Principles and Practices of Financial Management
1. Introduction
This document has been produced in accordance with
chapters 20.2 and 20.3 of the Financial Services
Authority's New Conduct of Business sourcebook. It describes
the Company's principles and practices relating to Forester Life's
with-profits business.
Principles are enduring statements of the overarching standards
we adopt in managing our with-profits fund which describe the
business model we use in meeting our duties to with-profits
policyholders and in responding to longer-term changes in the
business and economic environment.
Practices describe our approach to managing the with-profits
fund and to responding to changes in the business and economic
environment in the shorter-term, which contain sufficient detail to
enable a knowledgeable observer to understand the material risks
and rewards from maintaining a with-profits policy with us.
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2. Background
The ultimate holding company of Forester Life Limited is the
Independent Order of Foresters, a Canadian registered fraternal ben
efits society that operates in the United States, Canada and the
United Kingdom. The group operates under the trading name,
Foresters.
Foresters is an international financial and membership services
organisation with three quaters of a million members and
funds under management of approximately £2.5 billion. As well as
providing a comprehensive range of insurance, pension and
investment products, Foresters gives large scale support to
charitable and community causes. In the UK, this includes over 100
recipients, including the Association of Children's Hospices and
CLIC Sargent. During 2006, Foresters UK charity work involved over
260,000 volunteer hours through its branch network, which helped to
raise funds in excess of £1.3 million.
Foresters' brand promise declares that:
It is our sole mission to serve you in building a stronger,
richer and more meaningful future for you, your family and the
community around you. Because of this unique perspective, you can
be sure that your relationship with us will be more personal and
rewarding than you can get from traditional financial services
providers.
We promise to always provide you with:
Products and services tailored to provide for
your family's financial security and peace of mind;- People who will listen to you, respond to your
needs and provide professional advice to guide you as your family
grows and changes;
- Programmes to enrich the lives of your family,
your community and the children who represent its future.
Foresters was registered in the UK as an insurance society branch
operation of its Canadian parent in 1929. For most of its life, it
has operated as a mutual life office, providing protection and
savings products, as well as charitable support to deserving causes
and additional membership benefits mostly covering illness and
disability.
Activity peaked in the 1960s/70s when the field force numbered
over 300, to satisfy the demand for home-based distribution.
However, sales and membership subsequently declined in the face of
competition, especially from banks and building societies.
Therefore, in the mid 1980s, Foresters launched a new portfolio of
life and investment products in the UK, through its direct sales
force, much more in line with those available from the market. Good
progress was made in terms of new business and membership growth as
well as charitable support, but the process of selling life
products and obligatory Forester membership did not sit comfortably
with regulatory requirements stemming from the Financial Services
Act 1986.
Following discussions with the Department of Trade and Industry
(the Government department responsible at the time for the
regulation of insurance companies), it was decided to restructure
the Foresters UK Branch. This would enable the Branch to pursue its
special membership objectives.
The method of restructuring was to separate the UK Branch from
the regulated insurance business by setting up a new corporate
entity, Forester Life Limited (the “Company”). This company was
incorporated in England and Wales in December 1994 and authorised
by the Department of Trade and Industry to carry on insurance
business on 14 September 1995. It was established to market and
service long-term business, primarily to Foresters members.
Under a Schedule 2C scheme, approved by the High Court on 20
September 1995, the existing long-term insurance business of the
Foresters UK Branch was transferred into the new company, with
effect from 1 October 1995. Within the transfer, existing
with-profits business was “ring-fenced” into a sub-fund,
exclusively for the benefit of the with-profits policyholders.
In respect of shareholder commitment to support the sub-fund,
the Schedule 2C states that:
“Forester Life shall from time to time transfer to the
Segregated Fund from the surplus assets within the remainder of its
long term funds such additional assets as the Appointed Actuary
[now interpreted as the With-Profits Actuary] of Forester Life may
certify to be necessary in order to meet Forester Life's
liabilities to the holders of Transferred With Profit Policies or
the reasonable expectations of those policyholders.”
To date, there have been no such transfers into the fund.
This fund has been closed to new business since the transfer,
although premiums on in-force business continue to be paid into it.
