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COB 6.6 Projections

Application

Purpose

COB 6.6.2G

COB 6.6 amplifies Principle 7 (Communications with clients), which requires a firm to pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading. A projection needs to be carried out on a basis of uniform and consistent rates of investment return so that firms do not seek to compete on the basis of wholly speculative forecasts as to the potential value of future benefits. This should ensure that private customers purchasing a life policy, key features scheme, simplified prospectus scheme, 9or stakeholder pension scheme receive information about possible future returns from their investment in a way which is fair and not misleading.

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Content

COB 6.6.3G

COB 6.6 sets out:

  1. (1)

    when these rules apply COB 6.6.4 R - COB 6.6.7 R);

  2. (2)

    the information and statements to accompany projections COB 6.6.8 R - COB 6.6.18 R);

  3. (3)

    what records must be kept of projections issued to customers COB 6.6.19 R);

  4. (4)

    the method of calculating a projectionCOB 6.6.20 G - COB 6.6.53 G);

  5. (5)

    the method of calculating the effect of deductions (the reduction in yield) which must be included within key featuresCOB 6.6.54 G - COB 6.6.62 R);

  6. (6)

    the method of calculating charges and expenses relating to key features schemes or simplified prospectus schemes9. COB 6.6.63 G - COB 6.6.79 G);

    9
  7. (7)

    assumptions to be used when converting a retirement fund into an annuity COB 6.6.80 R - COB 6.6.85 R); and

  8. (8)

    how to produce a pension transfer value analysis COB 6.6.86 G - COB 6.6.93 R).

General

COB 6.6.4R

A firm must not provide a projection for a life policy, key features scheme, simplified prospectus scheme, 9or stakeholder pension scheme unless the projection is calculated and presented in accordance with the rules in COB 6.6.

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COB 6.6.4AG

12If a firm produces a projection for a SIPP, it should do so in a way which is consistent with the principles in COB 6.6 (Projections).

Exceptions

COB 6.6.5R

COB 6.6.4 R does not apply to a firm when it provides a projection:

  1. (1)

    of the benefits payable under a defined benefit occupational pension scheme, unless they are money-purchase benefits;

  2. (2)

    issued with a view to determining a maximum contribution allowed by HM Revenue and Customs8, provided the assumptions used in calculating such a contribution are disclosed;

  3. (3)

    if the benefits are fixed and do not depend on an assumption of a future investment return;

  4. (4)

    of a benefit under an existing contract where the date to which the benefit is being projected is not more than six months after the date on which the projection is given;

  5. (5)

    contained in a decision tree as specified in COB 6.5.8 R;

  6. (6)

    of the benefits payable under pension scheme or a stakeholder pension scheme if they were:

    1. (a)

      calculated and issued in accordance with regulations made under section 113 of the Pensions Schemes Act 1993; or

    2. (b)

      calculated and issued as in (a) and, in addition, includes one or more of the following benefits:

      1. (i)

        the projected fund at the projection date; or

      2. (ii)

        the cash sum and the residual pension in real terms; or

      3. (iii)

        the pension in real terms calculated assuming a rate of return 1% per annum less than that prescribed in the regulations; or

    3. (c)

      calculated as in (a) or (b) but where the illustration of benefits is not required to be issued under the regulations by reference to proximity to the projection date or the small size of the fund.

  7. (7)

    provided in accordance with COB 8.2.4 R and COB 8.2.17 E where the life policy, key features scheme, simplified prospectus scheme, 9or stakeholder pension scheme is a structured capital-at-risk product.24

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COB 6.6.5AG
  1. (1)

    A revised projection to take account of a different marital or civil partnership 10status or projection date will fall within the exception in COB 6.6.5 R (6) as long as it meets the conditions of that rule.

  2. (2)

    Where the exception in COB 6.6.5 R (6) does not apply and a firm provides a real value projection for a pension scheme or a stakeholder pension scheme, then normally it would be a type P projection if in terms of prices or a type Q projection if in terms of earnings. The calculation method is set out in COB 6.6.34 R (5).2

Higher volatility funds

COB 6.6.6R

A firm must not provide a projection of possible investment returns or realisable values, or figures or statements which would enable the calculation of such a projection, for an investment in a higher volatility fund.

Projections issued by independent intermediaries

COB 6.6.7R

A firm must, in addition to complying with other rules in this section, ensure that a projection given to a particular customer is relevant to that customer's circumstances. 7

Information to accompany projections

COB 6.6.8R
  1. (1)

    A document containing a projection must include the information detailed in COB 6.5 (Key Features) under the headings 'An Example', 'Tables', 'Deductions Summary' and 'Commission and Remuneration', unless (2) applies.

  2. (2)

    The information under the headings 'Tables', 'Deductions Summary' and 'Commission and Remuneration' need not be included in a projection issued in respect of:

    1. (a)

      an existing contract; or

    2. (b)

      a financial promotion (other than a direct offer financial promotion); or

    3. (c)

      an execution-only transaction relating to a key features scheme or a simplified prospectus scheme9.

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  3. (3)

    If the projection relates to a contract to which regular premiums or contributions can be made, the total amount or number of premiums or contributions payable over the projection term must be made clear.

  4. (3A)

    If the projection is a type P projection or a type Q projection, the basis used for increases in premiums or contributions must be disclosed.

  5. (4)

    Other than a type P projection or a type Q projection, where a projection is given which makes allowance for increases in premiums or contributions, the premium or contribution in the final year must be shown (or, where the rate of possible future increments is based upon rates of growth in a salary or index, details of that salary or index).2

Generic and stochastic projections

COB 6.6.9R
  1. (1)

    A firm may provide a generic projection for illustrative purposes based on a single rate of investment return only in the following circumstances:

    1. (a)

      in a financial promotion (other than a direct offer financial promotion) which comprises a table (or extracts from a table) published by a newspaper, magazine or other periodical publication, or by the firm itself, which compares illustrative projections from at least five product providers; or

    2. (b)

      where the purpose is to indicate the likely cost of a proposed transaction; or

    3. (c)

      to provide an estimate of the additional premium or contribution required to achieve a specified target; or

    4. (d)

      when providing a type P projection or a type Q projection.

  2. (2)

    A firm which provides a generic projection must ensure that:

    1. (a)

      it does not relate solely to an existing contract;

    2. (b)

      the rate of return used does not exceed the higher projection rate for its class of business;

    3. (c)

      where the rate used exceeds the middle rate by more than 0.5 percentage point, a statement is included advising why it is believed reasonable to project at such a high rate of return;

    4. (d)

      where the charges and expenses (as described in COB 6.6.23 R) of the product provider are available, they are used, or an estimate is given based on the firm's knowledge of the charges and expenses applicable to similar contracts;

    5. (e)

      it is accompanied by the written statements contained in COB 6.6.17 R; and

    6. (f)

      key features or a simplified prospectus9 are supplied in accordance with COB 6.1 to COB 6.5 (Key Features) if a recommendation is subsequently made.

  3. (3)

    A firm may issue a stochastic projection only where:

    1. (a)

      the purpose is to indicate a range of possible outcomes; and

    2. (b)

      either:

      1. (i)

        it is provided for the purpose of a proposed transaction; or

      2. (ii)

        it is provided in addition to a projection which: (A) is not a stochastic projection but which complies with COB 6.6.4 R; or (B) is a projection excepted under COB 6.6.5 R(6).

  4. (4)

    A firm which issues a stochastic projection must ensure that:

    1. (a)

      it is based on a reasonable number of simulations and is consistent with the economic assumptions underlying the rates of inflation in COB 6.6.48A R and the intermediate rates of return in COB 6.6.50 R and COB 6.6.51 R;

    2. (b)

      its presentation does not reduce the impact of non-stochastic projections; and

    3. (c)

      it is issued only in circumstances in which the firm has taken reasonable steps to ascertain that the customer will be able to understand the stochastic projection.23

COB 6.6.9AE
  1. (1)

    For the purposes of COB 6.6.9 R (3)(a) and (4)(a) and (b):

    1. (a)

      to indicate a range of expected outcomes, a firm should present the results:

      1. (i)

        as amounts showing the median (50%) figure and, in addition, at least the amounts at 10% and 90%, or at least the amounts at 20% and 80%; or

      2. (ii)

        graphically showing the frequency of results from at least 10% to 90%; or

      3. (iii)

        in a diagrammatic form which indicates both the range and frequency of results;

    2. (b)

      to base the stochastic projection on a reasonable number of simulations, a firm should incorporate the results of at least 500 simulations; to enable consistent projections to be issued and to facilitate recreating previously issued projections, a firm should use the same set of simulations until the investment model or the underlying assumptions are revised; and

    3. (c)

      to be consistent with the economic assumptions, a firm should ensure that:

      1. (i)

        the parameters of each asset class are consistent with each other and the median (50%) result for a fund invested 70% in UK equities and 30% in UK government fixed interest stocks does not exceed a projection calculated using the intermediate rate of return from COB 6.6.50 R or COB 6.6.51 R; and

      2. (ii)

        the investment model is tested and adjusted so that the results are consistent with COB 6.6.9 R(4)(a).

