Article

FSA consults on lowering its projection rates

The Financial Services Authority (FSA) is consulting on rules to ensure investors taking out a retail investment product such as a personal pension or a life policy receive a realistic indication of potential future returns and charges.

The Financial Services Authority (FSA) is consulting on rules to ensure investors taking out a retail investment product such as a personal pension or a life policy receive a realistic indication of potential future returns and charges.

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 (PwC), the FSA is consulting on a reduction in the current projection rates.

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 (KFIs) 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 (CPI) 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."

Notes for editors

1. The FSA and FRC consultation paper ('Product projections and transfer value analysis' consultation by the FSA and 'Statutory Money Purchase Illustrations' consultation by the FRC) can be found on the FSA's website.
2. The PwC report can be found on the FSA’s website.
3. The policy statement on pension transfer value analysis (TVA) can be found on the FSA's website.
4. Projection rates apply to retail investment products such as personal pension plans, stocks and shares Individual Savings Plans (ISAs), tax free savings plans, endowment policies, investment bonds and whole of life policies, which do not fall within the scope of the Markets in Financial Instruments Directive (MiFID). MiFID products such as defined contribution pension schemes, unit trusts, open-ended investment companies (OEICs) and investment trusts are not required to use projection rates.
5. FSA rules require firms to present projections for non-MiFID products in a standard format and to use prescribed rates of return. These rules are designed to prevent consumers being misled by inappropriately high rates of return.  These rules appear in Chapter 13 of the FSA’s Conduct of Business Sourcebook (COBS).  They are also referenced in COBS 19. Firms must ensure that they always use rates which are consistent with the expected returns of a given product. These rates must not exceed the maximum levels set in the FSA’s rules.
6. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
7. The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013. The Financial Services Bill currently undergoing parliamentary scrutiny is expected to receive Royal Assent by the end of 2012.