43.—(1) The rates of interest to be used in calculating the present value of future payments by or to a society shall be no greater than the rates of interest determined from a prudent assessment of the yields on existing assets attributed to the long term business and, to the extent appropriate, the yields which it is expected will be obtained on sums to be invested in the future.
(2) For the purposes of paragraph (1) above, the assumed yield on an asset attributed to the long term business, before any adjustment to take account of the effect of taxation, shall not exceed the yield on that asset calculated in accordance with paragraphs (3) to (7) below, reduced by 2.5 per cent. of that yield.
(3) For the purpose of calculating the yield on an asset—
(a)the asset shall be valued in accordance with Part IV of these Regulations, excluding any provision under which assets may be taken at lower book values for the purposes of an investigation to which section 46 or 47 of the 1992 Act applies; and
(b)where a particular asset is required to be taken into account only to a specified extent by the operation of regulation 32 above, the future income to be taken into account (whether interest, dividends or repayments of capital) shall be correspondingly reduced.
(4) For fixed interest investments (that is to say, investments which are fixed interest securities as defined in regulation 19(1) above) the yield on an asset, subject to paragraph (7) below, shall be that annual rate of interest which, if used to calculate the present value of future payments of interest before the deduction of tax and the present value of repayments of capital, would result in the sum of those amounts being equal to the value of the asset.
(5) For variable interest investments (that is to say, investments which are not fixed interest securities as defined in regulation 19(1) above) that are equity shares or land, the yield on an asset, subject to paragraph (7) below, shall be the ratio to the value of the asset of the income before deduction of tax which would be received in the period of twelve months following the valuation date on the assumption that the asset will be held throughout that period and that the factors which affect income will remain unchanged, so however that account shall be taken of any changes in those factors known to have occurred by the valuation date and in particular, without prejudice to the generality of the foregoing, of—
(a)any known changes in the rental income from property or in dividends on equity shares;
(b)any forecast changes in dividends which have been publicly announced by the valuation date;
(c)the effect of any alterations in capital structure; and
(d)the value (at the most recent date for which it is known at the valuation date) of any determinant of the amount of any future interest payment, the said value being deemed to remain unaltered for all subsequent dates.
(6) For variable interest investments (that is to say, investments which are not fixed interest securities as defined in regulation 19(1) above) other than equity shares or land, the yield on an asset, subject to paragraph (7) below, shall be that annual rate of interest which, if used to calculate the present value of future payments of interest, before deduction of tax, and the present value of repayments of capital, where applicable, would result in the sum of these amounts being equal to the value of the asset, on the assumption that—
(a)the value of any determinant of the amount of the next interest rate payment and capital repayment made during the following twelve months will be the value of that determinant at the most recent date for which it is known at the valuation date;
(b)the amount of future interest payments and capital repayments will take account, where appropriate, of—
(i)the right of either party to have the investment repaid; and
(ii)an assumed yield on other comparable investments made in the future not exceeding an amount determined in accordance with paragraphs (8) to (10) below; and
(c)indices and all other factors which affect future income payments or capital repayment will remain unchanged after the valuation date.
(7) In calculating the yield on an asset under this regulation—
(a)if the asset does not consist of equity shares or land—
(i)a prudent adjustment shall be made to exclude that part of the yield estimated to represent compensation for the risk that the income from the asset might not be maintained or that capital repayments might not be received as they fall due; and
(ii)in making that adjustment, regard shall be had wherever possible to the yields on risk-free investments of a similar term in the same currency;
(b)for assets which are equity shares or land, adjustments to yields shall be made as appropriate to exclude that part, if any, of the yield from each category of asset that is needed to compensation for the risk that the aggregate income from that category of asset, taking one year with another, might not be maintained; for the purposes of this subparagraph, a “category of asset” comprises assets of a similar nature, type and degree of risk.
(8) To the extent that it is necessary to make an assumption about the yields which will be obtained on sums to be invested in future, the yield shall be determined in accordance with paragraphs (9) and (10) below.
(9) Where the liabilities are denominated in sterling, the yield assumed, before any adjustments to take account of the effect of taxation—
(a)on any investment to be made more than three years after the valuation date, shall not exceed the lowest of—
(i)the long term gilt yield current on the valuation date; or
(ii)6 per cent. per annum, increased by one quarter of the excess, if any, of the long term gilt yield current on the valuation date over 6 per cent. per annum; or
(iii)7.5 per cent. per annum,
where “the long term gilt yield” means the annualised equivalent of the 15 year medium coupon yield for United Kingdom Government fixed-interest securities jointly compiled by the Financial Times, the Institute of Actuaries and the Faculty of Actuaries;
(b)on any investment to be made at any time not more than three years after the valuation date shall not exceed the assumed yield determined under paragraph (2) above adjusted linearly over the said three years to the yield determined in accordance with subparagraph (a) above.
(10) Where the liabilities are denominated in currencies other than sterling, the yield shall be determined on assumptions that are as prudent as those made under paragraph (9) above.
(11) In no case shall a rate of interest determined for the purposes of paragraph (1) above exceed the adjusted overall yield on assets calculated as the weighted average of the reduced yields on the individual assets arrived at under paragraph (2) above; and when that weighted average is calculated—
(a)the weight given to each investment shall be its value as an asset determined in accordance with Part IV of these Regulations, excluding any provision under which assets may be taken at lower book values for the purposes of any investigation to which section 46 or 47 of the 1992 Act applies; and
(b)except in relation to the rate of interest used in valuing payments of property linked benefits (as defined in regulation 19(1) above), both the yield and the value of any linked assets (as so defined) shall be omitted from the calculation.
(12) For the purpose of determining the rates of interest to be used in valuing a particular category of contracts the assets may, where appropriate, be notionally apportioned between different categories of contracts.