  2. (2)

    Compliance with (1) may be relied upon as tending to establish compliance with COB 6.6.9 R(3)(a) and (4)(a) and (b).3

Pension projections

COB 6.6.10R

For pension targeting, a firm's own assumptions as to future rates of return (but not exceeding the higher rate of return as specified in COB 6.6.49 R), salary increases and inflation must be used to determine the level of contributions. Any allowance for salary increases used in pension targeting must not be less than the rate of return assumed before retirement less 3% per annum.

COB 6.6.11R

A projection in respect of the protected rights for an appropriate personal pension must, for the purpose of comparison, include a projection which:

  1. (1)

    is calculated to the customer's State retirement age, using the lower and higher real rates of return specified in COB 6.6.52 R, together with a statement of the benefits which the minimum contributions would secure if the customer did not take out an appropriate personal pension;

  2. (2)

    [deleted]

  3. (3)

    aggregates contributions in respect of the current and the next two tax years;

  4. (4)

    is followed by the appropriate personal pension projection and a description of any differences in:

    1. (a)

      presentation, for example, real or monetary rates of return, joint or single life;

    2. (b)

      the dates from which the benefits are assumed to be payable;

    3. (c)

      the nature of the benefits, for example, index-linked or limited price indexation ('LPI') increases.2

COB 6.6.12G

COB 6.6.11 R (1) to (3) require that, where the contract is in respect of contracting-out of the State Second Pension, there should be a comparison using real rates of return of the benefits being given up and the relevant contract. COB 6.6.11 R (4) permits additional projections provided that the differences are described.2

COB 6.6.13R

A projection for an unsecured or alternatively secured pension11 from a personal pension or stakeholder pension scheme:

11
  1. (1)

    must include:

    1. (a)

      a statement of the initial amount of maximum income as specified in the current tables published by the Government Actuary for 11an unsecured or alternatively secured pension;

      111111
    2. (b)

      a statement of the assumed initial level of income and the assumed basis for future years and in particular where there is a short-term annuity, if subsequent short-term annuities are assumed11;

    3. (c)

      a schedule showing under the heading 'WHAT THE BENEFITS MIGHT BE' the amount of income and the fund at each, or every fifth11, anniversary for each of the rates of return specified in COB 6.6.49 R;

      11
    4. (d)

      a statement of the projected open market values and the amounts of annuity at age 75 or the date at which it is reasonably assumed an annuity will be purchased; and which for an alternatively secured pension will be after ten years;11 and

    5. (e)

      a statement of the amount of annuity that could be secured using an immediate annuity rate available in the market; and

  2. (2)

    must assume that the current rate of gilt-index yield will continue to apply in projecting amounts of minimum and maximum income throughout the term of the projection.2

Statements to accompany projections

COB 6.6.14R
  1. (1)

    A document containing a projection must include the appropriate statements set out in COB 6.6.16 R - COB 6.6.18 R.

  2. (2)

    A statement may be altered if a firm believes on reasonable grounds that it is not wholly appropriate to the contract in question. But the alteration must not reduce the significance or impact of the statement.

  3. (3)

    Any statement required to accompany a projection must appear adjacent to the projected values and be in a type size no smaller or less prominent than that used for the projected values.

COB 6.6.15R
  1. (1)

    The statements in COB 6.6.16 R must accompany each projection for a life policy, key features scheme or simplified prospectus scheme9 as indicated, except a generic projection given in accordance with COB 6.6.9 R (see COB 6.6.17 R), or a protected rights annuity projection calculated in accordance with COB 6.6.11 R (see COB 6.6.18 R).

    9
  2. (2)

    For a pension scheme or stakeholder pension scheme, the appropriate statement from item 4 of COB 6.6.16 R must appear immediately after the projection.

  3. (3)

    Where a pension scheme or stakeholder pension scheme projection, using monetary rates of return in COB 6.6.51 R, is provided at the same time as a type P projection or a type Q projection, the appropriate statement from COB 6.6.16 4 must appear immediately after the projection. The remainder of the appropriate statements in COB 6.6.16 R need only be included once, as long as the firm makes it clear that these statements apply to both types of projection.2

COB 6.6.16R

Statements to accompany projections of life policies, 9key features schemes, simplified prospectus schemes, 9or stakeholder pension schemes (excluding generic projections and protected rights annuity projections)

This table belongs to COB 6.6.15 R

Statements to accompany projections of life policies, key features schemes, simplified prospectus schemes, 9or stakeholder pension schemes (excluding generic projections and protected rights annuity projections)

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1. These figures are only examples and are not guaranteed - they are not minimum or maximum amounts. What you will get back depends on how your investment grows and on the tax treatment of the investment.

2. [You could get back] [your retirement fund could be] more or less than this.

3. All firms use the same rates of growth for projections but their charges vary. [They also use the same rates to show how funds may be converted into pension income].

4. (a) Do not forget that inflation would reduce what you could buy in the future with the amounts shown.

(b) This illustration shows, in today's prices, the pension that might be payable when you retire. This means we have allowed for future inflation to give you an indication of how much you would be able to buy with your pension if it were payable today.

5. [Your pension income will depend on how your investment grows and on interest rates at the time you retire].

6. These rates of return are not necessarily appropriate [for contracts written in] [for units traded in] [for shares traded in] currencies other than sterling.

7. Benefits may also be affected by fluctuations in exchange rates.

Note:

In respect of statement 4, the firm must include the appropriate statement (a) or (b).

Statement 5 applies to pension contracts only and statements 6 and 7 apply to non-sterling investments only.2

COB 6.6.17R

Statements to accompany generic projections

This table belongs to COB 6.6.15 R

Statements to accompany generic projections

These figures are only illustrative.

An assessment of your needs will be confirmed before a recommendation can be made OR Your needs will be confirmed before a recommendation can be made.

Key features or a simplified prospectus, together with9 a projection which is personal to your circumstances, will be provided if a recommendation for an investment product is made.

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COB 6.6.18R

Statements to accompany projections for protected rights contracts

This table belongs to COB 6.6.15 R

Statements to accompany projections for protected rights contracts

1. These figures are only meant to give you a rough idea of the amount of pension you might get compared with the benefit that you would be giving up under the State Second Pension.

2. The figures show what might happen if we achieved an investment return of [x%] or [y%] each year on top of the rate of earnings inflation.

3. They are only examples and are not guaranteed - they are not minimum or maximum amounts. What you will get back depends on how your investment grows.

4. You could get back more or less than this.

5. All firms use the same rates of growth for projections but their charges vary. They also use the same rates to illustrate how funds may be converted into pension income.

6. Your pension income will depend on how your investment grows and interest rates at the time you retire.

Note: [x%] and [y%] in statement 2 are the real rates of return used in the projection as specified in COB 6.6.51.2

Records

COB 6.6.19R

A firm must ensure that a record of a projection provided to a customer is made and retained, unless it relates to a proposal which does not proceed. The record must be retained for a minimum period of:

  1. (1)

    six years in the case of a record relevant to a life policy, pension contract or stakeholder pension scheme;

  2. (2)

    indefinitely in the case of a record relevant to a pension transfer or pension opt-out;

  3. (3)

    three years in any other case.

The calculation of a projection

COB 6.6.20G

COB 6.6.21 R - COB 6.6.53 G set out:

  1. (1)

    definitions of key terms used in the calculation of a projection (COB 6.6.21 R);

  2. (2)

    the basic approach to be used when calculating a projection for life policies (COB 6.6.34 R), Holloway sickness policies (9COB 6.6.35 R), key features schemes or simplified prospectus schemes 9(COB 6.6.36 R) and stakeholder pension schemes (COB 6.6.34 R);

    9
  3. (3)

    principles which must be taken into account when calculating a projection including general principles which may apply to all life policies, key features schemes, simplified prospectus schemes 9and stakeholder pension schemes (COB 6.6.37 R - COB 6.6.38 R) and specific principles applicable to certain types of product or features within a product (9COB 6.6.39 R - COB 6.6.46 R);

    9
  4. (4)

    tables containing the rates of return to be used when calculating a projection depending on the type of contract being projected COB 6.6.47 R - COB 6.6.53 G).

Key terms used in the calculation of a projection

COB 6.6.21R

The descriptions of defined terms in COB 6.6.22 R to COB 6.6.33 R apply to all references to those terms in COB 6.6.34 R - COB 6.6.78 G which detail the method of calculating projections and of calculating charges and expenses and the recommended method of calculating scheme expenses.

