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Projections

1

Calculating standardised deterministic projections

1.1

A standardised deterministic projection must:

(1)

include a projection of benefits at the lower, intermediate and higher rates of return;

(2)

be rounded down; and

(3)

show no more than three significant figures.

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1.2

Calculating projections: additional requirements for a pension scheme

(1)

A standardised deterministic projection within a key features illustration for a personal pension scheme or stakeholder pension scheme must include or be accompanied by information explaining the impact of inflation on those benefits.

(2)

Where a firm chooses to provide that information required in (1) in the form of one or more projections of benefits, it must include a projection in real terms, so long as it is either:

(a)

calculated using:

(i)

the appropriate intermediate rate of return;

(ii)

the intermediate rate of price inflation, in accordance with COBS 13 Annex 2 2.5R; and

(iii)

an annuity calculated in accordance with COBS 13 Annex 2 3.1R; or

(b)

consistent with the statutory money purchase illustration assumptions, with any material differences between the assumptions used and those otherwise required for accompanying standardised deterministic projections explained.

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1.3

(1)

If a generic projection is prepared for a stakeholder pension scheme or personal pension scheme in circumstances where a generic key features illustration is permitted under COBS 13.4.2 R,6 sufficient separate projections, covering a range of different contractual periods and contributions, must be included for a retail client to be able to make an informed decision about whether to invest.

(2)

A projection prepared on that basis may omit benefits in nominal terms and only show a range of figures at the intermediate rate of return, of benefits in real terms.

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1.4

A firm will provide sufficient separate projections if it prepares a table that shows projections in real terms for a variety of periods to maturity and a variety of contribution levels, taking into account the charges and other material terms that apply to the stakeholder pension scheme or personal pension scheme. Such a table could be laid out like a specimen benefits table (see COBS 13 Annex 2 1.8).

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Calculating an alternative projection

1.5

An alternative projection must:

(1)

(if the alternative projection is not a stochastic projection) not exceed the higher rate of return;

(2)

(if the alternative projection is not a stochastic projection), use assumptions consistent with the assumptions which apply to standardised deterministic projections in this Annex, unless the reasons for any inconsistency are:

(a)

reasonable;

(b)

explained to a retail client, with enough information for the retail client to be able to understand the difference between the alternative projection and any standardised deterministic projection being provided; and

(3)

(if the alternative projection is a stochastic projection) only be used if:

(a)

there are reasonable grounds for believing that a retail client will be able to understand it;

(b)

it is based on a reasonable number of simulations and assumptions which are reasonable and supported by objective data; and

(c)

the alternative projection is accompanied by enough information for the retail client to be able to understand the difference between the alternative projection and any standardised deterministic projection being provided.

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1.6

An alternative projection may be used either as part of a key features illustration or separately. However, it must not detract from any standardised deterministic projection required by COBS 13.4.1 R or COBS 13.5.1 R.

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Exceptions

1.7

A projection:

(1)

for a product that will mature in six months or less; or

(2)

prepared in order to determine the maximum level of contributions permitted to be made to a personal pension scheme,

may be prepared and presented on any reasonable basis but only if, in the case of (2), the assumptions used to calculate the projection and contributions are disclosed with the relevant projection.

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1.8

In the case of a stakeholder pension scheme in circumstances where a generic key features illustration is permitted under COBS 13.4.2R,6 the specimen benefits table, contained within the "Stakeholder pension decision tree" factsheet available on 24www.moneyadviceservice.org.uk4and headed "Pension Table...How much should I save towards a pension?" which sets out initial monthly pension amounts, may be used instead of a standardised deterministic projection but only if it is accompanied by an explanation of the caveats and assumptions behind the table.

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1.9

The rules in this Annex do not apply to a projection which is consistent with the statutory money purchase illustration requirements.

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1.10

A personal pension scheme or stakeholder pension scheme taken out before 6 April 2014 may omit the standardised deterministic projection for existing business may omit the projection at the intermediate rate of return

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2

Assumptions to follow when calculating projections.

Assumptions: projection date

2.1

A standardised deterministic projection must be calculated to the projection date described below:

Product

Projection date

(1)

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

The anniversary of the commencement date:

(a) which first falls after the seventy-fifth birthday of the life assured; or

(b) (if there is more than one life assured) the anniversary of the commencement date which falls after the seventy fifth birthday of:

(i) (if benefits are payable on the first death) the oldest life assured; or

(ii) (in all other cases) the youngest life assured;

subject to a minimum projection date of ten years.

