11.4.2
Phoenix Life Limited
Principles and Practices of
Financial Management
January 2024
PLL PPFM Page 1 January 2024
Phoenix Life Limited
Principles and Practices of Financial Management
Contents
Page
Introduction and Background
1. Introduction 3
2. Background to Principles and Practices of 6
Financial Management
3. Company Background 8
4. Key Concepts of With-Profits Business 15
Principles and Practices of Financial Management
5. Guiding Principles and Practices 22
6. Principles and Practices – 90% With-Profits Fund 30
7. Principles and Practices – 100% With-Profits Fund 68
8. Principles and Practices – Alba With-Profits Fund 99
9. Principles and Practices – Britannic With-Profits Fund 130
10. Principles and Practices – Britannic Industrial Branch Fund 170
11. Principles and Practices – Phoenix With-Profits Fund 197
12. Principles and Practices – Scottish Mutual With-Profits Fund 230
13. Principles and Practices – SPI With-Profits Fund 262
14. Principles and Practices – SAL With-Profits Fund 294
15. Principles and Practices – Pearl With-Profits Fund 333
16. Principles and Practices – SERP Fund 367
17. Principles and Practices – London Life With-Profits Fund 382
18. Principles and Practices – National Provident Life With-Profits Fund 410
With-Profits Governance Arrangements
19. With-Profits Governance Arrangements 435
Appendices
1. Glossary 437
2. Historic Information 445
PLL PPFM Page 2 January 2024
3. History of Principles and Practices of 450
Financial Management for Phoenix Life Limited
PLL PPFM Page 3 January 2024
1. Introduction
This document sets out the Principles and Practices of Financial Management applied in
managing the with-profits business of Phoenix Life Limited as at 1 January 2024. Although
Phoenix Life Limited contains policies originally issued by Standard Life Assurance Limited,
this document is aimed at holders of policies that were not originally issued by Standard Life
Assurance Limited and there are separate documents for the Standard Life policies.
Phoenix Life Limited’s assets are divided between a large long-term business fund and a
much smaller Shareholder Fund. The long-term business fund is internally segregated into
18 funds:
• the 90% With-Profits Fund;
• the 100% With-Profits Fund;
• the Alba With-Profits Fund;
• the Britannic With-Profits Fund;
• the Britannic Industrial Branch Fund;
• the Phoenix With-Profits Fund;
• the Scottish Mutual With-Profits Fund;
• the SPI With-Profits Fund;
• the SAL With-Profits Fund;
• the Pearl With-Profits Fund;
• the SERP With-Profits Fund;
• the London Life With-Profits Fund;
• the National Provident Life With-Profits Fund;
• the Heritage With-Profits Fund;
• the UK Smoothed Managed With-Profits Fund;
• the German With-Profits Fund;
• the German Smoothed Managed With-Profits Fund; and
• the Non-Profit Fund.
With-profits business is contained in each of the first 17 funds listed above. The Board is
responsible for managing the with-profits business in most of these funds, including setting
bonuses. The With-Profits Committee is responsible for setting investment and bonus policy
for the SPI With-Profits Fund and National Provident Life With-Profits Fund only.
This Principles and Practices of Financial Management also applies to the participating Irish
business which transferred under the 2022 Scheme to Phoenix Life Assurance Europe dac
(PLAE) and was reinsured back to Phoenix Life Limited (see appendix 2 for more detail).
Unless specifically stated otherwise, where we talk about ‘policies’ in this document we mean
both policies that participate directly in the Phoenix Life Limited funds and policies that
participate in the funds via reinsurance.
Separate documents are maintained for the Principles and Practices of Financial
Management for the with-profits funds that were previously part of Standard Life Assurance
Limited. These are the:
• the Heritage With-Profits Fund;
• the UK Smoothed Managed With-Profits Fund;
• the German With-Profits Fund; and
• the German Smoothed Managed With-Profits Fund.
This also applies to participating European business which transferred to Standard Life
International dac (SLIntl) and was reinsured back to Standard Life Assurance Limited.
The rest of this document is applicable only for the funds listed in sections 6 to 18 and the
term with-profits funds means the with-profits funds of Phoenix Life Limited excluding those
that were previously part of Standard Life Assurance Limited.
PLL PPFM Page 4 January 2024
The Principles and Practices of Financial Management:
• is used in the governance of the with-profits business within the with-profits funds of
Phoenix Life Limited by the Board and the With-Profits Committee, with particular regard to
the use of discretion in managing the with-profits funds; and
• provides information on the possible risks and rewards associated with a with-profits policy
within a particular with-profits fund.
The Principles and Practices of Financial Management is prepared in accordance with
Section 20.3 of the Conduct of Business Sourcebook which forms part of the Handbook
issued by the Financial Conduct Authority (FCA).
These Principles and Practices have been drawn up in accordance with the law and
regulation as Phoenix Life Limited understands it as at 1 January 2024. Should this
understanding prove to have been incorrect, for example as a result of a court or regulatory
ruling with retrospective effect, the Principles and Practices will be amended to comply and
will be applied as if they had always been so amended.
Section 2 gives more details about the background to Principles and Practices and how and
when they can be changed. Appendix 3 gives details of changes to this document since
1 January 2007.
Section 3 provides some background information on Phoenix Life Limited and its with-profits
funds. Appendix 2 gives details of the historic schemes of transfer.
Section 4 introduces the key concepts of with-profits business and types of with-profits
business. This information is key to understanding the management of the with-profits funds.
Section 5 documents the guiding principles and practices adopted in managing the with-
profits business of Phoenix Life Limited. These guiding principles apply to all the with-profits
funds and in the event of conflict with other principles take priority.