Adjusted premium

COB 6.6.22R
  1. (1)

    The adjusted premium is the premium or contribution payable under the contract during the contract period (defined in COB 6.6.25 R), disregarding any increases that cannot be quantified at the commencement of the contract (but allowing for any increases which are assumed and disclosed in the key features or projection).

  2. (2)

    When calculating the amount of premium or contribution, a firm may deduct:

    1. (a)

      the cost of any rider benefits;

    2. (b)

      any part of a premium or contribution which is payable in respect of an exceptional mortality risk.9

Charges and expenses

COB 6.6.23R
  1. (1)

    For a key features scheme, simplified prospectus scheme9 or unit-linked life policy, charges and expenses are all explicit charges and expenses the customer will or may bear:

    9
    1. (a)

      including:

      1. (i)

        all other deductions and expenses which will or may bear upon the fund (including charges in respect of any collective investment scheme or insurance fund in which any funds of the contract in question are invested but excluding dealing costs of the underlying portfolio); and

      2. (ii)

        all deductions from the premium or contribution payable which do not accrue to the benefit of the customer by way of contribution to the value of the benefit;

    2. (b)

      having regard to:

      1. (i)

        the principal terms of the contract; and

      2. (ii)

        any tax relief which will be available to the fund or key features scheme or simplified prospectus scheme9 in respect of so much of the fund's or scheme's gross expenses as can be properly attributed to the contract.

        9
  2. (2)

    For a with-profits contract, or a unit-linked life policy where not all charges and expenses are determined in accordance with (1), charges and expenses are such expenses as the firm reasonably determines to be appropriate to the contract having regard to:

    1. (a)

      the principal terms of the contract;

    2. (b)

      any tax relief which will be available to the firm in respect of so much of the firm's gross expenses as can properly be attributed to the contract;

    3. (c)

      any transfers to shareholders' funds, or equivalent retentions from established surplus offset by any sustainable rate of transfer of surplus from non-profit business;

    4. (d)

      dealing costs of the underlying portfolio which should be excluded; and

    5. (e)

      any guidance published by the Institute of Actuaries or the Faculty of Actuaries (or by both jointly).

  3. (3)

    If a contract has explicit charges, it should be assumed that they continue at a rate no less than that at which similar charges are being made at the time when the projection or calculation of the effect of the charges is made.

COB 6.6.24G

For the calculation of the effect of deductions in projections, charges are all explicit charges adjusted for tax as in COB 6.6.23 R (1)(b) and expenses are all other deductions. For stakeholder pension schemes, charges are all explicit charges and expenses for the underlying policy or contract, including any charges levied by the manager or trustees of the stakeholder pension scheme.

Contract period

COB 6.6.25R

The contract period of a life policy, key features scheme, simplified prospectus scheme 9or stakeholder pension scheme is the period beginning with the commencement of the contract and ending as follows:

9
  1. (1)

    for a contract which contains an option under which benefits may be:

    1. (a)

      payable earlier than the date on which they would be payable if the option were not exercised; and

    2. (b)

      the marketing of which seeks to draw to the attention of customers the existence of an option or surrender value, so that it is reasonable to infer that the firm expects some customers to purchase the contract with the intention of exercising the option or surrendering the contract in whole or in part;

    on the earliest date on which an option may be exercised or the contract may be surrendered (in whole or in part);

  2. (2)

    for a contract which is a whole life assurance the premiums under which are regular premiums:

    1. (a)

      the anniversary of the commencement of the contract which first falls after the seventy-fifth birthday of the person whose life is assured under the contract, taking, if there are two or more such persons:

      1. (i)

        the older or oldest if the benefits under the contract are payable on the death of the first of them to die; and

      2. (ii)

        the younger or youngest in any other case; or

    2. (b)

      the tenth anniversary of the commencement of the contract;

    whichever is the later;

  3. (3)

    in the case of an endowment assurance or a non-pension deferred annuity, the premiums under which are regular premiums, on the maturity date;

  4. (4)

    in the case of an endowment assurance or a non-pension deferred annuity under which the only premium payable is a single premium and the term of which does not exceed ten years, on the maturity date;

  5. (5)

    in the case of a Holloway sickness policy, on the latest date on which the sickness benefit will cease to be payable;

  6. (6)

    in the case of a pension contract other than an immediate annuity, on the maturity date or, if the contract provides for annuities at various dates, the latest date at which an annuity may be purchased, except for an alternatively secured pension, where this is at the tenth anniversary of the contract;11

  7. (7)

    in the case of an immediate annuity, on the date to which the customer is expected to live, calculating the expectancy of life for this purpose by reference to an appropriate mortality basis; and

  8. (8)

    for the purpose of this section 'maturity date' means:

    1. (a)

      in relation to an endowment type assurance, the date specified in the contract as the maturity date;

    2. (b)

      in relation to a pension contract or stakeholder pension scheme, the vesting date of the annuity payable under the contract or, if no vesting date for the annuity is specified in the contract, the date specified in relation to the annuity as the retirement date by the firm in the projection in question, being a date not earlier than the earliest date on which the annuity could vest and not later than the latest such date.

COB 6.6.26R

In the case of any contract which falls within both COB 6.6.25 R (1) and one or more of COB 6.6.25 R (2)- (7), the contract period must be determined by reference to COB 6.6.25 R (1).

COB 6.6.27R

In the case of any contract not falling within COB 6.6.25 R, then:

  1. (1)

    for key features schemes and simplified prospectus schemes9, the contract period will end on the tenth anniversary of the commencement date of the contract; and

    9
  2. (2)

    for all other contracts there will be two contract periods, the first ending on the fifth anniversary of the commencement date of the contract, and the second ending on the tenth anniversary of the commencement date.

Cost of risk benefits

COB 6.6.28R

Cost of risk benefits means:

  1. (1)

    explicit mortality or morbidity charges (at a level no lower than the current level); or

  2. (2)

    the implicit cost or effect of mortality or morbidity appropriate to the class of customers;

and risk benefits means all forms of mortality and sickness benefits under a contract.

Relevant contribution

COB 6.6.29R

The relevant contribution is the actual payment or payments to be made by the customer, or a sum which reasonably reflects the amounts which the customer is proposing to invest, into a key features scheme or simplified prospectus scheme9, except in the case of a protected rights annuity (see COB 6.6.31 R).

9

Relevant premium

COB 6.6.30R

The relevant premium is the actual premium payable under a life policy less an amount equal to the cost of any rider benefit, except in the case of a protected rights annuity (see COB 6.6.31 R).

Relevant premium or contribution for protected rights annuities

COB 6.6.31R

The relevant premium or contribution in relation to a protected rights annuity is an amount that may reasonably be estimated to be paid by the Secretary of State or the Department of Social Services for Northern Ireland by way of minimum contributions in respect of the customer involved.

COB 6.6.32G

The relevant premium or contribution may include amounts in respect of minimum contributions expected to be paid in future years. This applies if the estimate for those years makes allowance for the most recent assumptions published by the Government Actuary in respect of the future years, and these assumptions and the period of any projection are made clear.

Relevant rate of return

COB 6.6.33R

The relevant rate of return is the intermediate projection rate appropriate to the category of business as set out in COB 6.6.50 R - COB 6.6.52 R, or the lower rate if COB 6.6.38 R (1) (Projections of surrender values and transfer values) applies.

Basic calculation method life policy or stakeholder pension scheme calculation

COB 6.6.34R
  1. (1)

    A projection of any future benefit payable under a life policy or stakeholder pension scheme must be calculated by reference to the relevant premium for the policy or stakeholder pension scheme.

  2. (2)

    The relevant premium must be accumulated to the projection date at the rate of return for its class of business as detailed in COB 6.6.50 R to COB 6.6.52 R, subject to charges and expenses (as described in COB 6.6.23 R) and the cost of risk benefits. The intermediate projection rate need not be used for an existing contract.1

  3. (3)

    An allowance must be made where a customer has exercised or has expressed the intention to exercise an option to effect a partial surrender of a policy.

  4. (4)

    Allowance must not be made for income withdrawals, surrenders, lapses or early discontinuance, except as in (3).

  5. (5)

    A type P projection or a type Q projection must be calculated as follows:

    1. (a)

      the relevant premium for the pension scheme or stakeholder pension scheme must be used;

    2. (b)

      the relevant premium, with allowance for premium increases as specified in COB 6.6.48A R, must be accumulated to the projection date at the intermediate monetary rate of return detailed in COB 6.6.51 R subject to charges and expenses (as described in COB 6.6.23 R) and the cost of risk benefits;

    3. (c)

      the retirement fund from (b) must then be converted to a real retirement fund by discounting from the projection date using the rate of increase in the retail prices index (for type P projection) or the rate of increase in earnings (for type Q projection) in COB 6.6.48A R;

    4. (d)

      the pension must be calculated from the real retirement fund using the appropriate intermediate rate in COB 6.6.51 R, using the mortality tables in COB 6.6.84 R, the format in COB 6.6.82 R (7) and expenses in COB 6.6.83 R.2

Holloway sickness policy calculation

COB 6.6.35R

For a Holloway sickness policy issued by a friendly society, a rate of bonus no greater than that last declared by the friendly society must be accumulated, with allowance for applicable charges and expenses (as described in COB 6.6.23 R) at the rates of return set out in COB 6.6.50 R until the projection date.

