Reduction in yield (RIY) and PRIIPs cost tables
The PRIIPs measure of charges expressed as points of annual return lost: the gap between the product's return before and after costs, shown in two tables of the KID.
Where a UCITS prospectus shows charges as a percentage of assets, the KID asks what costs take away from return. For reduction in yield (RIY), the standard 10,000 euro investment is projected over the recommended holding period, once with all costs, once without, and the difference between the two annual rates of return is taken. The rules sit in Annex VI of Delegated Regulation (EU) 2017/653, amended by Delegated Regulation (EU) 2021/2268, which has applied since January 1, 2023. The first table, "costs over time," gives total costs in euros and their annual impact as a percentage, at one year and at the recommended holding period; since 2023 the KID also states the expected average annual return before and after costs. The second, "composition of costs," sorts charges into one-off costs (entry, exit), ongoing costs (management fees and other administrative or operating costs, transaction costs) and incidental costs (performance fees, carried interest). Transaction costs are measured by the slippage method, and figures diverge most there from one manufacturer to the next. For a multi-option life insurance contract, the RIY combines the contract's charges with those of each unit-linked fund, hence ranges rather than a single figure. An entry charge weighs heavily on a one-year holding and almost nothing over fifteen years: the RIY spreads it over the period, which the saver who leaves early does not see.
Take 10,000 euros, gross return of 5% a year, recommended holding period of five years, entry charge of 3% and ongoing charges of 1.5% a year on value. Without costs, the final capital is 10,000 × 1.05^5 = 12,762.82 euros. With costs, it is 9,700 × (1.05 × 0.985)^5 = 9,700 × 1.03425^5 = 11,478.88 euros, a net return of (11,478.88 / 10,000)^(1/5) − 1 = 2.80% a year. The RIY is 5% − 2.80% = 2.20 points a year, and total costs 12,762.82 − 11,478.88 = 1,283.94 euros. Without the entry charge, net return would be 3.43%: entry accounts for 3.43 − 2.80 = 0.63 point, ongoing charges for 1.57 points.
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