A guide to how we manage our with-profits fund
(Principles and practices of financial management)
1. Introduction
We manage the with-profits fund in which you are a planholder. The
investments in this fund are kept separate from our other
investments. Furthermore, 100% of the profits go to policyholders
and nothing to our shareholders.
We manage the fund by following:
* Guiding principles; and
* Principles and Practices of Financial Management (PPFM).
What are the guiding principles?
Our guiding principles are the philosophy on which we base our
management of the fund.
* We will manage our entire business in a lawful, sound and
prudent manner. We will also
manage the fund to make sure we can pay all guarantees and aim
to give fair treatment to all our customers.
* In good years, we will hold back some of the profits made by
the fund and use them to pay
out more in poorer years. This is known as ‘smoothing’. However,
smoothing will not stop
what we pay out from getting smaller if investment returns
remain low over several years.
* If we think there’s not enough money in the with-profits fund
to enable us to meet our
commitments to the policyholders, we may add some money –
temporarily or permanently – from our other funds. We will not use
the with-profits fund to support our other funds or other companies
in our group.
* We will aim to make sure that all the money in the fund is
distributed over the remaining lifetime of the plans in the
fund.
* Normally we won’t change the approach we use when managing the
fund. But we might
consider making such a change if, for example, we need to:
* protect the financial position of the fund in
adverse circumstances;
* improve the accuracy of our methods;
* correct any major errors;
* ensure we follow changes in taxation or
regulation guidance; or
* deal with unforeseen events.
What is the PPFM?
The PPFM is a document describing how we run our with-profits
business. It is split into Principles and Practices.
Principles are high-level statements that describe our long-term
approach to managing the fund. Practices are more specific
statements that flow from the Principles. These describe how we
manage the fund.
We don’t expect to change the Principles often, but will do so
if we think they could lead to planholders being treated unfairly
or if they could stop us managing the fund properly. We must tell
you at least three months in advance if changes are to happen. Then
you will know how our long-term approach will be changing.
Practices change more often because we need to respond to how
the economy is doing, new rules and regulations, and new methods in
the life insurance industry. We will publish any changes to
Practices on our website and tell you about them in our next letter
to you. Then you will know how our approach has changed.
The PPFM is a long and detailed document. So this guide sets
outs only its key points.
The Principles are marked in the guide by a red square
(
)
To obtain our current PPFM please click
here.
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2. What are enhanced asset shares?
* Asset share is a calculation that determines how much each
plan has contributed to the fund and how much profit or loss the
plan has made. We calculate asset share by:
* looking at the premiums the plan has paid to the
fund;
* making deductions to cover our expenses, tax and
the costs of providing benefits to the
plan; and
* adding the investment returns made by the
plan.
* Where the total asset share of all the policies is less than
the value of the fund, we add on
additional investment returns, usually annually.
We call this increased asset share an enhanced asset
share.
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3. How we decide how much you get
* How much you get, and when, depends on the type of
with-profits plan you have. There are
three main types of with-profits plan in the fund:
* with-profits whole-life;
* with-profits term assurances; and
* with-profits endowments.
Your plan policy – which is a legal document setting out our
obligations and yours – tells
you which one you have.
If you have lost your plan policy, or are unsure which type you
have, please phone us on
08457 990011.
* Under your with-profits plan, in return for your premiums, we
pay a guaranteed lump-sum
payment (called a sum assured).
We aim to increase the guaranteed amount by adding bonuses.
* When we pay the guaranteed amount (and bonuses) will depend
upon the type of plan you
have.
* If you have a whole-life plan then the guaranteed
amount will be paid on your death.
* If you have a term assurance then the guaranteed
amount will only be paid if you die before the end of the plan’s
term.
* If you have an endowment then the guaranteed
amount will be paid at the end of the plan’s term or your earlier
death.
* Different amounts may be paid out on other events, such as
your partner’s death. There may also be different amounts depending
on when you die. Your plan policy will tell you what all these
amounts are.
* If you leave your plan early, you may be entitled to a payment
(called a surrender value). This payment will usually be less than
the guaranteed amount and bonuses.
Some plans have guaranteed surrender values. This means that the
amount we pay out on
surrender will never be less than the amount shown in your plan
policy.
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4. How we decide bonuses
We normally announce bonuses once a year. When
deciding whether we should pay bonuses, we look at the current
financial position of the fund and forecast how we expect this to
change in the future. If we think profits are not, or will not be,
enough, we may not pay any bonuses.
We also look at the level of guaranteed benefits on plans compared
to the enhanced asset
share of plans.
If the guaranteed benefits for your plan are higher than its
enhanced asset share, bonuses
may be small or nothing.
We pay different bonuses
for different groups of plans to reflect the nature of the
plans.
Annual bonuses
* We usually pay annual bonuses once a year to
with-profits plans.
