Pension Company Projections??

Hello

Does anyone understand how pension companies make their fund value projections? I have a number of funds with Standard Life - the majority (unfortunately) in with-profits.

I can view the current value of these funds and get a projection of their future value online making a variety of different assumptions. However, I'm blowed if I can reproduce these results myself, even though I believe I have all the necessary data. Here's an example - can anyone tell me what I'm doing wrong?

Present Fund value = X Number of years to retirement = N Assumed Annual Growth (%) = G Surrender Value Adjustment (%) = S

Value at retirement = X*(1-S/100) * (1+G/100)^N

I'm assuming the value at retirement is given in today's value.

Standard Life publish values for G for high, intermediate and low assumptions. As far as I can see, the upper limit for the Surrender value is 25%

I've applied this to each of my funds and ignored any final bonus but still get more than the value reported by the Standard Life online system. I'll take it up with SL but does anyone see where I might be going wrong?

Thanks Des

Reply to
Des
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And another thing....

If I obtain an online projection in today's money I get something like:-

Fund value = V1 giving a pension of P1 per annum

and if I request it in buying power (ie taking inflation into account) I get :-

Fund value = V2 giving a pension of P2 per annum

Now since the pension is based on the same assumptions in each case, why do I find that

P1/V1 = 0.067 but... P2/V2 = 0.043

Why aren't they in the same ratio?

Thanks for any advice Des

Reply to
Des

Could they be assuming that P2 is index linked and P1 is not?

Reply to
Ronald Raygun

I don't understand why you are using a surrender value adjustment. Surely only if you were surrendering, would you be multiplying X by (1-S/100) to get the payout you would obtain now. But if not surrendering, the maturity value will simply be X * (1+G/100)^N.

Are these policies paid-up or are you still contributing regular premiums? If the latter, the projections will take them into account, since obviously they will boost the maturity value.

If, say, you are contributing £Z per month for a further M months and the monthly growth factor is F = (1+G/100)^(1/12), these monthly premiums should contribute a further £Z * (F^M-1)/(F-1) to the aforementioned X * (1+G/100)^N.

Also, has the growth rate been adjusted for management charges?

Reply to
Ronald Raygun

Thanks - yes, it turns out that P2 is index linked, which I suppose makes some sense.

Interestingly, the difference between P1 and P2 is a factor of 2 - and if you fold in different growth assumptions the difference can be even greater. And this is only projecting 10 years ahead.

hmmm... pick a number, any number.

Thanks again Des

Reply to
Des

I initially didn't take the SVA into account - assuming that this only applies if you switch provider. However that gave me silly numbers - you'd need to assume huge management charges to get any sort of agreement. Plus, my policy is qbout 15 years old so I'd have thought the management/setup fees would mostly have been paid by now.

I admit to being a little confused about this, but I got the impression from my last chat with SL that the projection they present, can't assume that you stay with SL and so must take the SVA into account. Obviously this is something I need to clarify asap.

The notes accompanying the projections include the following ominous sounding sentence - "In this illustration we have allowed for deductions in respect of the cost of guarantees provided by with profits business." Perhaps this is the source of the 25% difference. Can I then expect another

25% cut (ie the SVA) if I move as well? Maybe I'd have been better just putting my money under the mattress!

I'm still making regular payments, but I used the SL online system to obtain a projection based on no further payments.

Thanks for that formula

Ah yes, the dreaded management charges. I haven't worked those in but I would hope they would only amount to a few percent at most on the projections at this stage. Please don't tell me I'm wrong ;-(

Des

Reply to
Des

"Des" wrote

Using say 1.5% each year (not unheard of!) for the next ten years, would amount to around 14% off the value at retirement ...

Reply to
Tim

That sounds awfully high to me - are you saying 1.5% is typical or an extreme?

What confuses me though is why the management charges have to be added in as a separate percentatge on top of the standard growth assumptions when companies make their projections. Presumably the charges are paid in order to achieve higher growth and the current FSA rules will make low-cost funds look more attractive than highly managed funds. Which could be very misleading.

Mind you, it's not clear to me that there is any corellation between management charge and fund performance.

Thanks Des

Reply to
Des

Just a quck follow up. I also have a Clerical Medical policy into which I pay a monthly payment. CM only provide a single annual projection based on 7% growth and 2.5% RPI. If I apply your formular above to my CM policy I get very close agreement which would seem to indicate that the CM charges are very low.

Thanks again Des

Reply to
Des

"Des" wrote

Not necessarily typical, but certainly not unheard-of.

"Des" wrote

Perhaps. But :-

"On 23 June 2003 FSA announced that it was to review the use of projection rates on investment products to re-evaluate its objectives in setting rates and the appropriate structure of its requirements.."

"... proposed that the FSA prescribed projection rates be challenged on four grounds - optimistic returns, **lack of costs**, same rates for all time frames and same assumptions for single and regular payments."

Reply to
Tim

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