Sections 6 to 18 document the principles and practices adopted in each of the with-profits
funds. Nothing in any of these sections should be inferred as applying to any other fund
unless explicitly stated.
Section 19 documents the with-profits governance arrangements.
A glossary of terms and a summary of abbreviations used in the document are given in
Appendix 1. Words that are defined in the glossary appear in italics in the main text.
Sections 1 to 4 and 19 of this document and the Appendices are background or explanatory
material and therefore neither principles nor practices for the purpose of the FCA rules.
None of the contents of this document forms part of, or varies, the terms or conditions of any
policy under which Phoenix Life Limited is the insurer. In the event of any inconsistency
between the contents of this document and any policy, the terms and conditions of the policy
prevail (except where overridden by a court order).
This document is intended to assist knowledgeable observers to understand the way in which
the with-profits business of the Phoenix Life Limited with-profits funds is conducted and the
material risks and rewards involved in effecting or maintaining a with-profits policy in a fund.
It is not a comprehensive explanation either of the management of the with-profits business of
a fund or of the other funds within Phoenix Life Limited or of every matter which may affect
the business. In addition, no part of the document should be read as a recommendation to
policyholders or potential policyholders or their advisers in relation to the effecting or
maintaining of a with-profits policy. Accordingly, any person considering whether to effect or
maintain a with-profits policy within a fund should seek independent financial advice.
When referring to with-profits policies, with-profits business accepted by Phoenix Life Limited
under reassurance agreements is included for the purposes of determining the amount
PLL PPFM Page 5 January 2024
payable to the reassuring company. However, the benefits payable to the with-profits
policyholders of the reassuring company are the responsibility of that company, and not
Phoenix Life Limited.
Statements in this document in relation to the risks and rewards involved in effecting and
maintaining a with-profits policy in a fund are by their nature forward-looking statements that
are subject to a variety of uncertainties. Readers of this document should read such forward-
looking statements in that context.
The contents of this document may change as the circumstances of Phoenix Life Limited and
the business environment change. The document may also change to reflect changes made
by Phoenix Life Limited to the management of its with-profits business. Phoenix Life Limited
intends to give notice of some changes as explained in section 2 of this document, other
changes will be made without notice.
Readers of this document should be aware that reading only selected sections or paragraphs
in isolation may result in a misleading impression of the way in which the with-profits business
of the funds is conducted and the material risks and rewards involved in effecting and
maintaining a with-profits policy with the funds. The principles set out in this document and
their associated practices should in particular be read together.
Phoenix Life Limited is authorised by the Prudential Regulation Authority (PRA) and regulated
by the FCA and PRA.
PLL PPFM Page 6 January 2024
2. Background to Principles and Practices of Financial Management
2.1 Principles and Practices
2.1.1 The principles:
• are enduring statements of the overarching standards adopted by Phoenix Life
Limited in managing the with-profits funds; and
• describe the business model used by Phoenix Life Limited in meeting its duties
to with-profits policyholders in the funds and in responding to longer-term
changes in the business and economic environment.
The principles are divided into guiding principles which apply to all the with-profits
funds (and are described in section 5) and other principles, which apply to a
particular with-profits fund (and are described in sections 6 to 18).
2.1.2 The practices set out how the principles are implemented:
• describe Phoenix Life Limited’s approach to managing the funds and to
responding to changes in the business and economic environment in the
shorter-term; and
• contain sufficient detail to enable a knowledgeable observer to understand the
material risks and rewards from effecting or maintaining a with-profits policy in
the funds.
There are practices associated with each principle and these are set out below
each principle.
2.2 Demonstrating Compliance with Principles and Practices
2.2.1 The Board produces an annual report addressed to with-profits policyholders
within six months of the financial year end. This report covers Phoenix Life
Limited’s compliance with its Principles and Practices of Financial Management
and significant matters where discretion has been exercised, in particular where
such matters relate to the competing or conflicting interests of policyholders and
shareholders. Policyholders will normally be advised of the report as part of their
next annual statement. The report is made available to policyholders on our
website.
2.2.2 An annual report for the Board is produced by the With-Profits Actuaries on key
aspects of the discretion exercised in respect of each fund (including the
application of its Principles and Practices of Financial Management).
2.3 Amendments to the Principles
2.3.1 The principles are not expected to change often. However Phoenix Life Limited
may amend any of the principles at any time. Any change will follow formal
consultation with and take into account the opinions of the Chief Actuary, the With-
Profits Actuary and the With-Profits Committee. Any changes to the principles will
be approved by the Board.
2.3.2 Policyholders will normally be provided with three months written notice in
advance of any changes to the principles. The written notice will set out any
proposed changes to the principles.
PLL PPFM Page 7 January 2024
2.3.3 The circumstances and reasons normally leading to such amendments to the
principles are likely to include:
• changes in regulations;
• to improve the management of the with-profits funds;
• maintaining equity between classes or groups of policyholders; and
• significant changes in the financial condition of Phoenix Life Limited.
2.4 Amendments to the Practices
2.4.1 The practices are expected to change as Phoenix Life Limited’s circumstances
and the business environment change. Any change will follow formal consultation
with and take into account the opinions of the Chief Actuary, the With-Profits
Actuary and the With-Profits Committee. Any material changes to the practices
will be approved by the Board.
2.4.2 The FCA will be provided with details of any material changes.
2.4.3 Policyholders will not be provided with any advance notification of changes to the
practices, although they will be informed within a reasonable period after any
material changes have been made. This notification will normally be with the next
annual statement.
2.5 Summary of Amendments Made to Phoenix Life Limited’s Principles and
Practices of Financial Management
2.5.1 The Principles and Practices of Financial Management will normally be displayed
on the www.phoenixlife.co.uk internet site and the version displayed on the
internet site will normally be updated shortly after any changes have been
implemented.
