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The Actuary The magazine of the Institute & Faculty of Actuaries

FSA unveils reduced pension projection rates

Rules which aim to give investors taking out a pension or life insurance policy a realistic indication of potential future returns have been published for consultation today by the Financial Services Authority.


The regulator is proposing a reduction in the projection rates that are used to offer investors an indication of the return they might get from an investment in a personal pension or life policy if it grows by certain specific rates.

For tax-advantaged products, it is proposing a reduction in these rates from 5%, 7% and 9% to 2%, 5% and 8% respectively. For tax-disadvantaged products, it is proposing a reduction in the projected rates from 4%, 6% and 8% to 1.5%, 4.5% and 7.5%.

All firms are expected to project on three different rates of returns and revise these rates down when a product is unlikely to achieve returns in line with them. The FSA now plans to strengthen its rules so providers always use the right rates of return. The FSA’s projection rates are the maximum they can use.

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.’

Today’s consultation follows research carried out by PricewaterhouseCoopers on behalf of the FSA that supported a downward move in the projection rates.

To ensure ‘consistency’ between personal pensions and defined contribution pension schemes, the consultation will also apply to reducing the projection rates for these schemes, allowing both advisers and investors to compare projected rates on a like-for-like basis.

The consultation paper also details a proposed update to the mortality assumption that should be used when illustrating a personal pension. This change, which would come into effect on December 21, aims to give investors a better idea of what they might get from a pension in retirement.

It takes into account the European Court of Justice ruling that requires insurance firms to charge the same rates for men and women to ensure gender equality.

In the consultation, the FSA is also proposing advisers use an explicit consumer price index assumption when assessing whether a member of a defined benefit pension scheme would be better off using a personal pension. Doing so will enable a ‘more accurate’ analysis of the benefits of a transfer, it said.

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