Royal London negative projection over next 7 years

help50

Hi, just got annual statement from RL which shows a drop in value this year from last, fair enough turbulent times. But it also says that by my retirement age in 2029 my fund is predicted to have a growth of -0.2%. Which to my simple view suggests, why would someone keep money in something for next 7 years if it’s just going to lose value? What am I missing here?

dunstonh

The FCA introduced negative projections several years back.

Which to my simple view suggests, why would someone keep money in something for next 7 years if it’s just going to lose value?

They are synthetic projections.  They are not forecasts.   They also factor in 2.0% currently for inflation (FCA decided to lower it from 2.5% a few years back).

Effectively, the modelling is based on long term returns of the asset types you invest in, minus charges and minus inflation.  Cash and gilts have very low projection rates.  So, the charges and inflation turn the figure negative if you are heavy in those and light in equities.

my fund is predicted to have a growth of -0.2%. 

It is not a prediction.  It is a projection.  

sandsy

it's not a prediction. It's an illustration of the outcome if a specific set of assumptions were borne out in practice.

In this case, the rate of growth on your funds is expected to be less than inflation. So the real rate (net of inflation) is negative. 

The rate of inflation is predetermined in the rules for illustrations. The growth rate on the funds is currently set by the pension scheme, based on the assets your pension is invested in.

What you get in practice will never be the same as shown on an illustration. Nobody has a crystal ball or can forecast returns accurately.

bostonerimus

Welcome to the world of mathematical modeling. You can't evaluate the result without knowing the algorithm and the inputs. It's about as useful as the large positive returns that were often predicted before.

[Deleted User]

Predicting returns is astrology.  There are too many scenarios. And it does depend on charges and investment types.  Say, you are mostly in bonds and inflation does not return to 2% as the market expects.  Well… Negative return is a plausible outcome. 

Malthusian

What is your pension invested in?

[Deleted User]

The Royal London app has 3 options of a prediction for pension though the app isn't loading for me at the moment - fairly sure it has a low (-) medium (2% growth or so) and high (4-5% or something) 

dunstonh

The Royal London app has 3 options of a prediction for pension

projection not prediction.   

 fairly sure it has a low (-) medium (2% growth or so) and high (4-5% or something) 

The rates will be based on the asset class of the underlying investments.


For those that are bored, here is the 2017 FCA guidelines on projections
https://www.fca.org.uk/publication/research/rates-return-fca-prescribed-projections.pdf

JohnWinder

Thanks for the link. I’m guessing ‘projections’ is used lest naive investors think ‘prediction’ means an accurate ‘this will happen’. Projection sounds more like a guess. But it seems harsh to suggest prediction isn’t a suitable term. 

‘Financial projections use existing or estimated financial data to forecast your business’s future income and expenses.’ https://www.score.org/resource/financial-projections-template

‘Financial projections forecast a company’s expected financial performance and position by presenting expected metrics such as projected revenue, expenses, capital expenditures, cash flows, etc.’ https://www.educba.com/financial-projections/

‘A financial projection shows the expected revenues, expenses, and cash flows of a business over a forecast period. ’ https://www.accountingtools.com/articles/financial-projection

‘Similar to creating a budget, financial projections are a way to forecast future revenue and expenses for your business.’ https://www.fool.com/the-ascent/small-business/accounting/articles/financial-projections/

‘A financial projection is what your business expects to happen, based off hypothetical situations using the facts and data you have available. ’ https://www.netsuite.com/portal/resource/articles/financial-management/small-business-financial-projections.shtml

‘Financial Forecasting is the process of estimating or predicting a business’s future financial performance. ’ https://www.toolshero.com/financial-management/financial-forecasting/

‘Financial forecasting is the process of estimating or predicting how a business will perform in the future. ’ https://corporatefinanceinstitute.com/resources/financial-modeling/financial-forecasting-guide/

‘Unlike other financial data, forecasts are just that: predictions based on conditions that are subject to change. ’ https://www.netsuite.com/portal/resource/articles/financial-management/importance-financial-forecasting.shtml

‘A financial forecast tries to predict what your business will look like (financially) in the future.’. https://bench.co/blog/accounting/financial-forecasting/

I can’t see how RL saying they expect growth to be -0.2% in a decade is not a prediction, but can only be a projection.  There seems to be something about a model with essential elements to financial projections, whereas ‘we think this will be the number’ seems more like a prediction. 

Albermarle

help50 said:

Hi, just got annual statement from RL which shows a drop in value this year from last, fair enough turbulent times. But it also says that by my retirement age in 2029 my fund is predicted to have a growth of -0.2%. Which to my simple view suggests, why would someone keep money in something for next 7 years if it’s just going to lose value? What am I missing here?

If as an alternative your money was in a cash savings account, then there would also be a negative projection, probably a much bigger one.

With the current financial uncertainty and high inflation, it can be more a case of picking the least worst option.
Although it is all guesswork when talking about in 7 years time. 

dunstonh

Thanks for the link. I’m guessing ‘projections’ is used lest naive investors think ‘prediction’ means an accurate ‘this will happen’. Projection sounds more like a guess. But it seems harsh to suggest prediction isn’t a suitable term. 

It could be semantics but the tone conveys a different message.  Prediction has a bit more certainty compared to projection which is a possibility given a set of circumstances.

In fact, it is a safer prediction to say that the projections will not be accurate.

I can’t see how RL saying they expect growth to be -0.2% in a decade is not a prediction, but can only be a projection.  There seems to be something about a model with essential elements to financial projections, whereas ‘we think this will be the number’ seems more like a prediction. 

RL are not saying that.  The FCA control the assumptions used in the projections.     And remember that the -0.2% is net of inflation which itself is an assumed figure that is nowhere near reality.

The problem with projections is that the assumptions used are fixed and not time weighted.  Two people in the same fund but say a 30 years different investing timescale will have exactly the same figures used in the projection.   It would assume inflation was always the same and the gross annual return was always the same.   We know that just doesn't happen.

Advisers can use modelling in their forecasting but providers are stuck with a projection method introduced in the late 80s with minor tweaks over the years.  It's primary function when introduced was to allow comparisons of costs. i.e. two providers using the same layout, methodology and assumptions could be compared and the one with the higher figures having the lower charges.   Nowadays, with providers all using differing headline rates due to the asset makeup of the funds, that is not really possibly without software.