2.5.2 Appendix 3 gives details of amendments previously made to the Principles and
Practices of Financial Management since 1 January 2007.
2.6 With-Profits Governance Arrangements
2.6.1 The with-profits governance arrangements are described in section 19.
PLL PPFM Page 8 January 2024
3. Company Background
3.1 Company History and Group Structure
3.1.1 Phoenix Life Limited as it is currently constituted is the result of a series of
previous business transfers. The most recent business transfer was in 2023 and
the provisions of the court scheme used to effect that transfer (the 2023 Scheme)
replaced those of previous schemes to which Phoenix Life Assurance Limited,
Phoenix Life Limited and Standard Life Assurance Limited were party.
However, both the 2022 Scheme between Phoenix Life Limited and Phoenix Life
Assurance Europe dac and the 2019 Scheme between Standard Life Assurance
Limited and Standard Life International dac remain in operation.
The 2023 Scheme became effective on its transfer date, 27 October 2023. Full
details of the past court schemes and other events are set out in Appendix 2.
3.1.2 The 2023 Scheme amended the closure provisions for each of the with-profits
funds listed in Appendix 2 A2.23. Closure can occur when the with-profits policy
liabilities fall below £10m (subject to annual indexation using RPI from the transfer
date) in the case of the 90% With-Profits Fund and the 100% With-Profits Fund or
below £50m (subject to annual indexation using RPI from the transfer date) in all
other cases. Upon the closure date policies may be
• transferred to the Non-Profit Fund and with-profits policies will be converted to
non-profit with a schedule of future guaranteed bonus additions, or
• transferred to the Non-Profit Fund and with-profit policies converted to unit-
linked policies investing in unit linked funds,
• transferred to another with-profits fund, or
• a combination of these.
Closure will only occur if the Board concludes, having taken advice from the
relevant With-Profits Actuaries and the With-Profits Committee, that closing the
With-Profits Fund is fair and in the best interests of policyholders of the relevant
With-Profits Fund.
Where a ‘may terminate’ point has been passed for any with-profits fund but the
decision is taken not to close the fund, the Board will state this fact along with any
relevant explanation in its annual report to with-profits policyholders.
On the closure of a with-profits fund with reinsured Irish business from PLAE, the
reinsurance will terminate and PLAE will use the termination amount it receives to
set up benefits in the PLAE Non-Profit Fund.
3.1.3 In accordance with the 2023 Scheme Phoenix Life Limited continues to have the
right to re-allocate any non-profit policy in any of the with-profits funds of Phoenix
Life Limited to the Non-Profit Fund provided that:
• such re-allocation is not contrary to the terms of the policy, and has been
approved by the With-Profits Committee; and
• in the opinion of the Board, having obtained appropriate actuarial advice,
assets:
• with a market value which is fair and equitable (in the context of the risks
being re-allocated to the Non-Profit Fund in respect of the policy); or
• with a market value which is consistent with an amount (where such an
amount can be calculated) that Phoenix Life Limited would have charged
in consideration of the assumption of the risk in respect of a new policy
which it issued on the same terms as the policy to be re-allocated from the
relevant with-profits fund to the Non-Profit Fund (subject to appropriate
adjustment to reflect differences in expenses or commission incurred),
PLL PPFM Page 9 January 2024
are being transferred or re-allocated from the relevant with-profits fund to the
Non-Profit Fund.
In respect of the SPI With-Profits Fund, separate provisions apply in relation to the
provision of non-profit annuities (including non-profit deferred annuities). For
these, the assets transferred from the SPI With-Profits Fund to the Non-Profit
Fund shall be based on the annuity rates being used by Phoenix Life Limited or
any other authorised insurer in the Phoenix Group or, if unavailable, on rates
consistent with those generally available in the market. If the With-Profits Actuary
considers that the amount that would be transferred exceeds that which is
reasonable based on the rates generally available in the market, then they may
recommend that the annuity benefit be provided from the SPI With-Profits Fund
and the With-Profits Committee shall have the right to require that the annuity
benefit be provided from the SPI With-Profits Fund or not.
3.1.4 The 2023 Scheme also includes provisions relating to the workings of the funds,
the allocation of tax, the shareholders share of surplus, and investment and bonus
policy. These have been incorporated into this document.
In particular, in relation to the investment policy, the provisions continue to allow
further hypothecation of the assets in the with-profits funds where this would not
be inappropriate having regards to the interests of relevant policyholders. For
example this may involve the matching of non asset share liabilities more
accurately, the hypothecation of different equity (and property) backing ratios to
further classes or groups of policies or through the hypothecation of fixed interest
assets by term remaining within asset shares to reduce the volatility of
policyholder returns near maturity.
3.1.5 The Buffer Reserve as described in sections 9 and 10 and appendix 2 continues
under the 2023 Scheme.
3.1.6 As a consequence of the 2023 Scheme the Principles and Practices of Financial
Management was updated. Changes were made to incorporate any changes in
the 2023 Scheme.
3.2 Capital Policy
3.2.1 The 2023 Scheme provides for Phoenix Life Limited to maintain a specific capital
policy.
3.2.2 The capital policy seeks to ensure that the company would be able to withstand a
number of internally specified stress scenarios.
3.2.3 The capital policy also seeks to ensure that each with-profits fund has sufficient
assets to meet its liabilities. Section 3.3 describes to the capital support available
to with-profits funds.
3.2.4 Under the requirements of the 2023 Scheme Phoenix Life Limited must
• hold sufficient assets to satisfy the Scheme Capital Quantity and Scheme
Capital Quality tests, and
• conduct its business so that there is no significant foreseeable risk that a
Capital Event arises and requires actions to be taken in its With-Profits Funds
(that would not be in accordance with the 2023 Scheme).