Furthermore, any new, additional or replacement policy issued
because of the exercising of an option will also not be part of the
fund. It is the Company's policy not to allow any alteration to the
terms of a contract.
Because of the closure to new business, the number of policies
remaining in the fund is gradually decreasing. The Schedule 2C
scheme states that when the number of policies in force falls below
5,000 Forester Life shall be released from its obligation to
maintain the fund as a separate account, if it has obtained the
prior written approval of the Financial Services Authority. In
these circumstances, the surplus would be used to determine a scale
of guaranteed bonuses that would apply to all remaining policies in
each subsequent year. It is expected that the number of policies in
force will fall below 5,000 around the year 2027.
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3. Enhanced Asset Shares
When the ring-fenced with-profits fund (“the Fund”) was set up in
1995, assets valued at £128.0 million were transferred into the
fund. This amount was approved by both the Department of Trade and
Industry and an Independent Actuary, who, under the terms of the
Schedule 2C arrangement, was required to consider the security and
benefit expectations of the with-profits policyholders.
These transferred assets exceeded the total asset shares of the
policies by £10.5 million. (Asset shares are the premiums paid by
the policyholder, less deductions for expenses, tax and other
charges accumulated at the rate of investment return achieved). As
the whole of the assets are reserved for policyholders, Forester
Life has developed the concept of ‘enhanced' asset shares. For
enhanced asset shares, the investment return has been increased to
ensure that the total enhanced asset shares are equal to the total
assets of the Fund, including the aforementioned £10.5 million.
Additionally, the enhanced asset share is always smoothed when
calculating claim values.
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4. Principles of Financial
Management
The following principles are not expected to change often. Should
there be any changes, the Company will send details, to all
with-profits policyholders, at least three months in advance of the
effective date.
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4.1. The amount payable under a with-profits
policy
The aim of the method used to determine the amount payable under a
with-profits policy is that the entire assets of the Fund are
distributed to policyholders over the remaining term of the
liabilities. Payouts are determined using a proportion of enhanced
asset shares, subject to any guaranteed claim values and to a
minimum surrender value basis the Company maintains for policies
without guaranteed surrender values.
The proportion may vary over time, by type of claim and by
policy type. An unusual feature of Forester Life's portfolio is
that a large number of policies have guaranteed surrender values.
The effect of guaranteed claim values is that some policies will
receive more than 100% of enhanced asset share. Consequently, other
policies may receive less than 100%. Overall, in the long term, the
total amount paid to claimants will be equal to 100% of enhanced
asset share.
Enhanced asset shares are calculated monthly, separately for
each policy, using a proprietary modelling package. This model
contains all historical data relevant to the calculation of
enhanced asset shares and is updated monthly. Where actual
historical experience is unavailable, the Company will use an
appropriate approximation.
Changes to the method, assumptions or parameters will be not be
made without the prior approval of the Forester Life Board. The
Board will receive advice from the With-Profits Actuary. In order
to treat policyholders fairly, the Company will not change the
historical assumptions and methods unless it can be clearly
demonstrated that a significant class of policyholders has been
materially disadvantaged.
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4.2. Annual bonus rates
The aim in setting annual bonus rates is to set rates that would be
level in stable economic conditions. These rates are normally
determined annually. In changing economic circumstances, the
Company may review them more frequently, as well as overriding the
constraints set out in 5.2 below.
For policies effected before 1985, annual bonus rates for each
product vary by age at entry and duration in force. For policies
effected subsequently, the annual bonus rates vary only by product.
In view of the fact that the Fund is closed to new business, the
Company cannot see any circumstances under which a new bonus series
would be necessary.
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4.3. Final bonus rates
Final bonus rates will be set such that the minimum payout on
death, maturity and surrender will be as close to 100% of the
enhanced asset shares as possible. These rates will allow for the
fact that for some policies future guaranteed claim values may be
in excess of 100% of enhanced asset share. Hence, for other
policies the minimum payout will be less than 100% of enhanced
asset share. In changing economic circumstances, these guaranteed
claim values may become more, or less, onerous. Consequently, the
minimum proportion of the enhanced asset share paid on claim may
fluctuate.
