The industry regulator, the Financial Services Authority is currently consulting on whether or not projection rates should still be used. Currently, if you receive an illustration for buying a pension or tax-privileged investment, you will be given projections of what your money could be worth over the years. These illustrations assume that your money will grow at 5%, 7% or 9%. These figures are reduced to 4%, 6% and 8% for savings and investments that are not tax-privileged.
The FSA is now calling into question whether these projection rates give false hope, with investors relying on the figures as to what they will get back at the end.
Our View
It is about time projection rates were reviewed, although we do not believe they should be scrapped altogether. We will be replying to the FSA's consultation with our views and will publish it on our web site, for those interested in reading it. We believe that projection rates should fall in line with general market returns and should be reviewed annually. For example, if you are taking out a pension, 5% could be realistic and so could 7% by taking a degree of risk. But, in most cases 9% is way off the mark.
What the FSA should be doing is allowing certain projections to be made but relating them to the level of risk investors would have to take in the market at the current time, to actually receive those returns.
As an example, a 5% projection could be given because at the moment, regular savers into deposit accounts can obtain 5% gross. If a projection of, say, 7% was used, it should be warned that although a 7% gain could be made, it is more than a building society would offer and therefore risks to capital are attached. Investors should then be told that if they only want a lower amount of risk, they should be looking at the 5% return. Obviously, a multitude of risk warnings would also be required but at least investors would know the real picture.