(2)

A contract that is not in (1):

(a) where the relevant marketing refers to a surrender value or an option to take benefits before they would otherwise be paid; or

(b) that is open-ended, or linked to one or more lives, which is not a personal pension scheme or stakeholder pension scheme

An appropriate date which highlights the features of the product

(3)

A contract that is not in (1) or (2) and has a specified maturity date

The maturity date specified in the contract

(4)

A contract that is not in (1) or (2) or (3)

The tenth anniversary of the commencement date

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Assumptions: contributions

2.2

A standardised deterministic projection must:

(1)

take account of all contributions due during the projection period;

(2)

be calculated on the basis that contributions are accumulated, net of charges, at the appropriate rate of return compounded on an annual basis;

(3)

(if it includes assumptions about contribution increases in line with an index) be based on an assumption that contribution increases are consistent with any assumptions regarding that index in this annex; and

(4)

deduct from contributions any rider benefits or extra premium which may be charged for an increased underwriting risk.

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Assumptions: rates of return

2.3

A standardised deterministic projection must be calculated using the following rates of return:

Nominal rates

Lower rate

Inter-mediate rate

Higher rate

tax-exempt business held in a wrapper or by a friendly society

personal pension schemes, stakeholder pension schemes and investment-linked annuities

5%

7%

9%

all other products

4%

6%

8%

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Exception

2.4

A standardised deterministic projection:

(1)

must be calculated using lower rates of return, if the rates described in this section overstate the investment potential of the product;

(2)

may be calculated using a lower rate of return if a retail client requests it.

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Assumptions: inflation

2.5

If inflation is taken into account, the standardised deterministic projection must be calculated using the following rates:

Lower rate

Inter-mediate rate

Higher rate

Price inflation

0.50%

2.50%

4.50%

Earnings inflation

>2%

>4%

>6%

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Assumptions: charges

2.6

The charges allowed for in a standardised deterministic projection:

(1)

must properly reflect:

(a)

all of the charges, expenses and deductions a client will, or may expect to be taken after investment into the product;6

(b)

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

(c)

the fact that certain charges will be fully or partially off-set, but only to the extent that the firm can show that the off-set funds will be available when the relevant charges arise; and

(2)

must not include the firm's dealing costs incurred on the underlying portfolio.

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2.7

(1)

Development and capital costs should normally be written off in the year in which they are incurred. However, some costs (for example, exceptional new business expenses) may be amortised and previous years’ costs may then be brought into account.

(2)

If it is reasonable to assume that higher expenses will be incurred in the future, appropriate allowances should be made, and any inflation assumptions should be consistent with those prescribed in these rules.

(3)

Expenses should be apportioned appropriately between products so that scales of expenses can be calculated and applied.

(4)

Where appropriate, mortality and morbidity should be allowed for on a best estimate basis. The basis for annuities should allow for future improvements in mortality.

(5)

A projection should not assume that charges will fall over time to a rate that is lower than the rate currently being charged on the relevant product (or, if there is no such charge, on a similar product).

(6)

A projection of surrender value, cash-in value or transfer value should take into account any specific current surrender value basis and penalties which may be applied.

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Additional requirements: with-profits policies

2.8

(1)

A standardised deterministic projection for a with-profits policy must properly reflect the deductions from asset share which a firm expects to make in accordance with its deductions plan.

(2)

A standardised deterministic projection for a with-profits policy where bonus rates apply must assume that the bonus rates supported by the relevant premium and rate of return apply throughout the term of the contract.

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Additional requirements: drawdown5 pensions

2.9

(1)

A standardised deterministic projection for a drawdown pension5 must be based on the requirements contained in (2) to the extent that they impose additional or conflicting requirements to the balance of the rules in this section.

(2)

A standardised deterministic projection for a drawdown pension5 must be based on an assumption that the current gilt-index yield will continue to apply throughout the relevant term and include:

(a)

where relevant 5the maximum initial income specified in the tables published by the Government Actuaries Department for a drawdown pension;5

(b)

the assumed level of income;

(c)

for a short-term annuity, where subsequent short-term annuities are assumed, a statement reflecting that fact;

(d)

(under the heading 'What the benefits might be'), the amount of income and the projected value of the fund at each fifth anniversary for the lower, intermediate and higher rate of return for as long as the fund is projected to exist at the higher rate of return;5

(e)

the projected open market values and the amounts of annuity that might be purchased after 10 years;5 and

(f)

the amount of annuity that could be secured using an immediate annuity rate available in the market.

