In its response to FSA Consultation Paper CP12/10 on product projections and transfer value analysis, AEGON has disagreed with FSA proposals to reduce the cap on the central pension projection rate from 7% to 5%.
AEGON claims this is unnecessary and could mislead consumers into making poor investment decisions between funds. AEGON has proposed an alternative which will make sure customers get realistic projections but without the risk of detriment.
The FSA's proposals refer to an analysis carried out by PricewaterhouseCoopers who were asked to consider what might be a reasonable central projection rate. In line with previous reports, their analysis is based on a fund invested two thirds in equities and one third in bonds. This has previously been regarded as a typical investment mix. AEGON argues it is no longer appropriate to base the central projection rate cap on an arbitrary investment mix. The move to asset specific projection rates should already mean projection rates more realistically reflect likely returns on the actual asset mix of each fund.
AEGON has particular concerns that capping the central pension projection rate at 5% is unreasonably pessimistic for equity-based funds. The PwC analysis suggests equity returns of between 6.5% and 8% in the medium to long term. Based on this, AEGON believes there is no justification for reducing the cap from 7% provided funds currently investing in other asset classes use lower projection rates.
Steven Cameron, AEGON's Head of Regulatory Strategy said:-
‘AEGON agrees it's unhelpful to give customers unrealistically high expectations of future returns. But there's also a risk of customer detriment if the FSA forces unrealistically low projection rates on the industry.'
‘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.'
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