PIA acts to lower rate projections

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The Independent Online
CITY REGULATORS may change the investment assumptions used to sell pensions and endowments in the wake of concern that customers are being misled as to what their policies will be worth.

In a reflection of growing pessimism over dwindling investment returns, the Personal Investment Authority is floating proposals to drop the expected rates of return used to sell policies by up to 2 percentage points. The change would alter the returns that customers are led to expect when their life and pensions policies mature by tens of thousands of pounds.

The PIA currently requires financial advisers to use projected returns of either 6 or 12 per cent, depending on the cautiousness of their customer. The rates are used to illustrate the amount investors are likely to get back from pension policies when they mature.

Under current arrangements an investor paying pounds 100 a month for 25 years into a personal pension can be told he might get back pounds 133,176, according to figures from Axa Sun Life, the life insurer.

That assumes a rate of return of 12 per cent a year, endorsed by the regulators. But concern that this is no longer realistic may lead regulators to drop the rate to 10 per cent. The same policyholder would then be told that pounds 99,814 is a more likely return from the same savings.

The assumed rates of return are vital to financial planning because they determine what investors should pay to achieve the desired payout on maturity.

Experts at PricewaterhouseCoopers, the financial consultancy, have warned that millions of policyholders could be paying premiums to endowments and pensions on the basis of unrealistically high returns.

Many endowment holders bought policies in the late 1980s, when financial advisers were allowed to use projected rates of return of up to 14 per cent to sell policies. Since then the top rate has already been reduced once, from 14 to 12 per cent.

It is feared that hundreds of thousands of endowment policyholders may have paid dangerously low premiums because of over-optimistic investment assumptions. When the funds come to maturity, many policyholders may face a shortfall on their mortgage.

The PIA has already been told in a report by Lombard Street Research, commissioned last year, that rates of return should be cut by 1 per cent.

Industry observers fear that this fails to take account of the abolition of dividend tax credits in last year's July Budget. It is estimated that this shaved a further 0.5 per cent a year off returns to pension contracts.

David Forfar, an expert with PricewaterhouseCoopers, said: "Even if money is invested in equities, it is stretching it to expect 12 per cent a year."

A spokeswoman for the PIA said: "We are talking about lowering rates. Some feel they are too high and need to be brought into line with the investment climate."