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3

How to calculate a projection for a future annuity

3.1

A projection for a future annuity must:

(1)

be calculated by rounding all factors to three decimal places before applying them to the relevant retirement fund;

(2)

use a mortality rate based on the year of birth rate derived from each of the Institute and Faculty of Actuaries’ Continuous Mortality Investigation tables PCMA00 and PCFA00 and including mortality improvements derived from each of the male and female annual mortality projection models, in equal parts;8

(3)

[deleted]7

(4)

(for an annuity where two lives are concerned):

(a)

reflect the age difference between the two lives; or

(b)

be based on the assumption that the male life is three years older than the female (if the genders differ) or the two lives have the same age (if the genders are the same);

(5)

include an expenses allowance of 4%;

(6)

be based on the following rates of return as appropriate:

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Lower rate

Intermediate rate

Higher rate

Level or fixed rate of increase annuities

Y+1.5%

Y+3.5%

Y+5.5%

RPI or LPI linked annuities

Y-1%

Y

Y+1%

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where:

'Y' is 0.5* (ILG0 + ILG5)-0.5 rounded to the nearest 0.2%, with an exact 0.1% rounded down; and

'ILG0' and 'ILG5' are the real yield on the FTSE Actuaries Government Securities Index-linked Real Yields over 5 years, assuming 0% and 5% inflation respectively, updated every 6 April to use the ILG0 and ILG5 which applied on or, if necessary, the business day immediately before, the preceding 15 February; and

(7)

(in the case of a future annuity with less than one year to maturity) be calculated using annuity rates that are no more favourable than the firm's relevant current immediate annuity rate or (if there is no such rate) the relevant immediate annuity rate available in the market; and

(8)

be assumed to be payable monthly in advance with a guaranteed period of 5 years, unless it is unreasonable to do so.

8E

3.1A

For any year commencing 6 April, the use of the male and female annual CMI Mortality Projections Models in the series CMI(20YY-1)_M_[1.25%] and CMI(20YY-1)_F_[1.25%], where YY-1 is the year of the Model used, will tend to show compliance with COBS 13 Annex 2 3.1 R (2).

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3.2

A projection for a future annuity:

(1)

must be calculated using lower rates of return , if the rates described in this section overstate the investment potential of the product;

(2)

may be calculated using a lower rate of return if a retail client requests it.

4

[deleted]7

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5

How to present a projection

5.1

A standardised deterministic projection must be accompanied by:

(1)

appropriate risk warnings, including warnings about volatility , the relationship between figures in real terms and those in nominal terms, and the degree to which any figures can be relied upon; and

(2)

a statement:

(a)

that projection rates are standardised or an explanation that projection rates that are lower than the standard rates have been used and why;

(b)

that charges may vary;

(c)

of the contributions that have been assumed;

(d)

that increases in contributions have been assumed (if that is the case), together with sufficient information for a retail client to be able to understand the nature and magnitude of the assumed increases; and

(e)

of the sum of any actual premiums charged for any rider benefits or increased underwriting risks (where these have been charged).

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Additional requirements: pension schemes and products linked to other products

5.2

A standardised deterministic projection for a product where the benefits illustrated depend on a link to a separate product must include an appropriate description of the material factors that might influence the returns available overall and any restrictions assumed in providing an illustration of benefits in relation to that separate product.

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Charges

1

Appropriate charges information

1.1

Appropriate charges information 9 comprises:

(1)

4(a)

a description of the nature and amount of the charges a client will or may be expected to bear in relation to the product and, if applicable, any investments within the product;

4(b)

if applicable, a description of the nature and amount of the adviser charges a retail client has agreed may be taken, including whether it is taken before or after investment into the product;

(2)

an 'effect of charges' table; and

(3)

'reduction in yield' information.

1.2

Where a firm does not include a projection within its key features illustration the charges information can be on a generic basis.

