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FSA projection rate cuts could lead to consumer detriment

Imposing ‘artificially’ lower projection rates for investment returns across the market could lead to consumer detriment as it may prompt individuals to make poor product choices, pension provider Aegon has argued in its response to a regulatory consultation.

Earlier this year, the Financial Services Authority published a consultation proposing cutting the current rates for tax advantaged products such as personal pensions from 5, 7 and 9 per cent to 2, 5 and 8 per cent respectively.

It also proposed cutting rates for tax-disadvantaged products from 4, 6 and 8 per cent to 1.5, 4.5 and 7.5 per cent respectively.

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Responding to the regulator’s proposals, Aegon has argued that the balance of two-thirds equities and one-third bonds used by researcher PricewaterhouseCoopers is arbitrary and no longer suitable, instead proposing asset-specific rates to more realistically reflect likely returns.

Steven Cameron, head of regulatory strategy for Aegon, said that while it is unhelpful to give customers unrealistically high expectations of future returns, it is also potentially harmful for the FSA to force “unrealistically low” projection rates on the industry.

He said: “The FSA notes that lowering projection rates could deter some people from saving at all and encourage others to save more. With the current squeeze on finances, we suspect more will be deterred than encouraged.

“But we’re also against suggesting to people they need to save more than may be necessary allowing for a more realistic future growth rate assumption.

“Artificially capping projection rates for equity-based funds will make it much harder to select between funds on a risk/return basis. Under the FSA proposals, customers may be presented with little extra growth prospects from equities over bonds but will be aware of the extra risks.

“Aegon has proposed an alternative approach which leaves the cap unchanged but places more emphasis on making sure the projection rate used reflects the underlying assets in each fund.

“This simple extension of the current asset-specific approach will mean customers continue to get a realistic indication of what they might get back, without the consumer detriment risks in the FSA’s proposals.”