A guide to how we manage our with-profits fund
(Priciples and practices of financial management)
1. Introduction
We manage the with-profit 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 – may tell 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 return has also been more volatile. 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 be 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. To view the latest copy click
here.
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