I find this question and answer confusing, can anyone shed some light on it? Question: A unitised with-profits contract has a capital unit design with an extra fund management charge of 6%. It guarantees the growth on existing units (both accumulation and capital) to be at least 2% pa. Why is there potentially a problem on the capital units? Answer: The office needs the capital unit price to grow at 6% pa less than the accumulation unit price in order to take its required charges. If the discretionary regular bonus (in excess of the guarantee) on accumulation units falls below 6%, it will not be able to do so.
The fund management charge (FMC) is often taken by reducing the unit price. So if there were no bonuses or guaranteed growth we would expect to see the capital unit price fall by 6% for the extra FMC. In practice the capital unit price may not fall by this much because guaranteed growth and bonuses may be added. However, the capital unit price must always grow by 6% less than the accumulation unit price to reflect the extra charge. The capital units are guaranteed to grow at 2%, so the accumulation units must grow by at least 8% to maintain the 6% gap. 8% growth can be achieved by 2% guaranteed growth and a further 6% discretionary bonus. Best wishes Mark