Exceptions

1.3

An effect of charges table and reduction in yield information are not required for:

(1)

a life policy without a surrender value, but an appropriate warning must be included to make it clear that the policy has no cash-in value at any time;

(2)

a SIPP;

(3)

[deleted]4

(4)

a stakeholder product or a product that will be held in a CTF where the relevant product and the CTF levy their charges annually, if the following is included instead:

“There is an annual charge of y% of the value of the funds you accumulate. If your fund is valued at £250 throughout the year, this means we deduct [£250 x y/100] that year. If your fund is valued at £500 throughout the year, this means we deduct [£500 x y/100] that year. [After ten years these deductions reduce to [£250 x r/100] and [£500 x r/100] respectively.]”

where ‘y’ is the annual charge and ‘r’ is the reduced annual charge (if any).

1.4

Reduction in yield information is not required for a without profits life policy with guaranteed benefits (except on surrender or variation), a life policy with a term not exceeding five years or a life policy that will be held in a CTF.

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3

Reduction in yield

3.1

Reduction in yield (‘A’) is ‘B’ less ‘C’ where:

(1)

'B' is the intermediate rate of return for the relevant product; and

(2)

'C' is determined by:

(a)

carrying out a standardised deterministic projection to the projection date, using ‘B’; and then

(b)

calculating the annual rate of return (‘C’) (rounded to the nearest tenth of 1 %) required to achieve the same projection value if charges are left out of account.

3.2

A firm must present reduction in yield as ‘A%’, as part of a statement which explains that ‘charges and expenses have the effect of reducing your anticipated returns from ‘B%’ to ‘C%’, or in some other appropriate way.

3.3

If contributions will be invested in more than one fund in a single designated investment or made by an initial lump sum payment that is followed by regular contributions, the reduction in yield must be:

(1)

calculated separately for each fund or for the single contribution and the regular contributions (as the case may be); and

(2)

presented:

(a)

on a fund by fund, or single contribution and regular contribution, basis, together with a statement which explains the nature and effect of a reduction in yield, the reason for the inclusion of more than one reduction in yield figure and the reason for the differences between them; or

(b)

(if the reduction in yield results are so similar that one figure could reasonably be regarded as representative of the others), as a single figure together with a statement which explains the nature and effect of a reduction in yield, and that the reduction in yield figure given is representative of the reduction in yield figures for each of the funds or for the single and regular contributions (as the case may be); or

(c)

through a single figure combining the separate figures for each fund or contribution in a proportionate manner, with an appropriate description.

3.4

Where a firm is calculating reduction in yield information, it must:

(1)

disregard charges related to mortality and morbidity risks; or

(2)

(where the requirement in (1) produces figures that are misleading) include a statement with the reduction in yield information that it has been calculated taking into account charges related to mortality and morbidity risk.

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Charges

1

Appropriate charges information

1.1

Appropriate charges information comprises:

(1)

(a)

a description of the nature and amount of the charges a client will or may be expected to bear in relation to the product and, if applicable, any investments within the product;

(b)

if applicable, a description of the nature and amount of the adviser charges and consultancy charges a retail client or employer has agreed may be taken before investment into the product;

(c)

if applicable, a description of the nature and amount of the adviser charges and consultancy charges a retail client or employer has agreed may be taken after investment into the product;

(2)

an ‘effect of charges’ table; and

(3)

‘reduction in yield’ information.

Exception

1.2

An effect of charges table and reduction in yield information are not required for a stakeholder pension scheme, where adviser charges or consultancy charges are not being facilitated by the scheme, if the following is included instead:

“There is an annual charge of y% of the value of the funds you accumulate. If your fund is valued at £500 throughout the year, this means we deduct [£500 x y/100] that year. If your fund is valued at £7500 throughout the year, we will deduct [£7500 x y/100] that year.”

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2

Effect of charges table

2.1

Each effect of charges table must be accompanied by:

(1)

an explanation of what the table shows;

(2)

a statement that all relevant guarantees have been taken into account (if there are any);

(3)

a warning that one effect of the charges referred to is that a retail client could get back less than they invest (if that is the case); and

(4)

the rate of returnused to calculate the figures in the table.

2.2

Subject to Note 2 below, an effect of charges table must be in the following form:

Note 1

Note 2

Note 3

Note 4

Note 5

Note 6

At end of year

Total paid in to date

Withdrawals

If there were no charges

If only product and investment charges are taken

After all charges are taken

£

£

£

£

£

1

...