3.2.5 The Scheme Capital Quantity Test states that Phoenix Life Limited must hold
sufficient assets in excess of liabilities to:
• meet its Solvency Capital Requirement (SCR) in internally specified scenarios
consistent with the Board’s risk appetite, and
• in those stress scenarios, provide any support needed by With-Profits Funds
in accordance with section 3.3.
PLL PPFM Page 10 January 2024
3.2.6 The risk appetite for the purpose of the Scheme Capital Quantity Test is specified
as a ‘less than 1-in-10 chance of failing to meet its SCR in one year’ but this can
be changed from time to time as described in 3.2.12.
3.2.7 The Scheme Capital Quality Test states that Phoenix Life Limited shall hold assets
in the Non-Profit Fund and the Shareholder Fund such that in stress scenarios
considered appropriate by the Board, Phoenix Life Limited can:
• maintain compliance of the Matching Adjustment Fund with the relevant
Solvency II regulations, and
• meet anticipated liquidity demands that would arise in those stress scenarios
including provision of support to with-profits funds as contemplated in section
3.3 below in the form of assets that would be appropriate for the with-profits
funds to hold.
3.2.8 If, in the reasonable opinion of the Board (having regard to the advice of the Chief
Actuary), a capital event arises, Phoenix Life Limited shall identify and take actions
that, in the reasonable opinion of the Board (having regard to the advice of the
Chief Actuary) are necessary for Phoenix Life Limited to cease to experience a
capital event. For the London Life With-Profits Fund there are historic scheme
requirements to be met before interventions can be made. For the SPI With-
Profits Fund and National Provident Life With-Profits Fund the Board does not
have powers to take such actions as this is a matter for the With-Profits
Committee.
3.2.9 Phoenix Life Limited shall not take any actions that would result in the business of
each with-profits fund not being conducted in accordance with the Scheme
Principles of Financial Management of the 2023 Scheme, unless the Board
considers that the actions otherwise permitted would be insufficient for the capital
event to cease.
3.2.10 Where this is the case, Phoenix Life Limited may take additional actions that would
result in the business of a with-profits fund not being conducted in accordance with
the 2023 Scheme provided that
• in the reasonable opinion of the Board (having regard to the advice of the
Chief Actuary and the relevant With-Profits Actuaries), such actions treat
policyholders fairly and are only taken to the extent that they are necessary
after taking into account the actual and/or expected impact of the actions
permitted under 3.2.9 and
• such actions shall be limited to changing the asset mix for with-profits policies
allocated or reinsured to that with-profits fund, as necessary for Phoenix Life
Limited to cease to experience a capital event.
3.2.11 Phoenix Life Limited shall notify the regulators as soon as reasonably practicable
after it has determined that a capital event has occurred or is reasonably likely to
occur.
3.2.12 The 2023 Scheme provides that the Board may change the Scheme Capital
Quantity Test and/or the Scheme Capital Quality Test in order to reflect a change
to the risk appetite or stress scenarios which the Board has set for Phoenix Life
Limited as a whole.
To the extent that a change in risk appetite would have the effect of reducing the
amount of assets required to be held by Phoenix Life Limited under the Scheme
Capital Quantity Test, Phoenix Life Limited shall be required to obtain a certificate
from an independent actuary to the effect that, in their opinion, the proposed
changes to the Scheme Capital Quantity Test are unlikely to have a material
adverse effect on the interests of the holders of policies of Phoenix Life Limited
overall.
PLL PPFM Page 11 January 2024
3.2.13 A Capital Event arises if Phoenix Life Limited is unduly exposed to a risk of being
unable to meet its SCR, or its capital needs (as determined in accordance with
regulatory requirements to be adequate, both as to amount and quality, to ensure
that there is no significant risk that its liabilities cannot be met as they fall due).
3.3 Capital Support
In the unlikely event that the with-profits asset value of any of the with-profits funds
falls below (or is likely to fall below) the threshold amount for that fund, support will
be provided to that fund by way of a loan or other contribution arrangement from
the Non-Profit Fund or the Shareholder Fund to the extent that the Board
determines there are assets in those funds available to make such a loan.
The loan would be repayable with the approval of the Board if the with-profits
asset amount is more than the threshold amount.
Whether or not interest would be payable by the fund on any loan received, and
the interest rate payable if applicable, will vary depending on the with-profits fund
receiving the loan.
The terms for any such loan (including the rate of return and the manner of
repayment) will be determined as the Board thinks fit, provided that the relevant
With-Profits Actuary has certified to the with-profits committee that the terms of
such arrangements are, in the opinion of the relevant With-Profits Actuary, no less
favourable than arm’s length commercial terms and will not detrimentally affect the
reasonable expectation of the holders of with-profits policies in the relevant with-
profits fund.
In the event that any of the with-profits funds cannot meet its regulatory capital
requirements from its own resources, the With-Profits Committee can recommend,
or in the case of the SPI With-Profits Fund request, that the Board holds additional
capital in the Non-Profit Fund or the Shareholder Fund to meet any shortfall. To
the extent that the Board does not or cannot make sufficient assets available, then
it will be necessary to take other actions within the relevant with-profits fund to
ensure that it can meet its regulatory capital requirements from its own capital
resources.
This document does not cover the capital support agreements in respect of the
former Standard Life Assurance Limited business.
3.4 Main inter fund agreements – risk transfer arrangements
3.4.1 This document does not cover any of the internal arrangements in respect of the
former Standard Life Assurance Limited business.
3.4.2 The Britannic With-Profits Fund transfers the unit-linked liability and associated
expense risk under most unitised life and pensions business to the Non-Profit
Fund.
