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The money purchase critical yield (MPCY) is a calculator that the Quilter illustration system uses to compare projection results from another provider, to projection results from the Collective Retirement Account (CRA).
The results of the MPCY are displayed in a table on an appendix to an uncrystallised pension projection. An example of the output is shown below:
| Low rate | Mid-rate | High rate | |
| Existing provider's projection rate after deducting 2.0% for inflation |
-0.75% | 2.25% | 5.25% |
| Existing provider's projected value |
£164,000 | £223,000 | £300,000 |
| Projected value of the proposed CRA using existing provider's projection rate |
£157,000 | £220,000 | £305,000 |
| Critical yield needed for the proposed CRA to match the existing provider's projected value |
-0.37% | 2.37% | 5.08% |
If the client has two or more existing pension products with other providers, separate illustration inputs are required for each product.
The main purpose of the MPCY is to compare the CRA with an existing product, so you need to input the current transfer value of the existing product. If the existing plan also contains a regular contribution, and it is included in the projections from the other product, then you include the regular contribution in the MPCY too.
You can also use the MPCY to compare new business illustrations from other providers. The MPCY will include all lump sum and regular contributions, as well as adviser fees and other charges.
Therefore the MPCY can be used for:
- transfer values
- lump sum contributions
- regular contributions (which can be level or escalating in line with Average Weekly Earnings).
There are two sets of figures you need to input from the other providers’ projection results:
- The growth rates used for the low/mid/high projections: These should be the inflation-adjusted (or ‘real terms’) growth rates, and will be displayed in the first row of the output table.
- The low/mid/high projection values: All providers should now be giving inflation-adjusted projection values, and this is what you should input. These are displayed in the second row of the output table.
The MPCY will do two calculations for each projection rate that is input:
- It will calculate the CRA inflation-adjusted projection value using the growth rate displayed in the first row of the output table; and
- it will calculate the inflation-adjusted growth rate that the CRA needs to grow at to achieve the inflation-adjusted projection values displayed in the second row of the output table.
The results of calculation 1 are displayed in the third row of the output table, and the results of calculation 2 are displayed in the fourth row of the output table.
There are exceptions to every rule, but in general you can tell whether the projection rate is in nominal terms or real terms by reference to the following table:
| Projection type | Nominal | Real terms |
| Low rate | Greater than 0.00% | Less than or equal to 0.00% |
| Mid-rate | Greater than 3.00% | Less than or equal to 3.00% |
| High rate | Greater than 6.00% | Less than or equal to 6.00% |
If the growth rate falls in the nominal column, then it needs to be adjusted (reduced) by inflation at 2.00%pa.
If the growth rate falls in the real terms column, then input that rate into the MPCY.
We have found that companies are not using the same method for calculating the growth rate net of the 2.00% pa inflation adjustment.
Method 1: Simply deducting 2.00% from the nominal growth rate.
As the maximum illustration nominal growth rates are 2% (low rate)/5% (mid-rate)/8% (high rate) this method gives maximum inflation-adjusted growth rates of 0.00%/3.00%/6.00% pa.
Method 2: Compound interest. This method uses the formula (1 + nominal growth rate%)/1.02 – 1 = real terms growth rate%
As the maximum illustration nominal growth rates are 2% (low rate)/5% (mid-rate)/8% (high rate) this method gives maximum inflation-adjusted growth rates of 0.00%/2.94%/5.88% pa.
Some companies show these to two decimal places as above, but others have shown them to one decimal place. Method 1 is not affected by this rounding, but method 2 results become 0.0%/2.9%/5.9%.
Method 1 is clearly an easier calculation, and easier to explain – as a result we have selected this method. However, method 2 is marginally more accurate in that it replicates the way inflation is applied to the projections.
Row 1 = other provider’s inflation-adjusted growth rates (derived as above if necessary)
Row 2 = other provider’s inflation-adjusted projection values
Row 3 = CRA inflation-adjusted projection values using the growth rates in row 1
Row 4 = CRA inflation-adjusted projection rate required so the CRA inflation-adjusted projection value equals the values in row 2
The results are another way of comparing the charges of the CRA and the other product.
Typically, if the Reduction in Yield (RIY) of the CRA is higher than the other product’s RIY, the critical yield in row 4 will be higher than the input growth rate in row 1 by a similar amount. Hence if there is a 0.2%pa difference between RIYs, it implies rows 1 and 4 are expected to have a difference of around 0.2%pa too.
This normally means two things:
- The projection values in rows 2 and 3 are significantly different.
- The critical yield in row 4 is significantly different to the other provider’s growth rate in row 1.
The cause of both of these problems is usually one of the following:
- the other provider’s projection rate input is the nominal growth rate, not the inflation-adjusted growth rate;
- the contributions in the CRA illustration are not consistent with the existing provider’s illustration inputs;
- the existing plan has a surrender penalty meaning the CRA start value is less than the existing provider’s illustration start value.
The first cause, (1), means the MPCY is treating the nominal growth rate input as an inflation-adjusted growth rate, and hence is around 2.0% pa too high. In turn this will make the row 3 figures much higher than row 2 as it is projecting at a growth rate 2.0%pa higher than that used for row 2.
The critical yield in row 4 being too low, compared to row 1, usually occurs when it is being compared to a nominal growth rate. As the critical yield is an inflation-adjusted growth rate, it can be around 2.0%pa less than the figures in row 1 when nominal growth rates have been input.
The MPCY requires the inflation-adjusted growth rate to be input, so the nominal growth rate needs to be adjusted as shown in the section How to adjust the growth rate for inflation.