Claim values are calculated as a percentage of enhanced asset
shares. Separate percentages may be used for death, maturity and
surrender. The percentages may vary by product. The Company will
normally determine the percentages annually, although it may review
them more frequently. Any change in the percentages will be subject
to rounding as well as upper and lower limits.
Enhanced asset shares will be calculated monthly, separately for
each policy, and hence final bonus rates will be calculated monthly
using these enhanced asset shares and the percentages determined
above.
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4.4. Smoothing the value of a with-profits
policy
The aim of the smoothing policy is to ensure that claim values are
not immediately subject to significant short-term fluctuations in
the value of assets.
Smoothing is applied irrespective of type of claim. There is no
limit to the cost of smoothing (that is, the extent to which the
amount actually payable under a with-profits policy diverges from
the non-smoothed enhanced asset share, except where due to
applicable guarantees), although due to the method used, the cost
will be neutral over the long-term. Any divergences between
smoothed and unsmoothed claim values will ultimately be reflected
in enhanced or reduced final bonus rates.
For policies without guaranteed surrender values, the Company
will review the minimum surrender value basis, referred to in
section 4.1, periodically. Changes may be made in the basis to
reflect not only changes in asset shares, but also the Company's
long-term view of investment returns.
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4.5. Investment strategy
The aim of the investment strategy is to secure the guaranteed
liabilities of the Fund with a high degree of confidence and,
concurrently, to outperform the Fund's total benchmark (see below).
The investment style is that of active portfolio management,
seeking superior investment returns by way of income and capital
appreciation.
The Company determines benchmark proportions of the total assets
for each different type of asset, as well as a suitable benchmark
index. The proportion is subject to minimum and maximum limits. The
Fund's total benchmark is calculated by multiplying the benchmark
proportion by the return on the benchmark index, for each type of
asset, and then summing the products.
Within the fixed interest asset class, there are also minimum
and maximum proportions of total assets for stocks with different
credit ratings. Some stocks with lower credit ratings are also
subject to a maximum outstanding term.
Limits will not be changed without the prior approval of the
Forester Life Board. The Board will receive advice from the
With-Profits Actuary, as well as the Investment Manager. In order
to treat policyholders fairly, the Company will not change the
limits unless it believes that the changes will be beneficial to
the policyholders, without significantly impairing their
security.
A proportion of the liabilities in respect of guaranteed ben
efits are secured by investing in appropriate fixed interest
securities. These securities, known as “matched” assets, will have
an average duration similar to that of the liabilities. The
proportion will depend upon the relationship between the value of
the guaranteed liabilities, assessed using the Company's best
estimates of future experience, and the total market value of the
assets of the Fund.
The investment strategy is independent of any assets outside of
the Fund. The Fund does not have any assets that would not be
traded because of their importance to Forester Life.
While the Company does not currently use derivative instruments,
it does not rule out their appropriate utilisation at some future
date. Any use of such instruments would be subject to the prior
approval of the Forester Life Board and would be subject to strict
controls and supervision.
The investment strategy applies to the whole Fund and across all
generations of policyholders.
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4.6. Business risk
The Fund would only undertake a business risk that involves the
with-profits business.
Any risk involving the with-profits business would be borne, in
the first instance, by the Fund. Examples of this include the
exposure to maintaining with-profit policies and guarantee and
smoothing costs. The rewards and losses from these risks will be
borne by the with-profits policyholders. These topics are dealt
with in more detail in sections 4.3, 4.4 and 4.7.
Compensation costs arising from the with-profits business would
be borne by the Fund.
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4.7. Charges and expenses
The Schedule 2C scheme states that:
“The expense charges that may be charged to the Fund shall be no
more than the appropriate proportion of the total expense charges
incurred by Forester Life, as certified by the With-Profits
Actuary, and any additional expenses as may be deemed appropriate
by the With-Profits Actuary.
The Company may from time to time and at any time charge the
Fund such special levies (including, for example, a levy to the
Policyholders' Protection Board) and compensation payments due to
policyholders in relation to the marketing or administration of
with-profit policies as are agreed by the With Profits
Actuary.”
