seem to struggle. Only today I’ve been dealing with Phoenix who had completely buggered up a bunch of projections, I looked at these and re-calculated them using their charges and subsequently queried their outputs. They then re-did them and come up with the same figures as me – laughably they then said ‘look they were correct all the time!’ Bejesus! Don’t get me started about Royal London!

    My issue is that the providers are all a bit rubbish – this is greater issue than not being able to understand different growth rates. I have learned to always assume the worst.

  7. headbelowthe parapet 17th February 2016 at 5:05 pm

    * Ahem* Just realised that what I have written is wrong – projection rates will of course have an effect (albeit quite small one) on an illustrated outcome. That said, as long as the rates are standard this will have no overall effect for comparison purposes – which is guess is the whole argument being made here! My suggestion is build (or buy) a system that can standardise the process for you…

  8. Why are illustrations needed? At best all they are is an estimate. If I went to a stockbroker and asked how much my shares might be worth in 10 years time I’d be laughed out of the door.

    The one thing that can be said with certainty when investing in asset backed investments is that they will fluctuate in value. It is more realistic to review past performance on a regular basis to assess if the plans are on target.

    There is an argument that illustrations show the effect of charges but the customer has no idea what these are in real time. Fund management, whatever the tax wrapper, is a simple concept. I give you a sum of money, you invest it and charge for this service. Why can’t the client be told how much they’ve been charged on an annual basis? I know the annual cost in £ terms for every other service I purchase and that helps me assess whether I am getting value for money.

    In my perfect world each year the investor would get a statement showing what the value of their holding at the start and the end of their investment year together with the cost in £ terms of providing this service. Why can’t this be done?

  9. This is a massive own goal by the regulators. I can see why they wanted to allow providers some latitude in order to ensure realistic growth assumptions. However, by allowing them to pick their own rates, they have made comparisons between providers much more difficult. I am sure some providers (especially those with the more expensive older contracts) were delighted with this opportunity to blow a smokescreen across just how uncompetitive their contracts actually are. This is just what those providers needed.
    The answer is that, while the FCA should continue to allow providers to assume realistic growth rates, they should mandate that, if requested, the provider must also provide a quote on a set of industry standard growth rates.

  10. It makes me feel old to be able to remember those years when all illustrations were the same, with both growth rates and charges being prescribed. This was one of the causes of the ‘endowment mortgage’ scandal because providers with higher charges were able to appear competitive in their illustrations.
    Providers have for years ‘gamed’ the illustration rules to make themselves appear competitive on charges – one of the reasons why RIY (which is calculated from projections) has little credibility among advisers for cost comparison.
    In fact RIY is still the best way to be able to take all charges into account and distil them to a single meaningful number. Projections (at the same growth rate) are also useful but frightening – does a £3,000 difference over 20 years actually matter if the difference in RIY is just 0.20% and the latter provider has a much better investment track record?
    Those advisers who have the excel DIY skills to calculate their own projections and RIY are making true progress and I congratulate you. The next step is ‘industrial strength’ calculation engines from the same suppliers as those that service the providers – which may help to keep Compliance happy too. Just checking provider numbers is itself a revelation! These illustration engines do exist but are not (yet) heavily marketed. The sooner the better IMHO.

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