3.4.3 The Phoenix With-Profits Fund transfers the unit liability for non-profit unit-linked
policies and certain expense risks to the Non-Profit Fund.
3.4.4 The Non-Profit Fund transfers certain mortality risks associated with Progressive
Protection Plan, Fair Share Whole Life and Linkplan to the Phoenix With-Profits
Fund.
3.4.5 The Non-Profit Fund transfers the With-Profits Performance Fund and With-Profits
Pension Fund element of former Alba Life former Crusader policies invested in
these notional funds to the Alba With-Profits Fund.
PLL PPFM Page 12 January 2024
3.4.6 The Non-Profit Fund transfers the Pension With-Profits Fund element of former
Swiss Life personal pension plan and free standing AVC policies to the 90% With-
Profits Fund.
3.4.7 The Non-Profit Fund transfers the unitised with-profits and smoothed return
business investment and guarantee risks of former Scottish Mutual Assurance
Limited business to the Scottish Mutual With-Profits Fund.
3.4.8 The Non-Profit Fund transfers the unitised with-profits investment and guarantee
risks and unit-linked guaranteed annuity option risk in respect of former Scottish
Provident Limited business to the SPI With-Profits Fund.
3.4.9 With-profits liabilities of unitised with-profits pensions and capital account policies
originally issued by NPI are fully reinsured on original terms from the Phoenix Life
Limited Non-Profit Fund to the Pearl With-Profits Fund.
3.4.10 The SPI With-Profits Fund transfers some of the expense risks under traditional
with-profits business to the Non-Profit Fund.
3.4.11 The 90% With-Profits Fund transfers the expense risks under the ex Swiss with-
profits business to the Non-Profit Fund other than in the event of major regulatory
change.
3.4.12 The SAL With-Profits Fund transfers the risks of the unitised with-profits bonds
written between October 1997 and December 1998, and the unitised with-profits
pensions (excluding the final salary unitised with-profits group pension policies)
into the Phoenix With-Profits Fund.
3.4.13 The SAL With-Profits Fund transfers the risks of some of the with-profits life
endowments written after September 1988 (‘Endowment Assurance’, ‘Economy
Mortgage Plan’, ‘Economy Plan’ and ‘Moneymaker’) to the 100% With-Profits
Fund.
3.4.14 The SAL With-Profits Fund transfers the risks of the property linked liabilities to the
Non-Profit fund.
3.4.15 The Pearl With-Profits Fund transfers the unit liability for non-profit unit-linked
policies and certain expense risks to the Non-Profit Fund.
3.4.16 The National Provident Life With-Profits Fund transfers the liability for certain
unitised with-profits investment known as Portfolio Bond to the Pearl With-Profits
Fund.
3.4.17 The London Life With-Profits Fund reinsures the basic and bonus annuity
payments for the Secure Pension Plus with-profits annuity to the Pearl With-Profits
Fund.
3.4.18 Annuity payments for pre 1 January 2000 pension annuities are reinsured from the
National Provident Life With-Profits Fund to the Pearl With-Profits Fund.
3.4.19 Unitised with-profits element of Portfolio and Investment Bonds originally issued by
NPI are reinsured from the Phoenix Life Limited Non-Profit fund to the Pearl With-
Profits Fund.
3.4.20 The unit-linked liabilities for policies in the National Provident Life With-Profits
Fund are reassured to the Non-Profit Fund.
PLL PPFM Page 13 January 2024
3.5 Main intra group agreements
3.5.1 This document does not cover any of the intra group arrangements in respect of
the former Standard Life Assurance Limited business.
3.5.2 Phoenix Life Limited has agreements with Phoenix Group Management Services
(PGMS) to provide management services to the with-profits funds.
3.5.3 Phoenix Life Assurance Europe dac reinsures its with-profits business into
Phoenix Life Limited.
3.6 Other significant arrangements
3.6.1 There are agreements between PGMS and Diligenta Limited, under which PGMS
sub-contracts to Diligenta some of the services it provides for policies in the with-
profits funds.
3.6.2 Where PGMS provide services to Phoenix Life Limited but have in turn outsourced
provision of those services to other providers, PGMS still retains responsibility for
providing all services, even in the event of a failure of these other providers.
Should PGMS be unable to meet any of its obligations to provide services then
Phoenix Life Limited would request that Phoenix Group, as owners of PGMS step
in to restore the position. Should Phoenix Group not do this, then Phoenix Life
Limited would attribute any losses to the shareholder fund or Non-Profit Fund, and
the with-profits funds would only be affected if the shareholder fund or Non-Profit
Fund had insufficient excess assets to bear the losses.
3.6.3 Phoenix Life Limited uses its investment managers to provide investment
management services for the with-profits funds, either directly or via collective
investment structures. Different investment managers may be used for the
different types of investments. The fees payable by Phoenix Life Limited under
this agreement vary for each with-profits fund depending on asset mix. The
investment management arrangements can typically be terminated with three
years notice or six months if the underperformance termination clause is invoked.
3.6.4 There is an agreement with HSBC under which HSBC provides accounting and
other administrative services in relation to the investments.
3.7 Management services agreements
3.7.1 This document does not cover any of the management services agreements in
respect of the former Standard Life Assurance Limited business.
3.7.2 The agreements provide specified policy and corporate administration services
associated with business as usual activity in return for specified charges, based on
unit charges and policy volumes. The unit charges are subject to annual
increases linked to movements in an external index, such as the Retail Prices
Index (RPI) or National Average Earnings Index (NAE).
3.7.3 There are additional activities that the service provider will provide on request to
Phoenix Life Limited. These are charged on different bases, usually related to the
actual costs incurred by the service provider.
