The FSA’s drive to make projections more realistic is making them more complex. But they need to be if they are to be at all accurate, finds Paul Farrow
The big danger is that while it may be easier to compare the likely returns on different funds with the same provider, it could become more difficult to compare the prospective returns and charges between different providers.
However, most providers we work with have already moved in line with our thoughts on expected returns and the FSA will be monitoring this so there should not be any real outliers in terms of the assumptions they are making. We therefore believe this danger can be negated effectively.
It should be remembered that nobody can predict the future consistently. The volatility of returns from equity markets since the start of the Millennium is an obvious example of this. That said, over the long term it remains likely that equities will outperform more secure assets such as fixed interest and cash and this should be reflected in the projection rates. Clients should be aware of this although it is paramount that the respective levels of risk and the potential to lose value are also understood.”
Patrick Connolly AWD Chase de Vere
Projections are intended to both provide an illustration of the benefits that can be expected at the end of the investment term and to demonstrate the effect of charges. On the first score projections of returns have proved faulty as an indication of the benefits that will eventually be paid out. Twenty years ago projections based on double-digit annual returns turned out to be significantly short of the mark in most cases, leaving investors with a black hole in their retirement plans.
When such a projection is presented to investors they understandably base their expectations on these figures, irrespective of the myriad of ifs and buts in the same document. And irrespective of how much product providers tailor their assumptions to the specific funds chosen, the projections are almost guaranteed to turn out to be wrong, because no one has a crystal ball.
Tailoring assumptions to individual funds is unlikely to yield a significantly more accurate projection of benefits and will impair comparability.
Laith Khalaf, Hargreaves Lansdown
In theory it is not before time that this is coming in as I’ve long been a massive sceptic on “projections”. People can use them to portray just about anything they want to.
The main problem with any projection however is that no one can forecast what the future holds, and fund performance itself is only ever backward looking. Equities have disappointed over the last 10 years – with a huge exception – emerging markets.
Because of the backward-looking nature of risk profiling models however, the vast majority of pension investors (except those in well run Sipps) have missed out. It doesn’t take Mystic Meg to foresee that risk models will now be advocating a bigger exposure to these markets after they’ve risen threefold and now look a bit toppy. And herein lies the problem of companies working out their own projections on their own funds. Will pension fund investors still be disappointed at overall returns from their provider after these changes have been made? Probably.”
Andrew Merricks, Skerritt