9Key features scheme and simplified prospectus scheme9 calculation

COB 6.6.36R
  1. (1)

    A projection of any future benefit payable under a key features scheme or simplified prospectus scheme 9must be calculated by reference to the relevant contribution for the scheme.

    9
  2. (2)

    The relevant contribution must be accumulated to the projection date at the rates of return for the relevant class of business as detailed in COB 6.6.50 R, subject to charges and expenses (as described in COB 6.6.23 R). The intermediate rate of return need not be used for an existing contract.1

  3. (3)

    An allowance must be made where a customer has exercised or expressed the intention to exercise an option under the key features scheme or simplified prospectus scheme9 to make withdrawals, either by:

    9
    1. (a)

      encashment of units; or

    2. (b)

      distribution of income, which must be calculated using an estimated gross distribution yield, reduced by the rate of tax relevant to the contract; the distribution yield must be rounded to the higher 0.1%.

  4. (4)

    No allowance must be made for the distribution of income except as in (3).

  5. (5)

    A type P projection or, a type Q projection must be calculated in accordance with COB 6.6.34 R (5) but substituting "contribution" for "premium" throughout.2

General rules applicable to the calculation of projections

COB 6.6.37R
  1. (1)

    A projection must be rounded down to not more than three significant figures.

  2. (2)

    Where the projection, other than a projection in real terms of a pension contract or stakeholder pension scheme, is less than the amount guaranteed under the life policy, key features scheme or simplified prospectus scheme9, the projection must be increased to that guaranteed amount.

    9
  3. (3)

    Where a customer is entitled, and has expressed the intention, to increase the premium or contribution by an amount linked to future salary or other index increases, the relevant premium or contribution may be calculated:

    1. (a)

      for a type P projection or a type Q projection, making allowance for increases at the relevant rate set out in COB 6.6.48A R; and

    2. (b)

      for all other cases, by making allowance for such increases on the same basis as that used for administration charges in COB 6.6.47 R.2

Projections of surrender values and transfer values

COB 6.6.38R

A projection of a surrender or transfer value:

  1. (1)

    must be given using the intermediate rate of return appropriate to its category of business, unless:

    1. (a)

      the firm reasonably expects the rate to overstate the potential of the contract, in which case a lower rate of return must be used and disclosed; or

    2. (b)

      the customer so requests, in which case a lower rate of return may be used, and the fact that it has been used must be disclosed;

  2. (2)

    must make allowance for partial surrenders of a contract where the contract terms permit this and the customer has exercised this option or expressed the intention to do so;

  3. (3)

    must allow for the firm'ssurrender value basis and reflect the current approach of the firm towards applying penalties on surrender, including less than full credit for accrued terminal bonus, specific penalties or exit charges; and

  4. (4)

    for a with-profits contract where bonus rates apply, must ensure that the bonus rates supported by the relevant premium are assumed to apply throughout the term of the contract.

Rules specific to products or features of products: annuities

COB 6.6.39R
  1. (1)

    Any projection of an annuity with one or more years to maturity must show an annuity value based on the higher and lower rates of return as set out in COB 6.6.50 R to COB 6.6.52 R, and make allowance for:

    1. (a)

      mortality (as set out in COB 6.6.84 R) and also, in the case of life policies, morbidity appropriate to the class of customers; and2

    2. (b)

      charges and expenses (as described in COB 6.6.23 R).

  2. (2)

    Any projection of an annuity with less than one year to maturity must be calculated using annuity rates no more favourable than the firm's current immediate annuity rates.

  3. (3)

    Where a firm which does not offer annuities issues a projection for a contract the proceeds of which are to be applied to the purchase of an annuity, the firm must use annuity rates no more favourable than those currently being used in the open market for such a projection.

COB 6.6.40R

In the case of a contract for an immediate annuity:

  1. (1)

    the uniform rate of continuous change in annuity supported by the actual premium to be paid must be determined for each rate of return with allowance for:

    1. (a)

      mortality appropriate to the class of customer; and

    2. (b)

      charges and expenses (as described in COB 6.6.23 R) on the assumptions used when calculating the firm's own annuity rates;

  2. (2)

    the rate of continuous change in annuity calculated must then be:

    1. (a)

      applied to the initial annuity under the contract which is the subject of the projection; and

    2. (b)

      assumed to be maintained throughout the term of the contract.

Appropriate personal pensions and protected rights annuities

COB 6.6.41R
  1. (1)

    The retirement fund for a protected rights annuity under an appropriate personal pension scheme or stakeholder pension scheme must be calculated by accumulating the relevant contribution less charges and expenses (as described in COB 6.6.23 R) at the relevant rates of return for the period.

    1. (a)

      The relevant period is either:

      1. (i)

        where the relevant contribution is a minimum contribution, from the 1st September following the end of the tax year to which the minimum contribution relates up to the maturity date; or

      2. (ii)

        where the relevant contribution is a transfer value, from the commencement of the contract up to the maturity date.

    2. (b)

      The relevant rates of return are:

      1. (i)

        in the case of a protected rights annuity projection issued in accordance with COB 6.6.11 R (1), the real rate of return in COB 6.6.52 R;

      2. (ii)

        in the case of any other protected rights annuity projection, the monetary rates of return in COB 6.6.51 R.

  2. (2)

    The annuity must be calculated by reference to the retirement fund using the relevant rates of return set out in COB 6.6.51 R, with allowance for mortality (as set out in COB 6.6.84 R) charges and expenses and the relevant rate of increase in payment.2

Pension schemes or stakeholder pension schemes

COB 6.6.42R
  1. (1)

    An additional projection may be given for a pension scheme or stakeholder pension scheme where the period to maturity is five years or less. This:

    1. (a)

      may be calculated using the intermediate rates of return specified in COB 6.6.51 R or COB 6.6.52 R;

    2. (b)

      may use a current annuity rate calculated using a rate of return no higher than the higher rate specified in COB 6.6.51 R or COB 6.6.52 R.

  2. (2)

    If the firm providing the projection offers annuities, it must use its own annuity rates.2

Single premium contracts

COB 6.6.43R

A projection relating to a series of single premiums (other than a protected rights annuity) may be a calculation set out as if those premiums were regular premiums, provided:

  1. (1)

    it is not otherwise given on a misleading basis;

  2. (2)

    the firm is bound unconditionally, and by express terms of the contract, to accept all single premiums which may be paid by the customer under the contract.

With-profits endowment business

COB 6.6.44R

For with-profit endowment assurance where the amount of any guaranteed benefit payable on death is not calculated by reference to the total value of the premiums paid under the contract before that event:

  1. (1)

    the cost of risk benefits must allow for the bonus rate or rates supported by the relevant premium (given the basic sum assured for such a policy with an appropriate office premium) calculated for each rate of return; and

  2. (2)

    the rate or rates of bonus must then be applied under the policy which is the subject of the projection and be assumed to be maintained throughout the term of the policy.

With-profits whole life assurance business

COB 6.6.45R

For with-profit whole life assurance other than a policy the bonuses under which are added to the surrender value:

  1. (1)

    the cost of risk benefits must allow for the bonus rate or rates supported by the premium (given the basic sum assured for such a policy with an appropriate office premium) calculated for each rate of return; and

  2. (2)

    the rate or rates of bonus must then be applied under the policy which is the subject of the projection and be assumed to be maintained throughout the term of the policy.

Contracts with reviewable administration charges

COB 6.6.46R

In respect of policies with reviewable administration charges:

  1. (1)

    a firm must make allowance for increases in administration charges which are reviewable at the firm's discretion, on a basis which:

    1. (a)

      is fair and reasonable; and

    2. (b)

      takes into account the firm's pricing policy as regards future levels of administration charges;

  2. (2)

    increases must be assumed at the appropriate rates of increase in COB 6.6.48A R for type P projections and type Q projections and the rates in COB 6.6.47 R for other projections, for any contracts where:

    1. (a)

      an administration charge is reviewable by the firm (whether or not any increases are contractually linked to an external index); or

    2. (b)

      expenses in respect of future renewal or claims costs are expressed as monetary amounts.2

COB 6.6.47R

Table of assumed rates of increase for policies with reviewable administration charges

This table belongs to COB 6.6.46 R

Basis of review

Assumed rate of increase

Lower rate of return

Intermediate rate of return

Higher rate of return

Administration charge reviewed in line with price increases

0.5%

2.5%

4.5%

Administration charge reviewed in line with earnings increases

2%

4%

6%

Contracts with rider benefits or extra premiums for underwriting risks

COB 6.6.48R

In respect of a contract with rider benefits, or where an extra premium is being charged for an increased underwriting risk:

  1. (1)

    the rider benefit or extra premium charged for an impaired life, hazardous pursuit, or on the grounds of occupation, must be taken into account when determining a projection;

  2. (2)

    if a deduction is made from the actual premium for a rider benefit or increased underwriting risk (or both), the sum of the amounts of the relevant premium must be quoted with the projection; and

  3. (3)

    for policies with rider benefits, a firm may apply the following procedure:

    1. (a)

      if the policy is also available without the rider benefit, then the same values must be projected as would be projected for such a policy with the premium appropriately reduced; and

    2. (b)

      if the contract is available only with one or more rider benefits, the firm must deduct a fair estimate of the cost of the extra benefits from the premium when determining the projection; if a fair estimate cannot be made, a rough estimate (rounded to the next higher 10% of the total premium payable by the policyholder) must be deducted.

