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Fund-specific growth rates used for Old Mutual Wealth illustrations

The Financial Conduct Authority (FCA) tells investment, life and pension providers how they must calculate the potential future value of life assurance, pension and investment accounts for use in illustrations.

Because future investment returns are uncertain, we generally use three scenarios of projected growth – high, mid and low. The FCA sets the maximum percentages to be used. From 6 April 2014 these have reduced from 5%, 7% and 9% for pensions and ISAs  to 2%, 5% and 8% per year and from 4%, 6% and 8% to 1.5%, 4.5% and 7.5% for other investments.

The FCA had previously stated that these rates must be adjusted to lower rates if we think that standard rates could overstate the potential growth of any of the funds held in a particular investment. These rates are known as ‘fund-specific’ growth rates and they are used to ensure the projections are realistic.

From 6 April 2014 we have applied fund-specific growth rates in illustrations for all platform products, Life and Bond products and all Old Mutual Wealth pension contracts including the Personal Pension Income Plan.

The table below shows the fund-specific growth rates we use.

As the following table shows, each fund is allocated a fund type from A to G based on the type of assets held by the fund at a fixed point in time. The type determines the growth rates used in the calculations for that fund.

Table of fund-specific growth rates
Fund type Typical holding CIA and Life products ISA and Pension products
  Low Mid High Low Mid High
Type A Cash deposit Only applicable to ISA and CIA -2.50% 0.50% 3.50% -2.00% 1.00% 4.00%
Type B Cash Mainly cash/money markets or combined cash/money markets and fixed interest -2.50% 0.50% 3.50% -2.00% 1.00% 4.00%
Type C Fixed interest Mainly fixed interest -2.00% 1.00% 4.00% -1.50% 1.50% 4.50%
Type D Low mixed Mixed holdings with at least half in cash/money markets and/or fixed interest -0.75% 2.25% 5.25% -0.25% 2.75% 5.75%
Type E High mixed Mixed holdings with less than half in cash/money markets and/or fixed interest 0.75% 3.75% 6.75% 1.25% 4.25% 7.25%
Type F Equity Mainly equities 1.50% 4.50% 7.50% 2.00% 5.00% 8.00%
Type G Property Mainly direct holdings in property 0.00% 3.00% 6.00% 0.50% 3.50% 6.50%

The projections for each fund in a plan, account or bond are calculated using the relevant fund-specific rates. These are then totalled to provide the combined projection for each of the low, mid and high growth scenarios. We also show an equivalent growth rate for each of the three scenarios on the illustration for information.

The low, mid and high growth rates used in the above table are worked out using research data provided by an independent company. They are not guaranteed and they are not minimum or maximum rates. We review growth rates each quarter and fund classifications each year. The last rates review and the last classification review were in September 2016.

An up-to-date list of funds and fund types can be found in the Our Fund Ranges fund statistics document. Please refer to the ‘Fund Type’ column.

Example:

To illustrate the potential future growth of a £10,000 investment in a CIA, with 60% into an equity fund (type F) and 40% into a fixed interest fund (type C), we would calculate as follows:

Low growth rate: Equity Fund £6,000 growing at 1.50% a year
Fixed Interest Fund £4,000 growing at -2.00% a year
Mid growth rate: Equity Fund £6,000 growing at 4.50% a year
Fixed Interest Fund £4,000 growing at 1.00% a year
High growth rate: Equity Fund £6,000 growing at 7.50% a year
Fixed Interest Fund £4,000 growing at 4.00% a year

The rates used in the above example are before charges have been deducted.