To determine redress according to FCA DISP App 4 (in particular DISP App 4.2.7G) one needs to consider the impact of contributions (which can include additional transfers in) and/or withdrawals on the current fund value. The regulator requires firms either to have the adjustment calculated by an actuary or to use an actuary approved method.
We derive an actuarial method by adopting a fund proxy and then derive a spread adjustment which reflects the relative return of the fund compared to that of the adopted proxy index. Where additional contributions have been made to the same fund, you will need to apportion funds – both the fund value and the value of any withdrawals the consumer has made after the additional contributions.
The fund rate of return
We adopt proxy indices and use historical returns to represent the risk / return profile of the fund e.g. “Conservative”, “Income”, “Growth” and “Global” (see table below).
The procedure to determine the fund rate of return are as follows:
- Use the appropriate proxy index and derive rates of returns for cashflows identified in equation 1 (see below).
- Derive a spread adjustment applied to derived returns above by solving equation 1.
- Using spread adjustment and fund returns to derive the ADJUSTED_FUND_VALUE as per equation 2 (see below).
The adopted proxy indices are detailed below:
Adjusted fund value
The actual CURRENT_FUND_VALUE can be represented as: Adjusted fund value
CURRENT_FUND_VALUE
= ROLLUP_TRANSFER_VALUE
+ ROLLUP_CONTRIBUTION_REGULAR + ROLLUP_CONTRIBUTION_ADHOC
– ROLLUP_WITHDRAWAL_REGULAR – ROLLUP_WITHDRAWAL_ADHOC
(This is equation 1)
Where “ROLLUP” is defined as the accumulated value of the transfer value, contributions, and withdrawals as appropriate. We split contributions and withdrawals into regular and ad hoc payments for convenience, taking into account timing, withdrawals that have taken place since the contribution and the derived fund rate of return (see below) that is consistent to the above equation.
Accumulated values, in all cases, are compound.
The procedure is first to solve the above equation for the fund rate of return and second to determine the adjusted fund value, namely the notional fund value adding back the withdrawals:
ADJUSTED_FUND_VALUE
= NOTIONAL_FUND_VALUE
+ TIME_ADJUSTED_WITHDRAWAL_REGULAR + TIME_ADJUSTED_WITHDRAWAL_ADHOC
where TIME_ADJUSTED is defined as the accumulated value of withdrawals taking into account timing, the relative weighting of the cashflows in relation to the relevant transfer and the appropriate (compounded) BOE rate.
(This is equation 2)
In equation 1 the fund rate of return is unknown and must be solved for; in equation 2 the fund rate of return is now known and is used to calculate the adjusted fund values accordingly.