Rate of inflation assumptions

COB 6.6.48AR

For pension schemes and stakeholder pension schemes, the following rates of inflation must be used when calculating type P projections or type Q projections:

  1. (1)

    rate of increase in the Retail Prices Index (for type P projections): 2.5%;

  2. (2)

    rate of increase in earnings (for type Q projections): not less than 1.5% in excess of the rate of increase in the Retail Prices Index in (1). 2

Rate of return assumptions

COB 6.6.49R
  1. (1)

    The appropriate rates of return for the type of contract being projected, taken from COB 6.6.50 R - COB 6.6.52 R, must be used when calculating a projection;

  2. (2)

    reduced rates of return must be used if the firm expects the rates in the tables to overstate the investment potential of a contract;

  3. (3)

    reduced rates of return may be used if requested by a customer; and

  4. (4)

    whenever reduced rates are used, they must be disclosed in the document containing the projection.

COB 6.6.50R

Rate of return assumptions for all 9key features schemes, simplified prospectus schemes9, ordinary branch non-pensions, industrial branch, friendly 9s9ociety, immediate annuity and Holloway sickness policies (all monetary rates of return)

This table belongs to COB 6.6.49 R

6

Rate of return assumptions for all key features schemes, simplified prospectus schemes9, ordinary branch non-pensions, industrial branch, friendly s9ociety, immediate annuity and Holloway sickness policies (all monetary rates of return)

99

Lower rate

Intermediate rate

Higher rate

(a) Non-tax-exempt business relating to key features schemes, simplified prospectus schemes9, ordinary branch non-pensions and industrial branch business

9

4%

6%

8%

(b) Holloway sickness policies

4%

6%

8%

(c) Tax-exempt business held within an ISA, PEP or CTF or by afriendly society, relating to key features schemes, simplified prospectus schemes9, ordinary branch non-pensions and industrial branch business6

9

5%

7%

9%

(d) immediate annuities

5%

7%

9%

Note:9

In relation to key features schemes and simplified prospectus schemes9: The monetary rates of return above include any distribution of income. The rates of return may be used for contracts for units denominated in currencies other than sterling unless it is expected they will overstate the investment potential of the contract.2

99
COB 6.6.51R

Rate of return assumptions for pension contracts and stakeholder pension schemes excluding contracts for immediate annuities and protected rights annuities issued in accordance with COB 6.6.11 R (1)

This table belongs to COB 6.6.49 R

Rate of return assumptions for pension contracts and stakeholder pension schemes excluding contracts for immediate annuities and protected rights annuities issued in accordance with COB 6.6.11 (1)

Lower

Intermediate

Higher

rate

rate

rate

(a) in deferment

Monetary rates of return

5%

7%

9%

(b) after vesting -

Monetary rates of return8

Y+1.5% 8

8

Y+3.5% 8

8

Y+5.5% 8

8

For annuities linked to the retail price index

Y-1%

Y%

Y+1%

For annuities linked to LPI (limited price indexation)

Y-1%

Y%

Y+1%

Note: For the after vesting rates of return: Y= 0.5 * ( ILG5 + ILG0) -0.5 8and rounded to the nearest 0.2%, with an exact 0.1% rounded down.

Where: ILG5 is the real yield on the FTSE Actuaries Government Securities Index-linked Real Yields over 5 years assuming 5% inflation, and ILG0 is the real yield on the FTSE Actuaries Government Securities Index-linked Real Yields over 5 years assuming 0% inflation.

The ILG0 and ILG5 yields to be used in the calculation of Y are the yields on the 15 February, or, where necessary, the previous working day. The rate of return Y must be updated on the following 6 April each year and used up to and including 5 April of the next year.2

COB 6.6.52R

Rate of return assumptions for protected rights annuity projections given in accordance with COB 6.6.11 R (1)

This table belongs to COB 6.6.49 R

Rate of return assumptions for protected rights annuity projections given in accordance with COB 6.6.11 (1)

Lower

Intermediate

Higher

rate

rate

rate

(a) In deferment: for periods in excess of five years - real rates of return

1%

N/A

3%

for periods of five years or less - monetary rates of return

5%

7%

9%

(b) after vesting: - for annuities linked to the retail prices index

1% 8

8

2% 8

8

3% 8

8
COB 6.6.53G

The rates of return in COB 6.6.50 R - COB 6.6.52 R are assumed to compound annually and allow for inflation.

Calculation of the reduction in yield due to the effect of charges and expenses content

COB 6.6.54G

9COB 6.6.55 R - COB 6.6.62 R set out the rules to be used when calculating the effect of deductions (the 'reduction in yield') to be provided within key features (COB 6.5) or in a projection accompanying a simplified prospectus (COB 6.2.43 R) for all types of life policies, key features schemes and simplified prospectus schemes. COB 6.6.63 G - COB 6.6.79 G provide guidance in assessing the expenses and charges relating to key features schemes and simplified prospectus schemes.

Basic calculation method of the reduction in yield

COB 6.6.55R
  1. (1)

    A firm must accumulate the adjusted premium to the end of the contract period at the relevant rate of return, making:

    1. (a)

      full allowance for the charges and expenses (as described in COB 6.6.23 R); and

    2. (b)

      no allowance for charges and expenses.

  2. (2)

    A firm must then calculate the rate of return which, if applied (on an annual compound basis) to the adjusted premium over the contract period, without making any allowance for the charges and expenses, will produce the same sum as that calculated under (1)(a).

  3. (3)

    The reduction in yield is the difference between the relevant rate of return and the rate of return found in (2).

COB 6.6.56R
  1. (1)

    When a firm is calculating a projection, charges which relate to benefits for any mortality or morbidity risks, or a proportion of them, must be assumed not to be made:

    1. (a)

      providing the assumption does not produce figures for the effect of charges deductions which suggest that the charges under the contract are lower than they actually are; and

    2. (b)

      only in so far as they are attributable solely to benefits for mortality or morbidity risks, a proper apportionment being made of any composite charges.

  2. (2)

    When a charge cannot be apportioned, (1) will not apply, but the firm may include in the information required to be given within a projection a statement to the effect that the reductions have been calculated without disregarding charges relating to benefits for any mortality or morbidity risks.

Alternative calculation method of the reduction in yield for a life policy

COB 6.6.57R

The following alternative method of calculation of the reduction in yield may be used at a firm's discretion for a life policy:

  1. (1)

    The adjusted premium must be accumulated to the end of the contract period at the relevant rate of return, making full allowance for the charges and expenses (as described in COB 6.6.23 R).

  2. (2)

    If the accumulated value will reach zero before the end of the contract period, the accumulation must cease at that stage; subsequent references in this rule to the contract period are to be taken where relevant as referring to that shorter calculation period.

  3. (3)

    In making this calculation, the total of all charges and expenses not solely attributable to the risk benefits must be assessed separately and accumulated to the end of the contract period at the relevant rate of return.

  4. (4)

    The adjusted premium must be accumulated to the end of the contract period at the relevant rate of return, making no allowance for charges and expenses.

  5. (5)

    The reduction in yield must be calculated in accordance with, COB 6.6.55 R, but using the shorter calculation period specified in (2), if applicable.

Other provisions

COB 6.6.58R

In the case of a protected rights annuity, the effect of charges and expenses (as described in COB 6.6.23 R) may be calculated on the assumption that premiums will continue to be paid after the first year.

COB 6.6.59R

The reduction in yield or the effect of charges and expenses must be expressed to the nearest tenth of 1%.

Unit-linked contracts with more than one fund

COB 6.6.60R
  1. (1)

    Where there is more than one fund into which the premiums under a unit-linked contract are expected to be paid initially (disregarding any option of the customer to require the funds to be changed):

    1. (a)

      the effect of charges and expenses must be calculated separately in relation to each such fund;

    2. (b)

      unless a representative figure is shown in accordance with (3), each of those reductions in yield must be shown in the information required within key features; and

    3. (c)

      a brief explanation of the difference between them may be included.