The aim of the Company's approach to applying charges and
apportioning expenses to with-profits policyholders is to apply
such charges and expenses in an equitable manner, with due
consideration to the nature of the item. The need to comply with
the Schedule 2C Scheme would be paramount.
In order to treat all its policyholders fairly, the Company will
not change the basis unless it can be clearly demonstrated that a
significant class of policyholders has been or will be materially
disadvantaged.
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4.8. Management of the inherited
estate
The inherited estate is being distributed
to policyholders through the use of enhanced asset shares and will
reduce as the Fund diminishes. It will reduce to zero as the number
of policies and the Fund reduces to zero, subject to the
termination of the fund as outlined at the end of Section 2 above.
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4.9. Volumes of new business and arrangements
on stopping taking new business
The Fund has been closed to new business since 1995. Therefore, the
arrangements for reviewing the limits on the quantity and type of
new with-profits business and the anticipated actions to be taken
on ceasing to write new business do not apply to the Company.
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4.10. Equity between the with-profits fund
and shareholders
Under the Schedule 2C scheme, assets may only be transferred out of
the Fund in order to meet expenses, special levies and compensation
payments relating to with-profits policyholders, tax, reinsurance
and claim payments to policyholders. Assets may also be disposed of
on an arm's length commercial terms basis.
Therefore, the with-profits policyholders receive 100% of the
surpluses within the fund.
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5. Practices of Financial
Management
The following practices are expected to change as the Company's
circumstances and the business environment change. Should there be
any changes, the Company will send details, to all with-profits
policyholders. Although this notice may be in arrears, it will be
within a reasonable time period from the effective date.
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5.1. The amount payable under a with-profits
policy
For all policies, the method that the Company uses to determine the
amount payable under a with-profits policy is the higher of:
a) a proportion of the enhanced asset share; and
b) the guaranteed claim value; and
c) for surrenders of policies on which there is no guaranteed
surrender value, the value calculated on a minimum surrender value
basis maintained by the Company.
The proportion of the enhanced asset share is discussed in sections
4.1 and 4.3, above.
The Company sets target ranges for maturity and surrender
payments. These target ranges apply to all such payments, except
those that cannot reasonably be compared with an asset share. For
both types of claim, the lower and upper limits of the range are
50% of unsmoothed asset share and 150% of unsmoothed asset share.
The amount of the payment to be used for the comparison with the
unsmoothed asset share is the proportion of enhanced asset share
payable on death or maturity (as in a) above), irrespective of the
type of claim.
The enhanced asset share at the end of each month is calculated for
each policy as follows:
| |
Enhanced asset share brought forward at the beginning of the
month |
| plus |
premiums received |
| plus |
adjusted investment return |
| minus |
charge for death claims |
| minus |
charge for expenses and commission |
| minus |
charge for tax |
| minus |
any annual bonuses surrendered or paid out, either in the form
of cash or placed on deposit with the Company. |
Before 1995, a further deduction was made for the cost of
additional benefits, offered by the Independent Order of Foresters,
known as "fraternal benefits".
The investment return has been adjusted so that the total of the
enhanced asset shares equals the value of the Fund. The adjustment
is constant for all years before 1995, when enhanced asset shares
were introduced. Subsequent adjustments are made at least
annually.
There is no explicit charge for guaranteed surrender values,
including surrender values that are not explicitly guaranteed, but
calculated from a formula. These are allowed for by paying out less
than 100% of the enhanced asset share on claim.
The investment return allocated to asset shares is that earned
on the entire Fund, although for years prior to1995 appropriate
indices have been used. No specific policy or class of policy has a
separate investment return calculated from a subset of the
Fund.
The charge for mortality is based on standard actuarial
mortality tables, adjusted to reflect the Company's experience. The
annual charge for expenses is the total amount charged to the Fund,
divided by the average number of policies in force.
The Schedule 2C scheme states the following in respect of
taxation:
“4.6. Deductions in respect of tax arising after the Effective
Date shall be charged to the Segregated Fund as determined by the
Appointed Actuary [now interpreted as the With-Profits Actuary] of
Forester Life and as if all appropriate allowances and reliefs that
would in such circumstances have been available had been claimed
and received.”