3.7.4 Costs associated with day to day administrative problems are borne by the service
provider. Compensation costs for pensions review and mortgage endowment
reviews remain with Phoenix Life Limited, whilst the costs for undertaking these
reviews are met by either Phoenix Life Limited or the service provider, depending
on the cause and the terms of each agreement.
PLL PPFM Page 14 January 2024
3.7.5 Most agreements are for a set period with the option to review and continue at the
end of the period. The extent to which unit charges can or will change on any
review are specified in each agreement. The exception to this is the contract
between Phoenix Life Limited and PGMS. In respect of the former Phoenix
Assurance Limited, Bradford, Phoenix Life & Pensions, Scottish Mutual, Scottish
Provident business and Phoenix & London Assurance Limited business, it is a
perpetual agreement and in respect of the former Swiss Life and Pearl business it
is also a perpetual agreement but under which the charges may be amended in
the event of major regulatory change. It is also a perpetual agreement in respect
of most of the former Britannic Assurance unitised with-profits life and pension
business.
3.7.6 Termination rights are provided based only on certain specific events (such as
material or persistent breach, persistent failure to meet service standards,
insolvency).
3.7.7 Service levels and performance under the management services agreements are
regularly reviewed.
PLL PPFM Page 15 January 2024
4 Key Concepts of With-Profits Business
4.1 Workings of a With-Profits Fund
Each with-profits fund in Phoenix Life Limited is operated as a stand-alone fund.
This means that on the whole, the policyholders of one fund are not affected by
the state or operation of another fund. This is described in more detail in section
5.
The premiums paid in respect of each policy go into the fund, which is then used
to pay out the policy benefits as defined in the policy conditions. The costs of
managing the fund and tax are paid out of the fund, together with an amount each
year to the shareholders, where applicable. The fund is invested in a variety of
different types of investments and the return earned on these investments
increases or decreases the value of the fund.
In order to help the Board (or the With-Profits Committee in the case of the SPI
With-Profits Fund) to determine the level of bonuses to pay and the fair distribution
of any surplus arising, asset shares are generally calculated. More details are
given in section 4.3.
The fund is subject to a number of inherent risks that arise from a range of factors,
including product design (for example the provision of guarantees to
policyholders), selling and marketing practices, interest rate and market
fluctuations and demographic changes. Phoenix Life Limited makes provisions
which it considers to be appropriate for the risks which it identifies in relation to the
business within each fund. There can be no assurance that all risks which might
emerge have been identified nor that the provisions for identified risks will prove to
be adequate. In addition, the risks to which the fund is exposed inevitably change
over time.
4.2 Types of With-Profits Business
There are two main types of with-profits business – traditional and unitised.
Details of some of the common features of these are given below. Not all with-
profits funds contain all the different types of contract and there are also additional
types of with-profits business such as smoothed return and deposit administration
business. Within Phoenix Life Limited there are many different types of policies,
some of which may operate differently or may have particular or special features,
not all of which are referred to below.
4.2.1 Traditional With-Profits Business
Policies are eligible to participate in the distribution of surplus in the fund by the
addition of annual and final bonuses.
Policies can be written as life or pension policies.
Life policies include endowment assurances and whole life policies.
Pension policies include retirement annuity policies where the benefit is in the form
of an annuity payable from the selected retirement age and endowment type
policies where the benefit is in the form of a cash sum at the selected retirement
age. Endowment type policies may have an option to convert the cash sum into
annuity benefits on fixed terms. For pension business on earlier death premiums
are refunded either with or without interest, an early termination value may be paid
or there may be no benefit paid, depending on the terms and conditions of the
policy.
PLL PPFM Page 16 January 2024
For life policies, the benefit payable at maturity (for endowment assurances) or on
death (or, if applicable, terminal illness or critical illness) includes:
• a guaranteed amount, the sum assured;
• annual bonuses, which may be added to each year as part of the annual bonus
declaration and which increase the guaranteed benefit; and
• final bonus, which may be added on death (or, if applicable, terminal illness or
critical illness) or maturity claims.
Some endowment assurances have an additional sum assured that is payable on
death before maturity but this is not eligible for bonuses. Some endowment
assurances have a guaranteed minimum death benefit which is a minimum
amount of benefit payable on death (but not on maturity). This guaranteed
minimum death benefit is not eligible for bonuses.
For pension policies, the benefit at selected retirement age includes:
• a guaranteed amount, the basic annuity or a sum that will be used to purchase
an annuity at retirement;
• annual bonuses, which may be added to each year as part of the annual bonus
declaration and which increase the guaranteed benefit; and
• final bonus, which may be added on retirement (either increasing the annuity
payable or increasing the cash sum available to purchase an annuity
depending on the type of policy).
A proportion can be taken as a lump sum and the rest of the benefit being a
reduced annuity or being used to purchase an annuity.
The death benefit for pension policies does not participate in bonuses unless the
benefit is based on the early termination value.
At retirement, when the annuity comes into payment, the policy becomes non-
profit and may be transferred to the Non-Profit Fund subject to the conditions in
paragraph 3.1.3 or may remain in the relevant with-profits fund. Reinsured Irish
business would be transferred to the PLAE Non-Profit Fund or remain in the
relevant PLAE with-profits fund.
For both life and pension policies, to receive the benefit, regular premiums must
be maintained except for some whole of life assurances where premiums are
designed to cease at a specified age, and some policies paid by a single premium.
Otherwise if premiums cease and certain criteria (that are explained in the terms
and conditions of each policy) have been met:
• a surrender value may be paid or a transfer value may be paid to another
pension provider; or
• the policy will be made paid up and the benefits due at maturity, retirement or
earlier death will be reduced. Depending on the policy terms, future bonuses
may or may not be added.
