FP Canada, Institute of Financial Planning release projection assumption guidelines
Uncertainty has been a feature of the Canadian economy recently, but for those who track trends and crunch numbers making projections aims to give some confidence in where things are headed.
FP Canada and the Institute of Financial Planning (formerly the Institut québécois de planification financière (IQPF)) have published their joint 2024 Projection Assumption Guidelines and Addendum for professional financial planners, taking effect from April 30, 2024.
The stats are designed to look beyond the current rate environment and are intended for making decisions for the long term (10+ years) while actual rates of return on fixed-term investments held to maturity and dividend yields on equities should be used by financial planners when looking at durations of less than 10 years.
The organizations stress the importance of financial planners’ own professional judgement when making projections and that the long-term nature of projections is clearly explained to clients, especially in the uncertain and high-interest-rate environment.
"The Projection Assumption Guidelines are established using a variety of trusted and publicly available external data sources, as well as results from a survey of investment and financial services firms," says Julie Seberras, CFP, MBA, FCSI and Chair of the FP Canada Standard Council Standards Panel. "Use of the Projection Assumption Guidelines is strongly encouraged to promote trust and confidence in the financial planner's projections, given their objectivity and basis in reliable sources."
Project assumption guidelines for 2024
Inflation rate: 2.1 %
Return rates:
Short-term 2.4 %
Fixed income 3.4 %
Canadian domestic equities 6.4 %
Foreign developed market equities 6.5 %
Foreign emerging market equities 8.3 %
Year's maximum pensionable earnings (YMPE) or Maximum pensionable earnings (MPE) growth rate
3.1 %
Borrowing rate 4.4%
The figures include some new considerations for 2024 as explained in the release statement:
While stability is an important consideration in setting the Projection Assumption Guidelines, significant changes in expected returns may occur from year to year. To account for this, as of 2024, the market-based expected returns reflected in asset prices are included in Projection Assumption Guidelines.
Asset class yields have historically varied in their ability to predict future asset class returns. Fixed income yields have historically been strongly predictive of 10+ year fixed income returns, Shiller earnings yields, which is the ratio of 10-year smoothed real earnings to market prices, have been moderately predictive of 10+ year future equity returns, and cash yields have had low predictive power over future cash returns.
This information is reflected in the Guidelines which include a market-based expected return figure in the calculation of fixed income and equity expected returns. Due to the stronger observed predictive power in fixed income, a 40% weight has been assigned to the market-based expected return for this asset class. A market-based expected return has not been included in the calculation for cash.
