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Projection rates are pension nightmare

The projection rates that pension providers are now using for cash and fixed-interest funds vary by as much as 1.5 per cent, making it a “nightmare” for advisers to compare products, according to O&M Systems.

The firm has hit out at the FSA for failing to produce guidance on acceptable projection rates after clamping down on the area.

Last year, the FSA repeatedly warned pension providers to stop using the standard 5, 7, 9 per cent growth rates to project for cash and fixed-interest funds, demanding that each provider should make and justify their own growth rates.

Most providers have now declared their fund-specific rates but there is a huge variance among them, making it harder to compare funds.

For example, mid-growth projection rates for a pension product investing in the M&G corporate bond fund vary from 6.75 per cent with Prudential to 5.25 per cent with Standard Life.

This means that for a £50,000 investment over 25 years, the fund value would vary by a third, assuming a 1 per cent charge.

Director Graham Miller says: “With no specific guidance on rates being issued by the FSA, there were always going to be differences between rates used in the market. However, a 1.5 per cent difference in the mid-growth rate for the same fund was completely unexpected.

“Almost every provider has a different rate and there is no consistency across the market. This will be a nightmare for IFAs to understand. If they get a quote from two providers, they are going to get massively different projections. Guidance from the FSA would not have gone amiss.”

An FSA spokeswoman says: “We have provided firms with a strong base for determining appropriate projection rates for their products.”


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There are 18 comments at the moment, we would love to hear your opinion too.

  1. This is as a result of dreadfully muddled thinking. The primary purpose of projections is to compare the difference that charges make and that becomes impossible if providers are using different growth rates. The FSA need to realise their mistake and act quickly.

  2. The FSA have created confusion and difficulty for IFAs, clients and even themselves! Their statement suggests that they seem to have totally missed the point.

  3. Absolute nightmare!

    There has to be consistency across the board for IFAs to have meaningful data without having to read lines and lines of explanatory notes, paying out for analysis software which in itself seems to be required by the FSA in order to advise on pension switching, but is flawed by the information provided by the providers based on guidance given by the FSA….

    No one looks at the projections in terms of the actual values these days – just whether one is higher than the other, given the premium paid and applied to the underlying charging structure.

    Just put it back to a standard 5,7 & 9% please Mr FSA and help us do our job.


  4. An example of the FSA comletely out of touch with reality. They have been criticalof IFA’s proceedures when advising on pension transfer and now just confuse matters even more.

    Revert to a standard 4,6,8 and leave it to advisers to advise on the possibility or otherwise of the asset class being used actually providing these returns.

  5. I blame the product providers for not thrashing this out with the FSA and among themselves. We’re almost back to the situation we had years ago with projections for With Profit contracts; because of the variance between product providers the PIA decided on standard projection rates! Do providers and the FSA really undersatnd the IFA’s requirements?

  6. This was always going to cause a problem. Both consumers and advisers, through FSA guidance over the years, have used illustrations to be able to contrast and compare products prior to making a selection.

    FSA were absolutely correct in expecting firms to use more appropriate growth rates. It is not fair or correct and is very misleading to project cash or fixed interest funds using the same growth rate assumption as equity funds. However, failing to provide sensible guidance or, as has been done before, stipulate more appropriate growth rates has simply served to confuse the consumer even more. Now that commission bias has been removed, we can all sit back and watch as one provider or fund manager uses significantly different projection rates to ‘appear’ better than a competitor. Is that in any way clear, fair and not misleading!

    As advisers have the ability to ask the providers and fund managers to supply illustrations at a growth rate of their choosing, as long as it is reasonable of course, I can foresee advisers, at least those of the same firm, requesting illustrations at the same growth rates in order to achieve consistency for both their own and their customers comparison purposes and to provide their customers with clear, fair and definitely not so misleading information so that they can both make informed decisions.

    Good luck.

  7. … why not have industry ‘standards’ as 0%, 1%, 3%, 5%, 7%, 9% & 11% – should cover all aspect … and nothing in between (ie no .25%’s or .5%’s allowed!!)

    Gives you 6 to choose from ‘covering’ most AtR growth rates …

    Then fine any provider failing to adhere to the system – in much the same way they fine IFAs for breathing in the wrong way/place/time …

    Your thoughts??

  8. Monsieur Reynard 12th August 2010 at 5:31 pm

    This has nothing to do with providers not “thrashing it out” with the FSA – when they tried to do so the FSA issued not very veiled threats of the consequences of not taking action that the FSA considered appropriate. Two representatives of the FSA were castigated at an AMPS meeting for the lack of prescription and at their apparent total lack of understanding of the implications of their dictat.

