Growing disquiet at prosperity projections

The figures used by finance companies to show how much a pension or an endowment might grow are to be scrapped, the chief City watchdog said yesterday amid concerns that consumers are being misled.

The Financial Services Authority sets the growth rates which companies must use when they are giving projections to illustrate the potential outcome of an investment. They have been set at 4% to 8% for endowments and 5% to 9% for individual savings accounts (Isas) and pensions, to reflect their tax advantages. But the FSA believes that the lower rate is misunderstood by consumers, who see it as the minimum they will receive.

Projections have come under fire because they were used to persuade home buyers to take out endowments, often with seeming guarantees of payouts that would exceed the amount required to pay off the mortgage.

Critics also argue that standardised projections fail to reflect the effect of the bear market, now that many insurance companies have reduced the equity content of their funds in favour of lower-yielding bonds.

Under proposals in a discussion paper issued by the FSA yesterday, companies might have to tell con sumers of the possibility that they will not get back all the cash they invested. Consumers could be given tables which show what would happen "if your investments do very badly".

The FSA yesterday ruled out a complete ban on projections but said the present 15-year-old regime needed to be replaced. New rules are likely to be brought in after the first quarter of next year.

David Severn, the FSA's head of retail investments policy, said: "The current 'one size fits all' regime is based on a broad brush approach and does not take sufficient account of different products' characteristics or the time frame for which the consumer wishes to invest. We have an open mind on what will best deliver the objectives we have set out. The current system has both strengths and weaknesses, and we must be careful not to throw away the baby with the bathwater."