Overall, the Fund is subject to tax on its investment income and
chargeable gains, with relief for expenses of management and
charges on income (the “I minus E” basis). Within the enhanced
asset share calculation, the tax rates used are those applicable to
Life Assurance business, with the following exceptions:
a) the rate of tax on unrealised gains, for a particular asset
class, is set equal to that on realised gains, and
b) the rate of tax on realised and unrealised gains, for a
particular asset class, may differ from the current rate for Life
Assurance business, to allow for a deferral of tax payable or
reclaimable.
The same parameters are used for all policies of the Fund in the
individual calculation of enhanced asset shares.
The method of determining enhanced asset shares is fully
documented. The model contains all historical data relevant to the
calculation of enhanced asset shares and is updated monthly.
If changes to the methods, parameters or assumptions were
required, then the With Profits Actuary would make a
recommendation. These changes would then be discussed and approved
by the Finance Committee and the Management Committee before being
submitted to the Board of Directors for final approval.
There is no explicit charge for guaranteed surrender values,
which are provided for as described in 5.3 below. Other risks will
be charged for in a way that does not materially disadvantage a
significant class of policyholders.
At least once a year, the Company determines whether the Fund
has an excess surplus, as defined in rule 6.12.58 of the Financial
Services Glossary of definitions. The factors likely to be
regarded as relevant to address policyholders' interests and
security when determining excess surplus are as
follows:
- The Fund is closed to new business;
- The shareholder commitment to support the Fund
under the Schedule 2C scheme, as described in section 2; and
- The ratio of the present value of the guaranteed
liabilities to the market value of the assets of the fund (see
section 5.5).
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5.2. Annual bonus rates
The percentage change in annual bonus rates, for each product, is
that required in order to ensure that the present value of the
claim payouts (excluding any final bonus), expenses and tax less
premiums is equal to 100% of the enhanced asset share for that
product. The present value will use the Company's best estimates of
future expense, tax, mortality and other decrements. The discount
rate will be equal to the overall yield on the Fund's investments
less a margin to allow for tax and guarantees.
The overall yield is calculated as a weighted average of the
yield on each asset, using the market values as the weights. The
yield is determined using the Financial Services Authority's rules
in respect of calculating the maximum yield on the assets, as used
in determining the rate of interest to be used in calculating the
present value of future payments by or to an insurer.
The Company's best estimates of future experience will obviously
be influenced by recent economic experience, although expected
changes in economic conditions will be taken into account.
Annual bonus rates are currently reset once a year. The current
maximum reduction in bonus rates is 20%. The current maximum
increase in bonus rates is 20%, although for policies with
guaranteed surrender values, the current maximum increase is 0%.
This latter figure enables the Fund to manage the amount of
guaranteed liabilities and pursue a more active investment
policy.
Interim bonus rates will be at the same rates as the latest
declared annual bonus rates.
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5.3. Final bonus rates
The Company's approach to setting final bonus rates is to
determine, annually, the percentages of enhanced asset share
payable on claim and then apply these percentages to each monthly
calculation of the enhanced asset share
The percentages of the enhanced asset share are those required
in order to ensure that the present value of the claim payouts,
expenses and tax less premiums is equal to 100% of the total
enhanced asset share, for all policies. The present value will use
the Company's best estimates of future expense, tax, mortality and
other decrements. The discount rate will be equal to the Company's
best estimate of future investment returns. The percentage changes
in annual bonus rates used will be those determined in the previous
section. However, if these percentage changes are subject to an
upper or lower limit, then the future percentage changes (subject
to the upper and lower limits) will also be determined using the
annual bonus rate methodology and these changes incorporated into
the current calculation.
The Company's best estimates of future experience will obviously
be influenced by recent economic experience, although expected
changes in economic conditions will be taken into account.
Policies that surrender may also receive a final bonus in a
similar way to other claims, although the Company generally uses a
larger percentage of the enhanced asset share for policies that
claim due to death or maturity compared to those that surrender.