    This debacle is entirely of the FSA’s own making, and appears to be the result of political manoeuvering by certain individuals at the FSA to show how tough they can be.

    Unfortunately what they’ve managed to prove is just how out of touch with reality they are, and how they are totally incapable of anticipating the consequences of their actions. The solution remains desperately easy – just change the standard projection rates downwards by 2% points. The change would have implemented within weeks, provided consistency across the Industry, and still allowed IFAs and their clients to make valid comparisons.

    If they can’t get the simple and easy things right, what hope for any significant changes that they try to introduce?

  9. Why not go to the pension consultants and ask what rates they use for each asset class for their stochastic modelling. They would be independent and are updated as needs be.

    Either that or ban projections

  10. Leslie Sharp’s suggestion that “advisers have the ability to ask the providers and fund managers to supply illustrations at a growth rate of their choosing” is completely true. We do have the ability to ask.

    Sadly, the answer is invariably ‘no’ due to providers either being unwilling, or their outdated systems being unable, to cope with such non standard tasks.

    And don’t get me started on With Profits! Half percent a year bonus on a unitised fund yet over the next 20 years they are trying to convince us that they will give an 8% return net of all charges if they acheive a 7% growth rate.

  11. RE: Leslie Sharpe | 12 Aug 2010 5:03 pm

    “As advisers have the ability to ask the providers and fund managers to supply illustrations at a growth rate of their choosing…”

    Yes right, of course we can ask. It doesn’t mean that they will provide them though.

    Leslie, I would be extremely surprised to find that all provides would oblige you. We have enough of a trouble to get any response from some providers, especially some of the occupational schemes.

  12. projections are a legacy from the days when people sold pensions. ‘OOh, look – put £20 a month into this and you could have this much money per year (and we won’t link that to inflation to help you understand how little you will have to actually live off)’.

    We have two things to do with pensions to help people; look at the individual existing contracts for their continuing suitability in terms of costs and benefits (tactical analysis) and then looking at the wider financial planning needs (strategic analysis).

    We have been advocating our IFA clients look beyond projections for years, and hopefully the people they turn to for a second opinion on this (compliance) will start to realise this too.

  13. Paul Standerwick 13th August 2010 at 10:02 am

    No leadership, no idea

  14. Why not revise the projected rates to 3%, 5% and 7%. Competent advisers can use the 3% rate in discussions with clients who hold mainly cash, 5% for clients who hold mainly fixed interest, 7% for clients who hold mainly equities in their portfolios. I realise this will not affect bank, and other incompetent advisers, who will quote cash, for lower AMCs, and still quote 7% growth rate, but as professional people, the rest of us should not be treated as school children in the remedial class!

  15. Charles Fisher’s suggestion of 3,5 and 7% makes sense, or indeed the choice of projections from 1-9% in 1% increments. I find it very difficult to get any kind of consistency in projections, coupled with what seem to be different inflation rates and annuity rates used for the pensions by the providers. It is difficult enough to get the full information in one go from the existing scheme to satisfy the compliance department, without expecting the insurer to provide alternative rates aswell.

  16. This is an issue we have been looking at via Adviser Forum, initially a group was set up to look at the impact of these changes and potential solutions and the findings were delivered earlier this year. Whilst the ideal solution would have been for the FSA or providers to agree a common approach for various reasons that has failed to materialise.

    It appears there will be a need for new software comparison services to help advisers, this is something we will be looking into in the coming months, although we are continuing to develop a dialogue to see what can be done collaboratively to avoid the considerable additional costs that this will inevitably involve. Given this backdrop we feel it’s worth investigating every possible avenue and will work with interested parties to pursue this. If any firms wish to understand more about our work in this area please contact me.

    Poppy Morgan
    Head of Forum Development

  17. The point is do you want to set your own projection rates? If I set these and my client takes away paperwork showing a 2% figure that’s what sticks in their mind. I’ve used it just to illustrate the effect of charges, but they have that figure set by me in years to come when they look at their papers! If the FSA set these rates then it’s a level playing field.

  18. We participated in the Adviser Forum work (Poppy Morgan’s entry above) and found it pertinent and useful. If anything is to come of a drive for consistency and sensibility the issue must be debated, agreed upon and driven forward. Which requires more than just a few comments here.

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