Market view: Misplaced focus on projection rates?
Earlier today, the Financial Services Authority revealed it is consulting on lowering projection rates for retail investment products from the current five-seven-nine per cent model to one of two, five and eight per cent.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “It’s good they’re asking questions, because the whole basis on which the industry communicates with their customers really needs a re-think.”
“What actually matters to the individual is managing their expectations: how much they are saving and how long they have to save for.
“If that isn’t what it’s driving towards than it’s probably pointing us in the wrong direction.
Mr McPhail believes advisers should be engaging more with their clients, checking back with them on an annual basis to make sure their plans are on track.
He added: “More of this engagement needs to be done on a non advised basis so the FSA’s policy needs to be geared towards largely a non advised world.”
According to Mike Wellby, director of Honeybee Financial Planners, the new rates are actually far too low.
He said: “Personally, certainly two per cent is much too low and as a medium, five per cent is too low. Between eight and nine per cent is reasonably close.
“It might be because if you have a look over the last 10 years that returns have been fairly low so maybe it’s the expectation that that might continue.”
He argues that when you look at the last 20 years of investment returns, the five-seven-nine projections don’t seem so inaccurate.
When the FSA first announced the consultation however, Professor David Blake of Cass Business school spoke out saying the rates were unrealistically high, even comparing them to mis-selling.
Gareth James, technical resources manager at AJ Bell, believes the projection rate system might be over-simplyfing things.
He said: “Current rules require the projection to be calculated using the standard rates with the projection altered only if the rates described overstate the investment potential of the product.
“The FSA is proposing to change these rules so that it requires projections to be calculated using rates that accurately reflect the investment potential of the product and do not exceed the standard rates of return.
“When looking at the practicalities the FSA needs to consider whether the rules both improve the outcome for the consumer and are capable of being adopted.
“If you consider commercial property in a SIPP as one example, how does an illustration accurately reflect the investment return when considering issues such as costs of upkeep, insurance, property management and risk of rental voids before we even think about the potential for growth in the value of the property?”