The with-profits concept is used across a broad
spectrum of products, including annuities, pensions and savings
products (including bonds and endowments). Consumers have a choice
of a wide range of savings products including:
bank deposits, generally assumed
to be safer, but with a lower return;
with-profits which typically gives
access to higher return investments, often coupled with a life
insurance element, while reducing the impact of market volatility
by giving a smoothed return to consumers;
unit-linked products (or direct investment
for example in equities) which are fully exposed to the market.
Policyholders share in the profits of the fund
via bonuses. There are two main types of bonuses.
Prudential expects to add regular (or reversionary)
bonuses to policies each year. Once added, these bonuses cannot
be removed and capital is required to support the increased level
Final (or terminal) bonuses are additional bonuses
which Prudential would expect to pay when the policy pays out.
Final bonuses vary in line with investment performance over the
life of a policy.
Prudential policyholders receive 90 per cent
of any profits distributed from the with-profits funds, through
the addition of bonuses to their policies. Shareholders receive
the remaining 10%.
Policyholder returns are generally smoothed
to protect against market volatility. Smoothing occurs when a
proportion of the investment return during good performance years
is held back to ensure that a reasonable return can be paid to
policyholders during years of poorer performance. This provides
smoothed increases in the value of the policy as opposed to the
fluctuations that would occur if a policy reflected the volatile
movements in the prices of stocks and shares and property. This
smoothing is particularly helpful to small investors.
Benefits under Prudential with-profits policies
are set by reference to what are known as "asset shares".
To meet our objectives for fair smoothed pay-out
values we target them on the asset shares of a representative
set of sample policies.
The asset share of a sample policy is a fair
value of the assets that have been accumulated to back the policy,
and is calculated by accumulating the premiums paid (less allowance
for expenses and charges) at the actual rates of investment return
earned on the underlying assets in the fund over the lifetime
of the policy.
Prudential aims to pay 100% of asset shares
Smoothing is applied so that the claim values
actually paid (which include the accrued annual bonuses and the
terminal bonus) change only gradually over time. Prudential's
intention is that any smoothing profits or losses should balance
out over time, so that in the long run with-profits policyholders
as a whole neither gain nor lose as a result of our smoothing
An excess surplus is that part of the inherited
estate that the company has assessed as being additional to the
needs of the with-profits fund. Before deciding there is an excess
surplus, the company should be confident that it can maintain
policyholder security and still have access to sufficient capital
to continue to operate within the fund's risk appetite, to support
expected new business and to protect itself against future risks
All with-profits funds must appoint a With-Profits
The With-Profits Actuary advises the board of
directors on the exercise of discretion in relation to its with-profits
business, for example in the setting of investment and bonus policy
and smoothing. The firm is required to keep the With-Profits Actuary
informed and must request his advice on the likely effect of a
material change in the firm's business plans on with-profits policyholders.
The With-Profits Actuary has the right to speak to the FSA about
concerns over the management of the with-profits fund.
The Prudential With-Profits Committee provides
independent judgement on whether the firm has complied with its
PPFM and considers conflicting rights and interests of policyholders
and shareholders. The Prudential With-Profits Committee is made
up of individuals who are independent of the firm's management
A reattribution involves negotiations to determine
how much with-profits policyholders should be paid now to compensate
them for giving up their 90% interest in any potential future
distribution of the inherited estate, if any such distribution
were to be made. Examples of issues which must be considered include:
the company's contractual obligations;
policyholders' reasonable expectations
the sources of the Estate; and
the likelihood of any future distribution.
The amount individual policyholders receive
under reattribution would vary: the overall payment should be
divided fairly, and may take into account such factors as policy
size and term.
Any proposal for reattribution will be put to a vote
of policyholders. It will be commented on by the Policyholder
Advocate (who may or may not make a recommendation to policyholders)
and the range of other governance bodies referred to in this submission.
In addition it needs to be approved by the Court
where policyholders will have the opportunity to be heard. The
Court will need to be satisfied that the proposal is fair.
To assist the Court, it will receive a report
prepared by a Reattribution Expert. The Reattribution Expert assesses
objectively the reattribution proposals and prepares a report
for the Court on the implications of the proposals for policyholder
security and benefit expectations.
A firm must also explain how it manages its
with-profits business in a public document called the Principles
and Practices of Financial Management (PPFM).
A PPFM, as the name suggests, is divided into
principles and practices. Principles must be enduring statements
of the overarching standards which the firm adopts in managing
its with-profits business, and must describe the business model
used by the firm in meeting its duties to with-profits policyholders
and in responding to longer-term changes in the business and the
economic environment. In contrast, practices should describe the
firm's approach to managing its with-profits business and responding
to changes in the business and economic environment in the shorter
term. Practices are expected to change as the firm's circumstances
and the business environment change.
The PPFM is required to cover the main areas
where a firm has discretion in relation to its with-profits business,
such as investment and bonus policy, smoothing, charges and expenses,
volumes of new business and the management of any inherited estate.
The principles and practices applied in the
management of the With-Profits Fund are set out in Prudential's
PPFM. The following extracts from the PPFM summarise our approach
to the management of the Fund:
Payouts to policyholders: The main objectives
of the company's bonus distribution policy are to:
give each with-profits policyholder
a return on the premiums which he or she has paid that reflects
the earnings of the underlying investments, whilst smoothing the
peaks and troughs of investment performance; and
ensure that with-profits policyholders
receive a fair share of the profits distributed from the with-profits
fund by way of bonus additions to their policies.
Smoothing: Our intention is that smoothing profits
and losses should balance out over time so that in the long run
with-profits policyholders in each sub-fund, or within a product
group with a specific smoothing account, neither gain nor lose
as a result of our smoothing policy.
We therefore do not expect the Inherited Estate
to grow as a result of smoothing.
Investment policy: The company's investment strategy
is to seek to secure the highest total return (allowing for the
effect of taxation and investment expenses) whilst:
maintaining an acceptable overall
risk level (having regard to the currency, nature and outstanding
duration of the liabilities) for the long-term fund; and
maintaining an appropriate and broad
mix of suitable investments, and protecting appropriately the
relative interests of all groups of policyholders.
Charges: The overall aim of the expense charging
and allocation methodology is to seek to ensure that all expense
allocations are fair between different groups of policyholders
and shareholders and between different sub-funds.