  2. (2)

    If any of the funds referred to in (1) is a unitised with-profits fund, the calculation relating to that fund must be made on the with-profits expenses basis as described in COB 6.6.23 R (2).

  3. (3)

    If, in the case of any contract, two or more of the calculations of the effect of charges and expenses would produce results which are so similar that one may fairly be regarded as representative of the other or others, only one figure for the effect of charges and expenses need be shown, accompanied by an indication that it is a representative figure.

Regular and single premium contracts

COB 6.6.61R

In the case of any contract where the premiums include both a regular and a single premium:

  1. (1)

    the reduction in yield should be calculated separately for the regular premiums and for the single premium; and

  2. (2)

    each of those reductions in yield should be shown in the information required in COB 6.5 (Contents of key features) with a brief indication of the difference between them.

Table of specimen values of the reduction in yield

COB 6.6.62R

Where COB 6.6.60 R or COB 6.6.61 R applies in relation to the calculation of the reduction in yield, either:

  1. (1)

    different tables must be shown with the values calculated separately for each fund or for the regular premiums and the single premiums (as the case may require); or

  2. (2)

    one table may be used, but it must contain those values calculated separately as required by (1), and it must make clear to the customer (or any potential customer in the case of a financial promotion) what the different values refer to.

Charges and expenses disclosure for 9key features schemes and simplified prospectus schemes9

COB 6.6.63G

COB 6.6.65 G - COB 6.6.79 G set out rules and guidance on how to calculate charges and expenses (as described in COB 6.6.23 R) for key features schemes and simplified prospectus schemes9.

9

Charges and expenses disclosure for authorised unit trusts

COB 6.6.65G
  1. (1)

    Charges and expenses as described in COB 6.6.23 R means "all explicit charges and expenses, and includes all other deductions and expenses which will or may bear upon the fund". The following paragraphs give guidance on the assessment and apportionment of expenses.

  2. (2)

    Those expenses that were, or would be, reported in the Annual report and Financial Statement of authorised unit trust schemes in accordance with the Statement of Recommended Practice ("SORP") issued by the FSA, will normally provide a suitable starting point for any assessment of the level of charges and expenses. The same principles apply to funds and schemes which are not within the scope of the SORP.

  3. (3)

    Where expenses are charged directly against the assets of the fund, it will normally be appropriate to express such expenses as an annual percentage charge against the fund, which is then added to other such charges. An example is a manager's periodic charge to form an aggregate percentage charge. It is reasonable to round this charge to the nearest 0.05%.

  4. (4)

    Where a key features scheme or simplified prospectus scheme9 invests in other packaged products, it will be necessary to look through to ensure that all charges and expenses which the customer will or may bear are included. Appropriate allowance may be made for any abatement to avoid double charging. If the product provider is not required to make expense disclosure in respect of such packaged products, the charges and expenses of an equivalent product from another provider should be used. In the case of investment trusts, the method in COB 6.6.70 G (4) should be used.

    9
  5. (5)

    Where the unit trust invests in other unit trusts, charges and expenses will be based on a reasonable distribution of assets that takes account of the investment philosophy of the unit trust.5

Representative unit trust

COB 6.6.66G
  1. (1)

    Where a document refers to investment in a number of trusts, charges and expenses (as described in COB 6.6.23 R) applicable to the trusts selected by the customer should be used. Where this is not practicable, it is permissible to use the charges and expenses of a representative unit trust.

  2. (2)

    The representative unit trust will normally be the one that is most likely to be selected by the customers to whom the material is issued. Where advantage is taken of this option, the document should include information which shows the differences if other trusts are selected. The normal presentation will be to show the differences as a reduction of investment return, or as an adjustment to the Table in key features or in the projection accompanying the simplified prospectus9. Where the reduction of investment return is used, it will not be necessary to show differences unless the rounded difference is at least 0.1% and the unrounded difference is at least 0.05%.

Types of expenses

COB 6.6.67G
  1. (1)

    The following are those expenses and costs of investment that firms should take into account when making their calculations. The list is not comprehensive. These are in addition to explicit charges.

  2. (2)

    Examples of expenses are:

    1. (a)

      registration fees;

    2. (b)

      safe custody fees;

    3. (c)

      trustees' fees;

    4. (d)

      handling charges;

    5. (e)

      audit fees;

    6. (f)

      regulatory fees and subscriptions;

    7. (g)

      costs of investment management, but excluding dealing costs of the underlying portfolio, and costs associated with routine management and servicing of existing property investments;

    8. (h)

      bid/offer spread in the pricing of units.

  3. (3)

    The spread in (h) should be on a basis that fairly represents the expected levy of such spread in the firm's experience of normal trading conditions.

  4. (4)

    The expenses should include allowance for any value added tax which is not recoverable.

Translation to fund level

COB 6.6.68G
  1. (1)

    The expenses and explicit charges need to be adjusted for any expected variation in costs from the period of the report to the period relevant to the disclosure expenses if such variation is believed to make a material difference.

  2. (2)

    The adjusted expenses should be expressed as a proportion of the relevant fund. For established funds, the relevant fund is the average size of the fund for the period of the report.

  3. (3)

    Where the use of the figure calculated as in (2) would be misleading, a fair estimate of the size of the relevant fund which is consistent with the adjusted expenses should be used. The same method should be used in the case of new funds. In determining the reasonable levels of expense to be assumed, account should be taken of the expense attributable to the existing fund which most closely corresponds to it, with proper regard to material differences in cost.

Review of expenses

COB 6.6.69R

The expenses used in calculations must be reviewed whenever material changes in the levels are identified which would mean that the disclosed amounts are misleading. In any event the expenses must be reviewed at least once a year.

Charges and expenses disclosure for investment trust savings schemes charges and expenses

COB 6.6.70G
  1. (1)

    Charges and expenses as described in COB 6.6.23 R should be taken to include all explicit charges and, in addition, all other deductions and expenses which are not financed from explicit charges. These include deductions and expenses within the trust.

  2. (2)

    The method is to identify all expenses that will be borne by the customer, and these will include not only the cost of acquiring a holding but also the cost of disposing of the investment.

  3. (3)

    Where expenses are charged directly against the assets of the investment trust, it will normally be appropriate to express the expenses as an annual percentage charge against the trust, which is then added to such charges, for example, a periodic management fee, to form an aggregate percentage charge. It will be reasonable to round to the nearest 0.05%.

  4. (4)

    Where an investment trust company (A) invests in another investment trust company (B), it will be necessary to look through to ensure that all charges or expenses which the customer will or may bear are included. Appropriate allowance may be made for any abatement to avoid double charging. Charges and expenses will be based on a reasonable distribution of assets that takes account of the investment philosophy of the investment trust company (A). If the investment trust company (B) is not required to make expense disclosure in respect of such assets, the charges and expenses of a similar company should be used.

Representative investment trust company

COB 6.6.71G
  1. (1)

    Where a document refers to investment in a number of investment trusts, charges and expenses (as described in COB 6.6.23 R) applicable to the trusts selected by the customer must be used. Where this is not practical, it is permissible to use the charges and expenses of a representative investment trust company.

  2. (2)

    The representative investment trust company will normally be the one that is most likely to be selected by the customers to whom the material is issued. Where advantage is taken of this option, the document must include information which shows the differences if other trusts are selected. The normal presentation will be to show the differences in the other reduction of investment return, or as an adjustment to the Table in key features. Where the reduction of investment return is used, it will not be necessary to show differences unless the rounded difference is at least 0.1% and the unrounded difference is at least 0.05%.

Types of expense

COB 6.6.72G
  1. (1)

    Expenses may be incurred either in acquiring or in holding an investment in an investment trust company. The list in (2) is not comprehensive and, in respect of other expenses, the list sets out the type of expense that should be included. The report and accounts of the investment trust company will normally provide a starting point in assessing the expenses that are charged against the assets of the investment trust company. These are in addition to disclosable charges.

  2. (2)

    Expenses to be included will be of four main types:

    1. (a)

      deductions levied against the assets of the investment trust company;

    2. (b)

      management expenses levied against the assets of the investment trust company; these expenses include management fees plus any management costs financed from commission received, directors' fees, pension contributions, non-recurring expenses, all other professional and regulator's fees and subscriptions, rents paid, depreciations, custody fees, audit fees and all other pre-tax expenses (except for interest paid); management expenses include marketing costs, if any;

    3. (c)

      expenses borne by the customer in acquiring or disposing of investment trust shares; these include adviser's commission (if any), stockbroker dealing commission on purchases and sales, stamp duty and withdrawal charges;

    4. (d)

      investment spread in the pricing of the investment trust shares.

  3. (3)

    Expenses should include allowance for any value added tax which is not recoverable.

