Widows cuts projection rates

Stock markets have fallen by 14% a year since 2000

In what could be a groundbreaking move, Scottish Widows has announced it is cutting its forecast for how much its products will grow.

The insurer is the first to take unilateral action to give customers a more honest view of how their investments will perform.

All UK life companies have previously used growth rates set by the Financial Services Authority.

But the rates were set in 1999, and since then, investment returns have plunged, as markets fell by 14% a year since 2000.

Many people believe the FSA rates are now unrealistic.

But investment companies have continued to use them, even though FSA rules state that if a company expects returns to be lower it should reduce its rates.

Endowment policies

The FSA states for example, that insurance companies should use a projection rate of a maximum of 8% a year for endowments.

It is in the interest of your customers to give them a realistic perspective of what is likely to happen

Robert Greenshields, Scottish Widows

Scottish Widows has now cut its maximum to 6%.

Customers will now see the projected maximum value of their endowment-backed mortgages fall even further.

But Robert Greenshields of Scottish Widows told the programme it is important to give information that is realistic.

"It is in the interest of your customers to give them a realistic perspective of what is likely to happen."

He continued by saying that although the old rates may have been appropriate in the past, the situation had now changed.

The FSA rules also state that if customers ask for different projections, the insurance company can use those.

FSA report

The FSA may yet reduce the rates for all insurance companies. And the regulator has confirmed it will be issuing a report later in the summer on this issue.

If it does decide to change the rates there would have to be a consultation and any change could not begin until 2004.

So for now it is up to individual insurers if they want to follow Scottish Widows or not.

BBC Radio 4's Money Box was broadcast at 1204 BST on Saturday, 31 May, 2003.