Annual bonuses are set by
taking into account what the fund can afford to pay now and in
the future. This approach enables us to make sure we can meet
all guaranteed amounts
when they have to be paid.
We aim to not vary too
much the amount of annual bonuses from year to year.
Once an annual bonus has
been added, it increases the guaranteed amount on your plan and so
cannot be taken away.
Interim bonuses
If you make a claim between dates on which we’ve
paid an annual bonus, we will add an
interim bonus too.This makes up for some, or
all, of the expected annual bonus earned since the last one.
* Interim bonuses will be paid at the same rates as the last
annual bonus.
Final bonuses
* Final (or terminal) bonuses may be paid to plans when they end.
We pay them to make sure that what you get back fairly reflects
your enhanced asset share; if the existing bonuses we have paid to
you have not already done this.
* In recent years, we have not paid a final bonus on many plans
due to stock market falls and
the general fall in interest rates.
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5. How we decide how much you get if you leave your plan
early
If you leave your plan early (surrender your
plan), we work out how much to pay you with
the aim of being fair to planholders leaving the fund and those
staying. If there is any conflict between the interests of
planholders who are leaving and those who are staying, we
normally give priority to those staying.
* We work out your surrender value by comparing a proportion of
your plan’s enhanced asset
share with your minimum surrender value. We then pay you the
higher amount.
If your plan has a guaranteed surrender value, then that will be
your minimum surrender
value. If it does not, we have a basis for calculating minimum
surrender values. We review
this basis periodically, to ensure it is appropriate.
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6. How we cushion you from the ups and downs of the
stockmarket
* Historically, the value of shares and property has risen more
than government bonds and
cash over long periods, such as 20 years. However, the returns
from shares and property are subject to a greater degree of
investment risk. One year an investment may do very well, the next
it could fall in value.
We aim to cushion investors against heavy falls by adding bonuses.
Instead of adding big
bonuses in good years and small or no bonuses in bad years, we
aim to smooth out the
returns. So we hold back some of the profit earned during good
years and then release it as
bonuses when returns have been poorer or seem likely to get
poorer. This ‘smoothing’ is one of the main ways in which the
with-profits fund aims to be fair to all investors. It also
keeps
the fund financially strong.
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7. How we invest the with-profits fund
We decide what to invest in and how much to
invest by looking at:
* the fund’s current and future financial position
and the need to make sure there’s enough
money in it;
* the level of guarantees in the fund; and
* planholders’ investment expectations.
* The fund invests in a mix of equities (shares), fixed-interest
type assets (such as
government bonds and corporate bonds) and cash. These
different investment types are
called assets.
We control the risks that
come with investing by choosing assets of good quality and by
setting limits on the amounts we invest in any one asset and on
our exposure to any third
party.
* We review our investment strategy at least annually but may
need to do so more often if
market conditions change quickly.
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8. How we minimise risks to the fund
The fund is exposed to a
number of risks. Our biggest risks come from the need to pay
all
guarantees when they are due and the
possibility of falls in share values.
We aim to minimise risks
to the fund and our business. We do this by, for example, changing
our investment strategy.
Except for normal levels
of investment risk resulting from managing the fund’s assets,
the
fund will not take on any significant new
risks. In particular, we’ve closed the fund to all new
business.
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9. How we decide charges and expenses
All charges for
administration, expenses and commission are based on what we
calculate to the fund’s fair share of the costs we incur.
* The cost of investment management is based
on what we calculate to be the fair share of our total investment
management costs. This calculation takes into account the fund’s
investment activity (i.e. the costs of buying and selling
assets).
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10. What the estate is and how we use it
* Some with-profits firms have what is known as an “estate”.
This is a pot of money that
provides working capital for the fund and supports its
operation. We build up this pot from
profits that are not needed to support the fund’s current and
future liabilities.
As this is a closed fund,
we aim to ensure a fair and orderly distribution of all the
fund’s
assets, including the estate, over the
remaining lifetime of the policies in force in the fund. We are
doing this by the use of enhanced asset shares.
By taking this approach, we expect the estate
to run down to zero over time, broadly in line
with the decrease in the fund.
* When the number of policies falls below 5,000, we may convert
the remaining policies in the fund so that they all receive fixed
bonuses. We would then merge the with-profits fund with our other
funds.
* We do not know yet when this might occur, although it is not
expected for many years. We
will let planholders know as soon as a decision has been made.
Any decision would have to satisfy any relevant legal and
regulatory requirements prevailing at the time.
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11. How to find out more
You can get a more detailed technical description of how we
manage the with-profits fund in our PPFM. You or your adviser can
ask us for a copy, please write to:
The Policy Administration Manager
Foresters House
Cromwell Avenue
Bromley
BR2 9BF
E-mail: adminteam@foresters.co.uk
Alternatively, you can access it here.
As part of our commitment to keeping you informed we will send
you an update about the fund with your yearly bonus statement.
We produce an annual report
showing how we have complied with the PPFM.
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