  4. (4)

    Expenses in (2)(c) and the spread in (2)(d) should be on bases that fairly represent the expected level of such expenses and spread. Where appropriate, a representative level of expenses and the spread should be used.

Translation to trust level

COB 6.6.73G
  1. (1)

    Having identified all the expenses in COB 6.6.72 G (2), a firm needs to express them as rates of charges and expenses (as described in COB 6.6.23 R) that can be used in projections and key features.

  2. (2)

    The process is as follows.

    1. (a)

      The expenses in COB 6.6.72 G (2)(a) and (b) should be expressed as a proportion of the overall fund using net asset value: For established companies, the relevant fund is taken to be based on the average size of the investment trust company for the period of assessment.

    2. (b)

      The expenses in COB 6.6.72 G (2)(c) and (d) will usually be expressed as a proportion of the fund based on share price or the amount of the investment, as appropriate. Some expenses will be a one-off expense or spread and some will be in the form of an annual charge.

    3. (c)

      The rates of charges and expenses calculated under (a) and (b) should be added together. The fact that the calculation at (a) used net asset value can be ignored as it is assumed that the level of discount or premium remains unaltered.

  3. (3)

    The charges and expenses will normally be historic and need to be adjusted for any expected variation in the level of costs from the period used in the assessment to the period relevant to the disclosure of the expenses if such variation is believed to make a material difference.

  4. (4)

    Where the use of the figure calculated in (3) would be misleading, a fair estimate of the size of the company which is consistent with the adjusted expenses should be used. The same method should be used in the case of new investment trusts. In determining the reasonable levels of expense to be assumed, account may be taken of the expenses attributable to the existing investment trust which most closely corresponds to it, but with proper regard to any material differences in cost.

  5. (5)

    Set-up costs may be amortised over a limited period not normally exceeding five years.

Review of expenses

COB 6.6.74R

The expenses used in calculations must be reviewed whenever material changes in the levels are identified which would mean that the disclosed amounts are misleading. In any event the expenses must be reviewed at least once a year.

Example of the calculation of reduction in investment return

COB 6.6.75G

COB 6.6.76 G - COB 6.6.78 G contain an example which has been prepared to assist understanding of the method of calculating the reduction in investment return. However, the figures should not be regarded as representative or indicative of likely levels of charges and expenses to be expected.

General

COB 6.6.76G
  1. (1)

    The reduction in investment return shows the effect of all charges and expenses to the customer.

  2. (2)

    The rates of investment return allow for all tax and withholding tax for which the product provider is responsible. The current rate of tax may be used to calculate the net distribution of income. Where appropriate, the net distributions are offset from the rate of investment return.

  3. (3)

    It is not necessary to allow for daily changes so that monthly steps are acceptable.

  4. (4)

    The rates of return are assumed to compound annually. The twelfth root is used to calculate the monthly rate. This is different from the fund management charge, where normally one twelfth of the annual rate is deducted monthly.

  5. (5)

    The bid/offer spread should be allowed as an initial charge so that subsequent figures are on the basis of the bid price, except where the context requires allowance to be made for the spread.

The parameters

COB 6.6.77G
  1. (1)

    Contract details: unit trust for a term of 10 years with a single investment of £6,000 (SP).

  2. (2)

    Distributions: at the rate of 2.4% per annum, distributed as 1.2% of the offer value at the end of each half year.

  3. (3)

    Charges:

    1. (a)

      initial charge of 3% of investment (IC);

    2. (b)

      fund management charge of 1/12 of 1.25% per month (FMC) on distribution units;

    3. (c)

      attributable expenses of 1/12 of 0.25% per month (AE);

    4. (d)

      investment spread of 3% (IS) making total bid/offer spread of 6%.

  4. (4)

    Calculation:

    1. (a)

      investment of £6,000 (SP) less (IC+IS) giving an initial bid value of £5,640

    2. (b)

      interest of 6% pa or 0.4868% per month less (FMC + AE) = 1.004868 x (1- 0.015/12) 1 = 0.3612% per month

    3. (c)

      the value after 10 years as shown in COB 6.6.79 G is £6,720

    4. (d)

      the internal rate of return necessary to generate £6,720 plus distributions over 120 months from an initial investment of £6,000 is 0.3030% per month or 3.7% per annum

    5. (e)

      one method of creating the table is to use 20 periods of six months, each of which end with the payment of a distribution.

    6. (f)

      after 6 months:

      1. (i)

        the bid value of the fund before the distribution is 6000 x 0.94 x (1.003612)^6 = £5,763

      2. (ii)

        the distribution is 0.012 x 5763/0.94 = £73

      3. (iii)

        the fund carried forward is 5763 - 73 = £5,690

      4. (iv)

        after the end of Year 1, that is, after the second 6 months

      5. (v)

        the bid value of the fund before the distribution is 5690 x (1.003612)^6 = £5,814

      6. (vi)

        the distribution is 0.012 x 5814/0.94 = £74

      7. (vii)

        the fund carried forward is 5814 - 74 = £5,740

      8. (viii)

        this bid value is disclosed as there is no exit penalty as what you might get back.

    7. (g)

      the "effect of deductions" is calculated from the accumulation of the investment with no allowance for charges and expenses but with allowance for income:

      1. (i)

        the accumulated fund after 1 year with no allowance for charges is [6000 x (1.004868)^6 - 73] x (1.004868)^6 - 74 = £6,210

      2. (ii)

        the "effect of deductions" is this figure less "what you might get back", that is, £6,210 - £5,740 = £470

    8. (h)

      this process is continued throughout the term of the table; after 10 years, the accumulated investment at 0.4868% per month with no allowance for charges and expenses but with allowance for the same distributions of income is £8,621; "What you might get back" is £6,723 so the "effect of deductions" is the difference or £1,898;

    9. (i)

      the deduction in investment return is determined by calculating the rate of interest which accumulates the investment with no allowance for charges and expenses but with allowance for income to £6,723; this is 0.3030% per month (0.4868% per month gives £8,621); the yearly rate is (1.00303)^12 - 1 or 3.7%.

COB 6.6.78G

In COB 6.6.79 G projected amounts are rounded down to three significant figures.

COB 6.6.79G

Specimen table of presentation of the effect of charges and expenses

This table belongs to COB 6.6.75 G

At end of year

Investment to date £

Income to date £

Effect of deductions to date £

What you might get back £

1

6,000

148

470

5,740

3

6,000

451

715

5,940

5

6,000

766

998

6,150

10

6,000

1,600

1,890

6,720

The last line in the table shows that over 10 years the effect of total charges and expenses could amount to £1,890.

Putting it another way, this would have the same effect as bringing the illustrated investment growth from 6.0% a year down to 3.7% a year.

Assumptions for pension annuities

COB 6.6.80R

The formulae shown must be used for calculating the factors for converting a retirement fund into an annuity. The formulae in COB 6.6.81 R assume that the annuity will be payable monthly in advance for a term certain of n years (typically five):

  1. (1)

    for an RPI-linked and LPI-linked annuity (excluding a protected rights annuity): use Factor (1);

  2. (2)

    for an annuity which is static or has fixed rates of escalation: use Factor (2);

  3. (3)

    for a spouse's reversionary annuity (excluding a protected rights annuity, and whether or not there is overlap with any guaranteed period under the associated single life annuity): use Factor (3);

  4. (4)

    [deleted]

  5. (5)

    for a protected rights annuity: use Factor (5).2

COB 6.6.81R

Table of formulae for pension annuity factors

This table belongs to COB 6.6.80 R and COB 6.6.82 R

Factor

Formula

(1)

(1+E)*[än(12)+ D x+n/Dx * äx+n(12)]

(2)

(1+E)*[än(12)+ D x+n/Dx * äx+n(12)]

(3)

(1+E)*[a y-ax:y]

(4)

(1+E)*[äf(12)+ 0.45*(a m-am:f )]

(5)

(1+E)*[äf(12)+ 0.50*(a m-am:f )]

(6) namely ax(12)

= ax+ 13/24

(7) namely äx:t(12)

= 13/24 * ax:t+ 11/24* a x:t1

COB 6.6.82R
  1. (1)

    All factors must be rounded to three decimal places before being applied to the retirement fund.

  2. (2)

    In the formulae the letters a and D have their normal actuarial notation meanings. In formulae for two lives, x is the member and y is the spouse or civil partner10, and for the protected rights formulae, f indicates the use of female mortality and m that for males. In addition, a monthly annuity is either Factor (6) or (7).

  3. (3)

    For retirement other than on a birthday, the factors must be obtained by linear interpolation on complete months. Where a member is not able (for practical reasons or otherwise) to determine the exact age at retirement, it must be assumed that the exact age at retirement is then the age at the last birthday.

  4. (4)

    Where the projection is of an annuity after taking a tax-free lump sum, the table must be used with the retirement fund reduced by the projected tax-free lump sum before rounding. Any tax-free lump sum illustrated should be rounded to three significant figures, unless the lump sum is equal to the amount of a loan.

