Page 65 - Profiles's Unit Trusts & Collective Investments - September 2024

Costs and Pricing

Reduction in Yield
RiY is a method used by the life assurance industry to illustrate the possible effect of costs on
an investment. It is expressed as a percentage designed to estimate the decrease in total annual
returns likely to be attributable to costs.
The total annual return is the percentage gain per year as a result of capital appreciation,
interest and dividends (assuming these are reinvested). An RiY of 3% means that the product
provider expects that 3% of the annual return – over the life of the product – will be absorbed by
costs. This figure can be deceptive: it reflects actual percentage points, not a fraction.
For example, assuming total growth of 10% per annum, an RiY of 3% means a net return of 7%
per annum (not 93% of 10%, which would be a net return of 9.3% per annum). To put it
differently, if a fund suffered zero growth, a so-called 3% RiY would mean a 3% per annum
reduction in capital, which equates to 14% total loss over five years (ignoring income).
RiY, as a future estimate rather than an historical calculation, is fraught with problems and can
be misleading. Firstly, the projected annual return, which is an unknown, impacts the RiY
inversely (ie, RiY rises with returns where annual fees are a percentage of investment value). So
conservative projections actually understate RiY. Secondly, because it includes upfront costs (like
commissions), it is sensitive to the time period – the RiY on a product held for 10 years will be
lower than the RiY over five years, all other things being equal. Hence assurers can play down RiY
by using long time-period projections. Thirdly, RiY does not take into account penalties that may
be levied if contractual contributions are reduced or stopped (and, historically, a minority of
policies go the distance). These and other factors mean that RiY is a highly inexact method of
estimating costs to the investor.
Retirement Savings Cost Disclosure (RSC)
The RSC, effective from March 2019, is designed to assist potential and existing employers
and/or boards of trustees (referred to as “clients” in the ASISA standard) when comparing
retirement fund quotations.
The RSC differs from the EAC because the latter is aimed at individuals. The RSC is aimed at
employers and trustees, it is not a member level cost disclosure standard and is not designed for
individual fund members.
For products that combine life cover and investment plans, the RSC applies to the savings
element only.
The RSC Disclosure Standard does not apply to RA funds (including group RA funds),
preservation funds, beneficiary funds, compulsory annuities and other retail products provided
that they are disclosing the EAC.
The template must show four separate components into which defined charges are allocated
over four investment periods:
Investment management charges
Advice charges
Administration charges
Other charges including regulatory, compliance and governance costs
The RSC is calculated separately for each of the four components and then totalled to derive the
RSC for the umbrella fund as a whole. The value for each of the components, as well as the total
RSC, is expressed as a percentage of the investment amount.
Chart 3.5
Illustrative total Retirement Savings Costs (RSC) as a percentage of assets
Charges 1 Year 1 to 3 Yrs 1 to 5 Yrs 1 to 10 Yrs
Investment Management 1.20% 1.20% 1.20% 1.20%
Advice 0.50% 0.50% 0.50% 0.50%
Administration 0.95% 0.95% 0.95% 0.95%
Other 0.30% 0.30% 0.30% 0.00%
Total RSC 2.95% 2.95% 2.95% 2.65%

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