To 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.
Types of Bonus
There are two types of bonus:
Annual bonuses (or reversionary/regular bonuses) are added to policies each year in order to gradually increase the guaranteed benefits under the policy.
Final bonuses (or terminal bonuses) are added when the benefits of a policy are realised (i.e. on surrender, maturity or death). These bonuses are used to make up the difference between the guaranteed benefits and the overall smoothed claim value. Prudential uses these bonuses to return to each policyholder a fair share of the assets of the with-profits fund, while reducing the impact of market changes, especially around the date of maturity.
Determination of Bonus Rates
The balance between annual and final bonuses influences the investment strategy that the fund can adopt. Annual bonuses increase the amounts guaranteed to policyholders and so need to be backed by less risky (and so normally less rewarding) investments. This, in turn, affects the overall level of return achieved. Annual bonus rates are therefore targeted on a prudent proportion of the investment return that we expect to earn in the future. Annual bonus rates have been gradually reduced over the last ten years in line with declining inflation and the associated reduction in expected future investment returns.
Total claim values are set by reference to "asset shares", which are calculated for typical policies by accumulating the premiums paid, less allowance for expenses and charges, at the actual rates of return earned on the assets of the with-profits fund over the life times of those policies. The asset shares also include allowance for distributions to shareholders and profits from other sources arising in the with profits fund. These asset shares provide a target level for claim values.
Smoothing
Smoothing is applied so that the claim values actually paid change only gradually over time. In normal investment conditions, we aim to ensure that total payouts on equivalent policies do not change by more than 10 per cent from one year to the next.
Prudential's intention is that any smoothing of profits or losses should balance out over time, so that in the long run with-profits policyholders neither gain nor lose as a result of the smoothing policy.
Over the last five years, the aggregate claim values paid on maturing policies have amounted to around 101 per cent of the corresponding asset shares.
Distribution of profits from the with-profits fund
Prudential's with-profits policyholders currently receive 90 per cent of the profits distributed from the with-profits fund as bonus additions to their policies and shareholders receive the remaining 10 per cent as dividend payments. Since policyholders and shareholders share proportionately in these profits, their interests are exactly aligned.
For the year 2000, profits distributed from Prudential's main with-profits fund will amount to £3.1 billion, of which £2.8 billion (90 per cent) will be added to policies as bonuses, and £307 million (10 per cent) will be distributed to shareholders.
Investment Strategy
The company's investment strategy is to seek to secure on behalf of its policyholders the highest combination of income and growth in capital value while maintaining the security of the fund.
The table below shows the investment mix of Prudential's with-profits fund.
|
End 2000
% |
End 1999
% |
| Equity shares |
|
|
| - UK shares |
47 |
58 |
| - Non-UK shares |
14 |
14 |
| - Unlisted shares |
0 |
0 |
| Fixed interest |
20 |
13 |
| Property |
14 |
12 |
| Other investments |
5 |
3 |
| Total |
100 |
100 |
|
During 2000 a number of changes were made to the investment strategy of the fund, including a gradual but significant shift away from UK equities, with the proceeds being invested predominantly in UK and overseas corporate debt. The reason for the shift is that equities have performed well in recent years, and prospective equity returns are no longer viewed as being so attractive relative to other asset classes. Market volatility also means that the risk of holding equities has increased. Conversely, the UK and overseas corporate debt markets are now considered attractive.
The asset mix will continue to be kept under review and should equities appear more attractive, and the markets less volatile, our intention would be to switch back into equities in future.
Investment Returns
The underlying investment return on the Prudential with-profits fund was 3 per cent in 2000 compared with a decline of 10.2 per cent in the FTSE 100 index and a decline of 8 per cent in the FTSE all share index. Returns on the with-profits fund in recent years have been as follows:
| Year |
1996 |
1997 |
1998 |
1999 |
2000 |
| Gross Return % |
12.6 |
19.8 |
12.6 |
19.3 |
3.0 |
Bonus Tables
Specimen claim values are shown below, with last year's figures in brackets.
| Contract |
Term |
Premium |
Claim Value |
Effective rate of return p.a. |
| Savings* |
10 |
50 per month |
9,058 (£9,673) |
8.0% (9.2%) |
|
25 |
50 per month |
88,976 (£95,874) |
12.3% (12.8%) |
| Personal Pension |
10 |
200 per month |
38,968 (£40,462) |
9.4% (10.1%) |
| Personal Pension |
20 |
200 per month |
190,941 (£203,930) |
12.3% (12.8%) |
*Based on a policy taken out by a male aged twenty-nine
For the two specimen savings policies, the claim values represent increases of 7 per cent and 11 per cent respectively over the policy values a year earlier, after allowing for the premiums paid during the year.
The effective rates of return on savings policies exclude the benefit of life assurance premium tax relief which would have been available for the 25 year policy. The rate of return on pensions policies ignores tax relief on premiums and tax on benefit payments.
The total value of bonuses declared for 2000 is £2,796 million for the PAC main fund and a further £641 million for the closed Scottish Amicable Fund.
The Prudence Bond return is based on 100.25% allocation, 5% bid /offer spread, invested for ten years to 1 March 2001.
Reversionary bonus rates on unitised life business have been reduced from 4.75% to 4.50%, and on unitised personal pension business from 5.25% to 5.00%.
Past performance is not necessarily a guide to the future and existing bonus rates cannot be guaranteed in the future. The return on surrender of a with-profits Prudence Bond can be reduced by the application of a market reduction. Terminal bonuses can be reduced or removed retrospectively.
Approved by The Prudential Assurance Company Limited, regulated in the conduct of investment business by the Personal Investment Authority.