  5. (5)

    Where a retirement fund includes both protected rights and non-protected rights benefits, the appropriate factors are to be used for each relevant part of the total fund.

  6. (6)

    Where there are protected rights funds and the person is not expected to be married or registered as a civil partner10 at retirement, an illustration of single life pensions may be provided. The factor must be calculated using the same assumptions as formula (5) in COB 6.6.81 R but ignoring the reversionary annuity part of the formula.

  7. (7)

    For type P projections, the annuity should assume 50% spouse's reversionary pension unless the firm has evidence that a different assumption would be more appropriate.2

COB 6.6.83R

In the formulae in COB 6.6.81 R, the allowance for expenses (E) is 4% for all annuities.2

COB 6.6.84R

In the formulae in COB 6.6.81 R, mortality rates must be calculated as follows:

  1. (1)

    the mortality tables to be used are PMA92 (for males) and PFA92 (for females) appropriate to the individual's year of birth with the medium cohort projection improvements8; these tables are published by the Faculty of Actuaries and Institute of Actuaries;2

  2. (2)

    where there are two lives concerned, for reversionary and for protected rights annuities, the husband is normally to be taken as being three years older than his wife; where the firm is aware that the wife is more that six years younger than her husband, an exact calculation must be performed using actual ages;

  3. (3)

    protected rights annuities must be calculated for both sexes on the basis that the member experiences female mortality and the spouse experiences male mortality.

COB 6.6.85R

In the formulae in COB 6.6.81 R, the mortality functions must be calculated at a rate of interest J, where:

  1. (1)

    J = (1 + I)/(1 + R) - 1;

  2. (2)

    R is the rate of escalation increase appropriate for the customer in formulae (2) and (3) in COB 6.6.80 R; it is 3% for pre-April 1997 protected rights benefits in formula (4), and zero otherwise;

  3. (3)

    the rate of return assumptions (1) are as set out in the tables in COB 6.6.50 R - COB 6.6.52 R with real rates of return being used for formulae (1) and (5) in COB 6.6.81 R and monetary rates otherwise; and

  4. (4)

    different factors will need to be calculated where a projection is being prepared on lower and higher rates of return, and where appropriate also the intermediate rate.

Pension transfer value analysis requirements content

COB 6.6.86G

COB 6.6.87 R - COB 6.6.93 R outline how a pension transfer value analysis should be prepared. A pension transfer value analysis should provide a comparison between the potential benefits available to the customer from an occupational pension scheme of which he is a member and the potential benefits that would be available to him under a personal pension or buy-out contract.

Basis of a pension transfer value analysis

COB 6.6.87R
  1. (1)

    The basis for the pension transfer value analysis must be clear, fair and not misleading.

  2. (2)

    The information analysed must include details relevant to the customer's circumstances:

    1. (a)

      spouse's, dependants' and children's pensions;

    2. (b)

      early retirement provision, including provision for retirement in ill-health;

    3. (c)

      a transfer value quotation detailing:

      1. (i)

        guarantee period;

      2. (ii)

        pre- and post-April 1988 Guaranteed Minimum Pension and excesses;

      3. (iii)

        revaluation rates both in deferment and payment, and whether they are guaranteed or discretionary;

      4. (iv)

        tax-free cash arrangements;

    4. (d)

      lump sum death benefits;

    5. (e)

      transfer club arrangements, if applicable;

    6. (f)

      relevant earnings;

    7. (g)

      period of service;

    8. (h)

      scheme details (for example, benefits, bridging pensions, guarantee periods, position before and after normal retirement date, history of discretionary increases);

    9. (i)

      whether members' benefits have been equalised for service from 17 May 1990;

    10. (j)

      ill-health benefits.

Required comparisons

COB 6.6.88R

The analysis must contain the following:

  1. (1)

    where the period before benefits are assumed to commence is one year or more:

    1. (a)

      a statement of the rates of return, calculated as in COB 6.6.92 R (2), which would have to be achieved under the transfer contract in order to provide the same level of benefits as those which would be afforded by the occupational pension scheme if the customer were to retire at normal retirement date ("the Target Benefits");

    2. (b)

      if in the firm's opinion early retirement would be materially more favourable to the customer than retirement at normal retirement date, a statement of the rates of return, calculated as in COB 6.6.92 R (2), which would have to be achieved under the transfer contract in order to provide the same pension as that afforded by the occupational pension scheme, assuming early retirement at a date on which the customer may be expected, or will have the option, to retire;

    3. (c)

      a statement of the value of the benefits payable on the death of the customer, under the transfer contract and under the occupational scheme, on the assumption that the customer were to die on the day after the date on which the transfer contract is assumed to have commenced; comparisons assuming other dates of death may be included if they are likely to enhance understanding of the differences between the benefits payable under the transfer contract and the occupational pension scheme;

  2. (2)

    where the period before benefits are assumed to commence is less than one year:

    1. (a)

      a statement of the annuity payable under the transfer contract and of the comparable Target Benefits;

    2. (b)

      where the normal retirement date under the occupational pension scheme is not within a year, a statement of the rates of return, calculated as in COB 6.6.92 R (2), which would have to be achieved under the transfer contract in order to provide the Target Benefits.

COB 6.6.89R
  1. (1)

    In all cases (except in a case within COB 6.6.88 R (2) in respect of the annuity) a statement of the assumptions must be provided which complies with the requirements of COB 6.6.90 R.

Required assumptions

COB 6.6.90R
  1. (1)

    The assumptions in COB 6.6.91 R must be made for the purposes of the required calculations, except as envisaged by this rule.

  2. (2)

    The assumptions may be varied only to incorporate more cautious assumptions.

  3. (3)

    If an annuity interest rate different from the Annuity Interest Rate (as specified in COB 6.6.91 R) is used, it must be the interest rate for annuities in payment provided that it is a multiple of 0.5% per annum and must not exceed the Annuity Interest Rate.2

  4. (4)

    Where the occupational pension scheme has a record of discretionary increases in pension, the assumptions must be consistent with the published practice of the trustees, if any, or based on a comparison of the increases granted over the last five years with a published index. It must be assumed that increases will continue, and allowance must be made for continuation by:

    1. (a)

      relying on any statement by the trustees of their practice;

    2. (b)

      comparing recent experience with the increase in the retail price index and restricting the future allowance to a maximum of the increase in the retail price index;

    3. (c)

      making a default assumption of limited pension indexation;

    4. (d)

      assessing the likelihood whether such increases will continue to be paid.

    Figures may be provided showing the effect of applying a factor representing the likelihood of such continuation.

COB 6.6.91R

Assumptions to be made

This table belongs to COB 6.6.90 R

Formula

Annuity interest rate ("AIR")

The intermediate after vesting monetary rate of return in COB 6.6.51 (b)

Retail prices index

2.5%

Average earnings index ("AEI") and section 21 orders

4.0%

Pre-retirement limited price indexation revaluation

2.5%

Post-retirement limited price indexation increases

2.5%

Index-linked pensions

The rate of intermediate return inCOB 6.6.51 for annuities linked to the retail price index

Note:

The interest rate in deferment must not be assumed but calculated as required by COB 6.6.92.2

Method of calculation

COB 6.6.92R
  1. (1)

    In calculating the Target Benefits for the purposes of the comparisons required by COB 6.6.88 R, regard must be had to benefits which commence at different times.

    1. (a)

      Where a benefit becomes payable at a different age from the age at which the Guaranteed Minimum Pension becomes payable, the benefit must be valued from its appropriate commencement date.

    2. (b)

      In the case of pensions payable only for a limited period, an allowance must be made.

  2. (2)

    The method of calculating the rate to be used for the purpose of the comparisons required by COB 6.6.88 R is:

    1. (a)

      make the assumptions required by COB 6.6.91 R;

    2. (b)

      on those assumptions, calculate the Target Benefits;

    3. (c)

      calculate, in accordance with COB 6.6.34 R- COB 6.6.62 R which relate to the calculation of projections, the interest rate in deferment necessary to attain a transfer value sufficient to provide benefits equal to the Target Benefits.

Required disclosures

COB 6.6.93R

The analysis must also contain:

  1. (1)

    a list of all the main assumptions made for the purposes of the analysis, set out consecutively and with equal prominence;

  2. (2)

    a warning as to the differences between the amounts of benefit under the occupational pension scheme and the level of benefits under the proposed transfer contract which depends on future investment performance and on interest rates at the time of retirement;

  3. (3)

    a description of any differences in the dates on which the pensions become payable, for example in the case of a protected rights pension under a personal pension scheme which will not become payable until the customer attains the State retirement age;

  4. (4)

    a warning of any shortfall in the value of the death benefits provided by the transfer contract and, where there is such a shortfall, if appropriate, a quotation for provision to make good the shortfall.