Supplement 8 - 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 | 2004 | 2003 | ||
| Risk discount rate | 7.3% | 7.5% | 6.4% | 7.0% | |
| Pre-tax investment returns: | |||||
| Base government fixed interest | 4.6% | 4.8% | 3.7% | 4.3% | |
| Ordinary shares | 7.6% | 7.8% | 6.7% | 7.3% | |
| Property | 6.6% | 6.8% | 5.7% | 6.3% | |
| Future expense inflation | 3.3% | 3.4% | 2.5% | 2.5% | |
| Tax rate | 30.0% | 30.0% | 34.9% | 35.4% | |
| Required Capital (% EU minimum) | 200%* / 100% | 200% / 100% | 115% | 115% | |
| Ireland | Italy | ||||
| 2004 | 2003 | 2004 | 2003 | ||
| Risk discount rate | 6.4% | 7.0% | 6.4% | 7.0% | |
| Pre-tax investment returns: | |||||
| Base government fixed interest | 3.7% | 4.3% | 3.7% | 4.3% | |
| Ordinary shares | 6.7% | 7.3% | 6.7% | 7.3% | |
| Property | 5.7% | 6.3% | 5.7% | 6.3% | |
| Future expense inflation | 4.0% | 4.0% | 2.5% | 2.5% | |
| Tax rate | 12.5% | 12.5% | 38.3% | 38.3% | |
| Required Capital (% EU minimum) | 150% | 150% | 115% | 115% | |
| Netherlands | Poland | ||||
| 2004 | 2003 | 2004 | 2003 | ||
| Risk discount rate | 6.4% | 7.0% | 9.7% | 9.7% | |
| Pre-tax investment returns: | |||||
| Base government fixed interest | 3.7% | 4.3% | 6.0% | 6.0% | |
| Ordinary shares | 6.7% | 7.3% | 9.0% | 9.0% | |
| Property | 5.7% | 6.3% | n/a | n/a | |
| Future expense inflation | 2.5% | 2.5% | 3.4% | 3.4% | |
| Tax rate | 31.5%** | 25.0% | 19.0% | 19.0% | |
| Required Capital (% EU minimum) | 150% | 150% | 150% | 150% | |
| Spain | |||||
| 2004 | 2003 | ||||
| Risk discount rate | 6.4% | 7.0% | |||
| Pre-tax investment returns: | |||||
| Base government fixed interest | 3.7% | 4.3% | |||
| Ordinary shares | 6.7% | 7.3% | |||
| Property | 5.7% | 6.3% | |||
| Future expense inflation | 2.5% | 2.5% | |||
| Tax rate | 35.0% | 35.0% | |||
| Required Capital (% EU minimum) | 125% / 110% | 125% / 110% | |||
* Required capital for UK annuities has been changed from 200% to 150% for 2005 life new business.
** In the Netherlands, the tax rate assumed in determining the embedded value as at 31 December 2004 was 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, and the reduction in corporation tax from 34.5% to 31.5%, which was effective from 1 January 2005.
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