A Guide To How We Manage Our With Profits Fund

A customer friendly version of the principles and practices of financial management (PPFM)

The PPFM sets out how the Society manages its With Profits fund and can be obtained on requests from our head office or downloaded here. The PPFM covers two areas; the principles which are high level statements regarding the long term management of the fund and the practices which are statements about how we implement the principles. Over time, we may amend the principles, but if we do this, we will write to members to advise them of the changes. If we amend the practices, we will write to members at the earliest opportunity to inform them.

This customer friendly guide aims to provide a simplified version of the main items contained in the PPFM.

What are our guiding principles?

• We manage our With Profits fund in a lawful, sound and prudent manner.
• We aim to treat all our customers fairly.
• We will operate in a manner to enable us to pay all guaranteed benefits when they become due.

What is the With Profits fund?

This is an investment fund where your money is combined with that of our other customers and then invested in a range of different assets (see section: How is the With Profits fund invested). The objective is to ensure that on death or maturity, you will receive the guaranteed benefit under the policy along with any annual bonus that has been added. Annual bonus is not guaranteed to be paid and may vary, including the possibility of none being paid in a particular year or years, depending upon the investment performance of the fund, our expenses and other factors such as the number of policyholders dying and cashing in their policy. Some of our policies may also have a terminal bonus added, but again this depends on the fund’s performance.

Annual Bonus – The rate of bonus is set by the Society’s Board after consultation with the With Profits Actuary, usually once every year. It is set by taking into account what the fund can afford both now and in the future to make sure that we can meet all the guaranteed amounts when they need to be paid. Once an annual bonus has been added it cannot be taken away providing the policy runs to maturity.

Interim Bonus – This type of bonus may be added if your policy matures during a period for which an annual bonus has not been declared. It is also the type of bonus that is added to your policy on death, (except conventional adult and Child Tax Exempt Savings Plans) and on surrender of ISAs and Bonds.

Terminal Bonus – Any terminal bonus is again agreed by the Board following consultation with the With Profits Actuary. This type of bonus is designed to ensure that the amount that you get back fairly represents the performance of the fund during the period of your investment.

What is an asset share?

An asset share is calculated by taking into account the premiums you have paid, the investment performance of the fund whilst you have been investing minus the charges that we make to cover expenses and the cost of death or sickness benefits (where applicable). The investment returns credited reflect the level of guarantees on an individual policy. If the guaranteed benefits on a policy are high, we have to adopt a safer investment approach in order to meet the guarantee (for example by investing in deposits or fixed interest assets). However, where guarantees are low, it allows us to invest in assets that may have a higher level of risk attached but over time could be expected to outperform the safer assets to provide a better return.

On average, we aim to pay out the full asset share to policyholders, but we also use smoothing (see the section on smoothing) to make sure that payouts, wherever possible, do not alter significantly from year to year. The Society’s Board sets the target range for payouts and these are detailed in the PPFM.

What is smoothing?

Smoothing helps to protect policy holders from short term fluctuations in the value of assets within the fund but will not protect from the potential long term and sustained falls in value. We do this by retaining some of the surplus during a good year and distributing a similar amount during a poorer year. It can be used to:

• Reduce the variation in maturity values between policies maturing at the same time with different contribution levels and type.
• Reduce the variation in maturity values at different maturity dates.
• Reduce the differences in payouts over time.

What are charges?

Charges are there to cover the expense of selling and setting up the policy, investing and ongoing administration. We assess what these are likely to be over the period of the policy, but these can vary. If actual expenses are higher than those shown in the illustration, any excess will be charged against the asset share and therefore any future bonus credited.

What happens if you end the policy before it matures?

If you want to stop paying the premiums on your policy (another name for this would be surrender), we have to calculate how much to pay you to be fair both to you and the other members remaining in the fund. We do this by using an asset share approach with a target range of 100%, though this may vary slightly. Unlike on maturity, there is no guarantee that you will receive a certain amount and particularly during the early years, you may not get back as much as you have paid in.

What is a Market Value Reduction (MVR)

At certain times, we may apply an MVR to reduce the surrender value of With Profits investment Bonds and ISAs. We do this to bring the overall payout closer to the asset share when the underlying value of the assets in our fund is lower to ensure that:

• The surrender value is not unfairly higher than the market value of the assets in the fund.
• To protect the remaining members by making sure that a fair share remains.

We will advise you if we are applying an MVR when you ask for a surrender vale, but this can change at any time if there is a sudden drop in the value of assets in the fund.

Our With Profits bond has guaranteed MVR free dates at every tenth anniversary and the ISA on the tenth anniversary and each subsequent five years. In addition, we do not apply an MVR on death.