5

At age [xx]

Note 1

This column must include at least the first, third and fifth year and the intended date of retirement.

For a drawdown pension, figures must be included for each of the first ten years, or less if the value of the fund is projected at the higher rate of return to reach zero before then.

Note 2

This column is optional. If it is retained it must show the cumulative contributions paid to the end of each relevant year.

Note 3

This column must show the cumulative withdrawals intended to be taken to the end of each relevant year. The column may be omitted if withdrawals are not anticipated or allowed.

Note 4

This column must show a standardised deterministic projection of the benefits, calculated in accordance with the rules in COBS 13 Annex 2 (Projections) at the appropriate intermediate rate of return to the end of each relevant year, but without taking any charges into account.

Note 5

This column must show a standardised deterministic projection of the benefits, calculated in accordance with the rules in COBS 13 Annex 2 (Projections) at the appropriate intermediate rate of return to the end of each relevant year, but taking into account only the charges described in COBS 13 Annex 4 R paragraph 1.1(1)(a).

Note 6

This column must show a standardised deterministic projection of the benefits, calculated in accordance with the rules in COBS 13 Annex 2 (Projections) at the appropriate intermediate rate of return to the end of each relevant year taking into account all charges described in COBS 13 Annex 4 R paragraph 1.1(1)(a) and (c).

Where both adviser charges and consultancy charges are being facilitated from a product this column should show the combined effect of those charges.

This column may be omitted if there are no adviser charges or consultancy charges.

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Exception

2.3

An effect of charges table may be amended, but only if and to the extent that it is necessary to properly reflect the nature and effect of, for example, the adviser charges, consultancy charges or the charges inherent in a particular product.

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2.4

The effect of COBS 13 Annex 4 paragraph 2.3R is that, for example, the column labels and explanatory text may be adjusted to reflect the nature of the contract or the terminology used.

2.5

An effect of charges table must be appropriately titled, for example, ‘How the charges reduce the value of your pension fund’.

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3

Reduction in yield

3.1

Product reduction in yield (‘A’) is ‘B’ less ‘C’ where:

(1)

‘B’ is the intermediate rate of return for the relevant product; and

(2)

‘C’ is determined by:

(a)

carrying out a standardised deterministic projection to the projection date, but without taking any adviser charges or consultancy charges into account, using ‘B’; and then

(b)

calculating the annual rate of return (‘C’) (rounded to the nearest tenth of 1 %) required to achieve the same projection value if charges are excluded.

3.2

Total reduction in yield (‘D’) is ‘B’ less ‘E’ where:

(1)

‘B’ is the intermediate rate of return for the relevant product; and

(2)

‘E’ is determined by:

(a)

carrying out a standardised deterministic projection to the projection date taking all charges into account, using ‘B’; and then

(b)

calculating the annual rate of return (‘E’) (rounded to the nearest tenth of 1 %) required to achieve the same projection value if charges are excluded.

3.3

(1)

A firm must present the product reduction in yield as ‘A%’, as part of a statement which explains that ‘product charges reduce your anticipated rate of returns from ‘B%’ to ‘C%’’, or in some other appropriate way.

(2)

If adviser charges or consultancy charges, or both adviser charges and consultancy charges are to be facilitated by the product, a firm must also present the reduction in yield as ‘D%’, as part of a statement which explains that ‘all charges reduce your anticipated rate of returns from ‘B%’ to ‘E’%’’, or in some other appropriate way and explain the difference between the two reduction in yield figures.

3.4

If contributions will be invested in more than one fund in a single designated investment or made by an initial lump sum payment that is followed by regular contributions, the reduction in yield must be:

(1)

calculated separately for each fund or for the single contribution and the regular contributions, as applicable; and

(2)

presented:

(a)

on a fund-by-fund, or single contribution and regular contribution, basis, together with a statement which explains the nature and effect of a reduction in yield, the reason for the inclusion of more than one reduction in yield figure and the reason for the differences between them; or

(b)

(if the reduction in yield results are so similar that one figure could reasonably be regarded as representative of the others) as a single figure together with a statement which explains the nature and effect of a reduction in yield, and that the reduction in yield figure given is representative of the reduction in yield figures for each of the funds or for the single and regular contributions, as applicable; or

(c)

through a single figure combining the separate figures for each fund or contribution in a proportionate manner, with an appropriate description.