If the criteria are not met, then the policy will lapse with no value.
Traditional with-profits business is sometimes referred to as conventional with-
profits business.
4.2.2 Life Regular Premium Unitised With-Profits Business
A proportion of each premium less charges buys with-profits units and, where
annual bonus is declared, either:
• the price of the with-profits units increases at the daily equivalent of the current
annual bonus rate (but subject to any rounding in the unit prices); or
• the bonuses purchase additional units.
PLL PPFM Page 17 January 2024
The benefit payable at maturity or on death (or, if applicable, terminal illness or
critical illness) includes:
• the value of the with-profits units;
• bonus units, if applicable; and
• any final bonus, which may be added.
Some types of policy might have a guaranteed minimum death benefit which is a
minimum amount of benefit payable on death (or, if applicable, terminal illness or
critical illness), but not on maturity. The cost of providing the guaranteed minimum
death benefit is generally met by cancelling units each month based on the sum at
risk.
If premiums cease and certain criteria (that are explained in the terms and
conditions of each policy) have been met:
• a surrender value may be paid; or
• the policy will be made paid up and the guaranteed minimum death benefit will
no longer apply.
The surrender value may include an element of final bonus. On surrender, the
value of each with-profits unit and bonus unit may be reduced by the application of
a market value reduction. If the criteria are not met then the policy will lapse with
no value.
For certain policies, with-profits units can be switched to buy units in a unit-linked
fund. If this is done, then the value of with-profits units will usually be calculated in
the same way as for a surrender value.
4.2.3 Life Single Premium Unitised With-Profits Business
These are similar to the above, except that only one premium is payable at the
start of the policy. Policies are whole of life assurance single premium bonds
where the benefit is payable on death. Some policies also provide for the benefit
to be payable upon surrender at a specified guarantee date or dates. The type of
policy and the date at which it was taken out determines the guarantee dates
applicable for that policy.
The benefit payable on surrender at a guarantee date is the same as at maturity
above. Some policies provide for an uplifted benefit to be paid on death.
The surrender value (withdrawal value) for claims, at other than a guarantee date,
may include an element of final bonus. The value of each with-profits unit and
bonus unit may be reduced by the application of a market value reduction. Any
market value reduction is calculated by reference to the underlying fair value and
in some cases allowing for smoothing.
4.2.4 Pension Unitised With-Profits Business
Under these policies the benefit is payable at the selected retirement age or earlier
death. For some policies a range of dates around the selected retirement age
applies. Otherwise they are similar to life unitised with-profits business.
Premiums may be single or regular contributions from an employee or employer,
payments for policies contracted out of the state second pension or transfers from
other pension providers. The business may be split into sections, such as for
contributions, for payments as a result of contracting out or for transfers in.
At retirement, the benefit is available to purchase an annuity. A proportion of the
benefit can usually be taken in a cash form at retirement.
PLL PPFM Page 18 January 2024
4.3 Asset Share Methodology
The purpose of asset share calculations is to assess the contribution a policy, or
group of policies, has made to its with-profits fund since the policy, or policies,
started. The asset share calculation is therefore intended to represent the effect of
the historical cashflows on the fund as a result of the policy, or group of policies.
Asset shares are not normally calculated for each individual policy. Rather the
asset shares are calculated for a limited number of specimen policies, or groups of
specimen policies, and these are then taken to be representative of the business
generally.
Asset shares are calculated by accumulating premiums paid at the rates of
investment return earned on the assets, after allowing for charges, such as
expenses, mortality and morbidity costs, cost of guarantees, cost of capital,
distributions to shareholders and tax as appropriate.
The exact components of asset share calculations and practices relating to asset
shares vary by the type of business. For each of the with-profits funds in Phoenix
Life Limited, details of how asset shares will be calculated in the future are given in
its principle 4 and the associated practices.
Asset shares are used to guide policy payouts and bonus declarations because
they provide a good indication of the appropriate level of total payouts in respect of
a policy or groups of policies.
Asset shares can decrease as well as increase and, at any time, may be greater
or less than the contractual guaranteed benefits due under the policy.
PLL PPFM Page 19 January 2024
The following table describes the possible elements credited or charged to asset
shares.
Element
Description of Allowance
(a)
Premiums
Premiums paid under the policy
(b)
Investment return
Investment return on assets backing asset shares
(before investment expenses)
(c)
Investment
expenses
Investment expenses incurred in maintaining
investments
(d)
Initial expenses
Administrative expenses incurred in setting up
policies, including commissions
(e)
Renewal expenses
Administrative expenses incurred in maintaining
policies and paying claims
(f)
Other expenses
Project and other one-off expenses incurred
(g)
Tax on investment
return
Tax charge on investment return
(h)
Tax relief on
expenses
Tax relief on expenses
(i)
Mortality & morbidity
costs
Costs of providing mortality and morbidity benefits
(j)
Early terminations
Effect of surrender and lapse experience
(k)
Paid-up policies
Effect of policies becoming paid up experience
(l)
Partial and regular
withdrawals
Effect of partial and regular withdrawals during
policy lifetime
(m)
Surrenders at
protected dates
Effect of surrender at guarantee date experience
(n)
Annuity payments
Annuity payments made under the policy
(o)
Charges for the cost
of guarantees
Charges for the costs of providing guarantees to
both with-profits and non-profit policies in the fund
(p)
Charges for the cost
of capital
Charges for the cost of providing capital to support
guarantees and new business strain
(q)
Distributions to
shareholders
The shareholder share of the distributed surplus
(r)
Tax on distributions
to shareholders
The tax associated with the shareholder share of
the distributed surplus
(s)
Profit and losses
from other business
Effect of experience of other business profits and
losses including from non-profit business in the fund
(t)
Estate distribution or
charge
Future distributions from or charges to the estate
(u)
Exceptional items
Enhancements or charges for exceptional items
Mortality and morbidity costs reflect that the amounts payable on death or serious
illness are generally more than the underlying asset share, but this may not always
be the case and, for some products, where the underlying asset share exceeds
the amount payable, the cost becomes negative and adds to the asset share.
