Firms are required to use projection rates to illustrate the potential future investment returns an investor may receive. Projection rates do not provide a guarantee of future investment returns, but offer investors an indication of what they might receive back from an investment.
Under the FSA’s current rules, firms must project on three different rates of return, revising these rates downwards where a product is unlikely to achieve returns in line with these rates. However, providers often fail to comply with this requirement, so the FSA is strengthening the rules to emphasise that providers should always use appropriate rates of return, subject to the FSA’s maximum projection rates.
Following the publication of independent and peer reviewed research by PricewaterhouseCoopers, the FSA is consulting on a reduction in the current projection rates.
Tax-advantaged products (e.g. personal pensions):
- Current rates: 5%, 7%, 9%
- Proposed rates: 2%, 5%, 8%
Tax-disadvantaged products (e.g. endowment policies, investment bonds):
- Current rates: 4%, 6%, 8%
- Proposed rates: 1.5%, 4.5%, 7.5%
To ensure consistency across both personal pensions and statutory money purchase/defined contribution schemes, the FSA and Financial Reporting Council will hold a joint consultation on a reduction in projection rates. Consistency across different types of pensions will allow both advisers and investors to compare projected rates of return on a like for like basis.
The consultation paper also addresses other issues aimed at giving investors a fairer indication of future pension benefits:
- The FSA will consult on revised mortality rates for insurers to use in Key Features Illustrations from 21 December 2012 onwards. The revised rates will provide investors with a better indication of what they may get from a personal pension or group personal pension in retirement. The consultation follows on from the European Court of Justice ruling which requires insurance firms to charge the same rates for men and women to ensure gender equality.
- The FSA will consult on an explicit Consumer Price Index assumption which advisers will use when assessing whether a member of a defined benefit pension scheme would be better off moving their money into a personal pension. An explicit CPI rate will allow all advisers to use the same rate and will provide pension scheme members with a more accurate analysis of the benefits of a transfer.
Sheila Nicoll, director of conduct policy at the FSA, said:
“Investors need to be able to trust information they receive and any suggestion as to how their investment might grow in future must not be misleading. We are proposing lower growth rates which firms may use but we are reinforcing the fact that these are maximum levels. Providers and advisers need to take a long, hard look at the rates they use, taking account of the underlying assets they are dealing with.”
