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30th Jan 2015
2014 - This is the second year CTC has run the growth rate survey. The full report can be found in the CTC Innovation Centre. Below are summary comments from Malcolm Kerr of EY and Nigel Chambers FIA, Managing Director of CTC.
Malcolm Kerr, EY
It is interesting and perhaps worrying that there is such a wide range of growth rate projections within the various assets classes covered by this comprehensive and highly relevant survey. It again brings into question whether or not the industry should adopt some firm standards.
Of course these are growth rate projections. Designed to help consumers and advisers understand how their savings might grow. And it’s worth remembering that the actual growth in the FTSE 100 over the past 15 years or so is not 2% or 5% or whatever but actually less than 0%. But in spite of this savings have still grown as a result of volatility facilitating the purchase of “cheap” units. Volatility is the friend of savers.
But volatility is the enemy of drawdown. And now that annuities are no longer going to be compulsory, many consumer pension funds will be used to create retirement income. And, as we know, selling “cheap” units can destroy the best-laid plans.
Actively managing portfolios – for example taking profits when available and transferring them into cash ready for withdrawal can mitigate these risks. This will become a significant element of the value that advisers will include in their on-going service propositions alongside their lifetime cash flow modelling.
But when income is the objective, it seems to me that income-producing funds have a very important role to play. For savers, income is normally reinvested. But for consumers looking for income, actual yield is of paramount importance. After all, if a portfolio can create a dividend yield of 3% the number of units that need to be sold to provide a 5% income is considerably reduced. And over 30% of FTSE companies have dividends in excess of 3.5%.
The retirement income market calls for some innovative retirement income funds and I have no doubt many will emerge during 2015. Working out how to illustrate these new vehicles is likely to be a major challenge.
Currently the industry is absorbed in the changes due to come into force in April 2015. No-one is quite sure how the general public will respond to the new flexibilities, particularly in the mass middle market where new opportunities really do open up.
Within the context of pensions flexibility, it is unfortunate that Illustrations in the form they are currently mandated are more often perceived as a compliance burden than providing useful insights for the individuals at whom they are directed. April 2015 brings in a few essential changes to reflect the new drawdown regime; but more effort and energy on behalf of providers is being directed to reflect their new propositions.
Post April, providers will continue to refresh their propositions and customer communication. With many more people considering alternative retirement income products there will be an opportunity to observe behaviours through the decision making and buying process. We believe then that the FCA should subsequently consider how the Illustration regime can be used to provide real information and help consumers make the right choices.
Particularly given how the retirement income market will develop, CTC is concerned that the wide range of growth rates being used, both within specific asset classes and across the whole piece, provides a recipe for confusion rather than illumination.
The survey results set out below largely speak for themselves. The range between the minimum “mid growth rate” used and the maximum are still surprisingly wide. Certainly some of the minimum rates used seem too low and the maximum rates too high. The averages do give a fairer view which is one of the benefits of making the survey results available.
In considering the appropriate mid growth rate to assume, two further factors need to be taken into account. Firstly, that the lower and higher growth rate illustrations will use rates 3% lower and higher respectively and, secondly, that all rates should be viewed in the context of an assumed inflation assumption of 2.5% per annum. We further need to remember that the same growth rates are generally being used both for short and very long term projections, this becomes increasingly important as more people will be using drawdown facilities in the future, where the period of the projection is inevitably shorter.