Principal economic assumptions - deterministic calculations
Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting period. The same margins are applied on a consistent basis across the Group to gross risk-free yields to obtain investment return assumptions for ordinary shares and property and to produce risk discount rates. Expense inflation is derived as a fixed margin above a local measure of long-term price inflation. Risk-free rates and price inflation have been harmonised across territories within the Euro currency zone, except for expense inflation in Ireland where significant differences remain. Required capital is shown as a multiple of the EU statutory minimum solvency margin.
Investment return assumptions are generally derived by major product class, based on hypothecating the assets at the valuation date. Assumptions about future investment mix are consistent with long-term plans. In most cases, the investment mix is assumed to continue unchanged throughout the projection period. The changes in assumptions between reporting dates reflect the actual movements in risk-free yields in the United Kingdom, the Eurozone and other territories. The principal economic assumptions used are as follows:
| United Kingdom | France | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||
| Risk discount rate | 7.3% | 7.5% | 7.2% | 6.4% | 7.0% | 7.0% | |||
| Pre-tax investment returns: | |||||||||
| Base government fixed interest | 4.6% | 4.8% | 4.5% | 3.7% | 4.3% | 4.3% | |||
| Ordinary shares | 7.6% | 7.8% | 7.5% | 6.7% | 7.3% | 7.3% | |||
| Property | 6.6% | 6.8% | 6.5% | 5.7% | 6.3% | 6.3% | |||
| Future expense inflation | 3.3% | 3.4% | 2.8% | 2.5% | 2.5% | 2.5% | |||
| Tax rate | 30.0% | 30.0% | 30.0% | 34.9% | 35.4% | 35.4% | |||
| Required Capital (% EU minimum) | 200% / 100% | 200% / 100% | 200% / 100% | 115% | 115% | 115% | |||
| Ireland | Italy | ||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||
| Risk discount rate | 6.4% | 7.0% | 7.0% | 6.4% | 7.0% | 7.0% | |||
| Pre-tax investment returns: | |||||||||
| Base government fixed interest | 3.7% | 4.3% | 4.3% | 3.7% | 4.3% | 4.3% | |||
| Ordinary shares | 6.7% | 7.3% | 7.3% | 6.7% | 7.3% | 7.3% | |||
| Property | 5.7% | 6.3% | 6.3% | 5.7% | 6.3% | 6.3% | |||
| Future expense inflation | 4.0% | 4.0% | 4.0% | 2.5% | 2.5% | 2.5% | |||
| Tax rate | 12.5% | 12.5% | 12.5% | 38.3% | 38.3% | 39.8% | |||
| Required Capital (% EU minimum) | 150% | 150% | 150% | 115% | 115% | 115% | |||
| Netherlands | Poland | ||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||
| Risk discount rate | 6.4% | 7.0% | 7.0% | 9.7% | 9.7% | 11.7% | |||
| Pre-tax investment returns: | |||||||||
| Base government fixed interest | 3.7% | 4.3% | 4.3% | 6.0% | 6.0% | 8.0% | |||
| Ordinary shares | 6.7% | 7.3% | 7.3% | 9.0% | 9.0% | 11.0% | |||
| Property | 5.7% | 6.3% | 6.3% | n/a | n/a | n/a | |||
| Future expense inflation | 2.5% | 2.5% | 2.5% | 3.4% | 3.4% | 5.4% | |||
| Tax rate | 31.5%* | 25.0% | 25.0% | 19.0% | 19.0% | 27.0% | |||
| Required Capital (% EU minimum) | 150% | 150% | 150% | 150% | 150% | 150% | |||
| Spain | |||||||||
| 2004 | 2003 | 2002 | |||||||
| Risk discount rate | 6.4% | 7.0% | 7.0% | ||||||
| Pre-tax investment returns: | |||||||||
| Base government fixed interest | 3.7% | 4.3% | 4.3% | ||||||
| Ordinary shares | 6.7% | 7.3% | 7.3% | ||||||
| Property | 5.7% | 6.3% | 6.3% | ||||||
| Future expense inflation | 2.5% | 2.5% | 2.5% | ||||||
| Tax rate | 35.0% | 35.0% | 35.0% | ||||||
| Required Capital (% EU minimum) | 125% / 110% | 125% / 110% | 125% / 110% | ||||||
| * In the Netherlands, the tax rate assumed in determining the embedded value as at 31 December 2004 has been changed from 25%, which was the average rate of tax assumed by the intermediary division, to the full rate of corporation tax in the Netherlands. This change reflects the calculation refinements now adopted for the intermediary division, described on Life EEV operating return before tax, and the reduction in corporation tax from 34.5% to 31.5%, which was effective from 1 January 2005. In 2005, profits will be grossed up at the local corporation tax rate of 31.5% in the Netherlands, reflecting the economic basis at the start of the year, increasing both reported pre-tax profits and the corresponding tax charge. | |||||||||
Where there are service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company. Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for credit risk. Required capital in the United Kingdom is 200% EU minimum for Norwich Union Annuities Ltd and 100% for other companies. Required capital in Spain is 125% EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies.
Other economic assumptions
Required capital relating to with-profit business is assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders. Bonus rates on participating business have been set at levels consistent with the economic assumptions and Aviva’s medium-term bonus plans. The distribution of profit between policyholders and shareholders within the with-profit funds assumes that the shareholder interest in conventional with-profit business in the United Kingdom and Ireland continues at the current rate of one-ninth of the cost of bonus.
