Massive difference in at-retirement projection rates

At-retirement growth rate projections used by insurers and Sipp providers vary widely, with some projecting 5 per cent returns on cash and others using 9 per cent projections for overseas equities, a report has found.

Range of projection rates usedCTC Software’s growth rates market review points to the risk posed to non-advised drawdown customers who are faced with products and providers claiming different growth expectations for identical or similar portfolio structures.

Some Sipp providers are using the FCA’s maximum 5 per cent cap for rates across the board for all asset classes, arguing an overoptimistic 5 per cent return for cash is offset by a cautious 5 per cent projection for equities. CTC says these providers should be giving discrete projections for each asset class.

Insurer projection rates
Insurer projection rates
Sipp provider projections
Sipp provider projection rates

The report found insurers’ growth projections were on average higher than those for Sipp providers.

CTC Software managing director Nigel Chambers says: “Our report shows there are still a lot of worrying outliers, with a wide range of numbers being used for projections for the same asset class. We know there are a lot of people taking non-advised drawdown, so it is important for pension consultants advising schemes on selecting a non-advised at-retirement option to ensure that the growth rates being used are realistic.

“We have a slight concern that growth rates used for SMPI purposes frequently differ from those used for the initial FCA illustrations; although, of course, this is partly due to the difference in rules.

“As in previous years, the diversity of rates used for the projection of cash/deposit holdings particularly stands out and in part shows an ongoing concern relating to the presentation of negative rates of growth once inflation is taken into account. One of the core messages the pensions industry still needs to get across is that savings for the longer term need, in substantial part, to be invested in assets that can be expected to provide a real rate of return and is in part related to the complete lack of understanding amongst consumers generally relating to the balance between risk and reward. The billions of pounds invested in building societies and cash Isas where consumers are effectively losing purchasing power year on year bears witness to this.

“It is particularly notable that at least in some areas the Sipp providers seem to be more conservative in the growth rates they are using than the Insurers whereas many would have thought the opposite to be true.”