The current maximum differentials are shown in the following
table:
| Endowment assurances |
Team assurances |
Whole-life assurances (*) |
Maximum differential |
| Prior to 15 years before maturity |
Prior to 15 years before expiry |
Before attained age 70 |
15% |
| Last 15 years |
Last 15 years |
From attained age 70 to attained age 85 |
15% reduced by one-one hundred and eightieth for each complete
month |
| |
|
From attained age 85 |
Nil |
(*) Attained age is defined as the age nearest birthday at entry
plus years and part-years since commencement. For joint-life
policies, the age nearest birthday at entry is the joint equivalent
age used in calculating the premium.
The percentages of enhanced asset share payable on death and
maturity will not exceed 100% unless the differential is zero for
all policies.
In a rapidly changing economic environment, the Company may set
the percentages of enhanced asset share payable on claim more
frequently than annually. Enhanced asset shares are calculated
monthly.
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5.4. Smoothing the value of a with-profits
policy
A smoothing formula is used to smooth the investment return, when
calculating enhanced asset shares. The smoothed investment return
for a month is calculated from two indices, representing the actual
and smoothed after-tax investment returns on the Fund's assets. The
smoothed investment return index for the current month is
calculated by taking a weighted average of
a) the index of actual returns for the month, and
b) the index of smoothed returns for the previous month plus one
month’s expected rate of long-term growth.
The weights used in the above formula and the expected rate of
long-term growth are reviewed regularly and may be changed at the
Company's discretion. Any changes will only apply to future
smoothed index values.
Investment returns before 1995 are not smoothed.
The smoothing formula is applied to all policies equally and
individually, as well as to all types of claim.
The Company expects smoothing to be neutral during periods of
relatively stable investment returns. However, in times of rapidly
changing asset values this will not be true. Although there is no
overall limit to the accumulated cost of, or excess from,
smoothing, the Company does not expect the cost or excess to be
significant. Notwithstanding, over the longer term, the Company
will make payments, in aggregate, equal to 100% of unsmoothed asset
share.
The Company does not place limits on the changes in the level of
claim payments from one period to another, other than those
implicitly imposed by the use of the smoothing formula.
Partial payments under policies, i.e. reversionary bonus
payments taken as cash payments or subsequently surrendered, are
included in the calculation of the enhanced asset share.
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5.5. Investment strategy
The strategy is independent of any assets held by the Company
outside the Fund.
The degree of matching between the Fund's assets and the
liabilities to the with-profit policyholders depends upon the ratio
of the present value of the guaranteed liabilities to the market
value of the assets of the Fund. The guaranteed liabilities are
defined as the present value of the claim payouts (excluding any
future annual and final bonuses), expenses and tax less premiums.
The present value will use the Company's best estimates of future
expense, tax, mortality and other decrements. The discount rate
will be the redemption yield on the matched assets (see next
paragraph).
A proportion of the guaranteed liabilities are invested in fixed
interest securities. This proportion is shown in the following
table and the assets, known as the “matched assets”, have a
duration equal to that of the guaranteed liabilities plus or minus
2 years.
| Ratio of guaranteed liabilities to Fund |
Up to 80% |
85% |
90% |
95% |
100% |
| Proportion in matched assets |
60% |
70% |
80% |
90% |
100% |
Calculations to determine the surplus and the mean term of the
liabilities will normally be carried out annually, although the
Company may do so more frequently. If, because of these
calculations, the Company finds that the amount of assets to be
invested in fixed interest securities needs to be increased or the
mean term of these assets needs to be adjusted, it will do so
within three months of the effective date of the calculation.
The investment strategy of the Fund is reviewed annually. This
would include calculations to determine the surplus and the mean
term of the liabilities.
The current minimum and maximum proportions of the Fund that may
be invested in different asset classes are shown in the following
table. These assets include the matched assets referred to above.
There would normally be no investments in assets not shown in the
table, for example, direct investment in property.
| Asset Class |
Minimum |
Maximum |
| Fixed interest |
48% |
58% |
| Index-linked gilts |
0% |
10% |
| Equities, including Real Estate Investment Trusts
(*) |
35% |
45% |
| Cash |
0% |
7% |
(*) The minimum and maximum proportions for Real Estate Investment
Trusts are 0%
and 10%, respectively.
Assets would normally be denominated in sterling and listed on a
recognised stock exchange operating in the European Union or the
Organisation for Economic Co-operation and Development (OECD)
For fixed interest investments, the minimum and maximum proportions
of the asset class that may be invested in different credit
ratings, together with the maximum outstanding term of the
securities is as follows:
| Credit Rating |
Minimum |
Maximum |
Maximum term |
| UK Government securities |
30% |
100% |
None |
| AAA |
0% |
50% |
None |
| AA |
0% |
30% |
None |
| A |
0% |
20% |
10 years |
| BBB |
0% |
10% |
5 years |
Assets that fall outside the limits of the above table will
normally be sold within 90 days, where feasible.
In addition to the above, the Fund’s assets will be well spread by
asset class, industry sector, issuer and, where relevant,
counterparty risk.
Before investing in new or novel investment instruments, a proposal
would be discussed and approved by the Investment Committee and the
Management Committee. The proposal would then be submitted to the
Board of Directors for final approval.
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5.6. Business risk
The Fund would only undertake a business risk that involves the
with-profits business.
In respect of residual risks, such as maintaining with-profit
policies and guarantee and smoothing costs, these are covered in
more detail in sections 5.3, 5.4 and 5.7. In particular, the cost
of maintaining with-profit policies depends on the total
maintenance expenses of the Company and the total number of
policies in force. The Company actively monitors both expenses and
the number of policies in force, to ensure that expenses are
controlled. The aim is for maintenance expenses per policy to rise
in line with consumer price inflation.
Residual risks are pooled among all with-profit
policyholders.
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5.7. Charges and expenses
The Company's total maintenance expenses for a year are apportioned
to all policies in proportion to the average weighted number of
policies in force during the year. Maintenance expenses exclude
renewal commission, but include all investment expenses except
those directly related to the sale or purchase of an investment,
such as commission and stamp duty. The expense for each policy will
be used in the enhanced asset share calculation.
The weightings used in the calculation reflect the relative
amount of resources used in maintaining each group of products. All
with-profits policies have the same weighting.
Renewal commission is apportioned between the Fund and
non-profit policies in proportion to premiums.
Direct investment expenses, such as commission and stamp duty,
are deducted from the proceeds of sales or added to the cost of the
investment, as appropriate.
Charges incurred through investment in collective investment
schemes would be borne by the Fund, although any charges incurred
by investment in a Foresters controlled collective investment
scheme would be reduced to eliminate the effect of
double-charging.
The Company will not charge expenses to the Fund at an amount
other than cost.
Any change in basis, including any change in the weightings used
for apportioning maintenance expenses, would need to be approved by
the Forester Life Board. The change would also require the approval
of the With Profits Actuary.
The Company will review the arrangements under which it obtains
out-sourced services at least once in every three years. Any
agreement would be in force for an initial period of three years
and continue thereafter until the expiry of not less than six
months' notice of termination, expiring on 31 December. Currently,
Forester Holdings (Europe) Limited, a member of the Foresters,
provides all support services necessary for the Company to operate
efficiently and economically in carrying out its business.
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5.8. Management of the inherited
estate
The inherited estate is gradually being distributed to
policyholders in the form of increased claim values. Consequently,
the investment strategy for the inherited estate is the same as for
the remainder of the Fund.
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5.9. Volumes of new business and arrangements
on stopping taking new business
The Fund has been closed to new business since 1995.
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5.10. Equity between the with-profits fund
and shareholders
The with-profits policyholders receive 100% of the surpluses within
the fund.
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6. Governance
In order to ensure that the Company complies with, maintains and
records the principles and practices set out in this document, it
has established a With-Profits Committee. The Committee is
comprised of the non-executive UK directors of the Company.
The Committee will, at least once in every 12 months, make a
judgement as to the compliance of the Company with the principles
and practices and how any competing or conflicting rights and
interests of policyholders have been addressed.
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7. Questions
If you have any questions regarding this document, please write to
the following:
Mr Euan Allison
Managing Director
Forester Life Limited
Foresters House
Cromwell Avenue
Bromley
BR2 9BF
E-mail: Euan.Allison@Foresters.co.uk
Although the Company will do its best to answer all questions,
please note that some information may be commercially sensitive or
confidential and hence cannot be disclosed.
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