Asset shares may take into account profit and losses from the experience of early
terminations, such as surrenders and lapses and policies becoming paid up. For
example profits occur where the early termination value is less than the underlying
asset share and conversely for losses.
PLL PPFM Page 20 January 2024
The precise approach to calculating asset shares differs between funds, and
between products within funds depending upon, amongst other things, the
historical practices.
4.4 Initial Asset Shares
4.4.1 The initial asset shares used when the funds were transferred into Phoenix Life
Limited were in most cases the closing asset shares in the transferring company.
Details of how those asset shares were calculated are not included here. Not all
the above items may necessarily have applied at all times for all types of policy in
the past. Different practices, often more approximate, may have been used in the
past and the practice is generally to continue to use the results of these practices
when determining the effect of those years on the asset shares of specimen
policies.
4.4.2 The calculation of the asset shares for certain policies as at 1 January 2006 where
they did not exist previously was specified in the 2005 Scheme.
4.4.3 Asset shares were calculated for all Swiss Life IB Fund endowment policyholders
transferring to the 90% With-Profits Fund as at 31 December 2005 on the basis of
Swiss Life’s then current Principles and Practices of Financial Management.
Appropriate bonus rates were then determined based on an enhancement of these
asset shares by 100%. A bonus reserve valuation was then carried out using the
bonus rates determined as above, and the resulting values were the starting point
for the development of asset shares within the 90% With-Profits Fund from
31 December 2005.
4.4.4 Asset shares for Swiss Life OB Fund Pensions With Profit Fund units were
calculated as at 31 December 2005 using the Principles and Practices of Financial
Management of Swiss Life. The resulting values were the starting point for the
development of asset shares within the 100% With-Profits Fund from
31 December 2005.
4.4.5 Asset shares for other Swiss Life OB Fund with-profits policies were calculated as
at 31 December 2005 using the Principles and Practices of Financial Management
of Swiss Life. The resulting asset shares were then scaled up to be equal to the
available assets in the Swiss Life OB Fund after allowing for other liabilities,
including liabilities for other policy types in accordance with the 2005 Scheme.
The resulting values were the starting point for the development of asset shares
within the 90% With-Profits Fund from 31 December 2005.
4.4.6 For former Swiss Life policies in the 100% With-Profits Fund, the individual policy
asset share at the date of transfer into Phoenix Life Limited was calculated using a
prospective (forward looking) valuation to apportion the assets of the Swiss Life
With Profit Fund between the in force policies in an appropriate manner. For
former Bradford policies, the individual policy asset share at the date of transfer
into Phoenix Life Limited was the original individual policy asset share increased
by 88.5% to apportion the assets attributable to with-profits policies between the in
force policies in an appropriate manner. In each case, from 31 December 2005
onwards these asset shares will be accumulated as described in this document
allowing for premiums, expenses, investment returns and other items from that
date forwards.
4.4.7 The calculation of the asset shares for Century policies as at 1 January 2007 was
specified in the 2006 Scheme.
Initial asset shares for Century with-profits policies were calculated using a bonus
reserve valuation as at 31 December 2006 adjusted so that at that date the value
of the transferring assets equalled the bonus reserve valuation liabilities of the
PLL PPFM Page 21 January 2024
transferring business. The bonus reserve valuation was calculated using the
future bonus relationships indicated by Century’s Court Order in 2001 (see
paragraph 9.1.2). The bonus reserve valuation included a liability in respect of
expected future shareholder transfers.
The transferring assets included the agreed value of the non-profit business which
existed, prior to the 2006 Scheme, in the Century With Profit Fund and the transfer
of assets worth £2.549m to the Britannic With-Profits Fund.
The adjustment took place after assets were set aside to either improve values for
surrendering policies or to smooth any anticipated discontinuities in policy payouts
which would arise if then current annual and final bonus scales were maintained.
The amounts of assets set aside were determined by the Century Board before
the Effective Date of the 2006 Scheme after taking advice from the Century With
Profits Committee and the Century With Profits Actuary.
4.4.8 The calculation of the asset shares for the former Scottish Mutual Assurance
Limited policies and former Scottish Provident Limited policies were specified at
the time of demutualisation on 1 January 1992 and 1 August 2001 respectively.
PLL PPFM Page 22 January 2024
5 Principles and Practices – Guiding Principles
In managing Phoenix Life Limited and its with-profits funds, a number of guiding principles are
applied. These guiding principles are considered when applying the other principles and
practices set out in this document. Should a situation arise in which there is a conflict
between one or more principles or practices, the fund is managed in order that the guiding
principles are applied. The guiding principles are part of the principles of financial
management used in managing each fund. The guiding principles and their associated
practices are shown below.
Principle
5.1
Legal Requirements
Phoenix Life Limited and its with-profits funds are managed in accordance with
Phoenix Life Limited’s then current understanding of all legal and regulatory
requirements.
This includes a commitment to observe all contractual terms set out in policy
documents, all guaranteed commitments and other obligations including:
• sound and prudent financial management of the with-profits funds;
• treating customers fairly;
• meeting solvency requirements; and
• the terms of the 2023 Scheme.
Practices
5.1.1 Periodic valuations of the assets and liabilities of Phoenix Life Limited and each
fund are carried out to establish the solvency level and the level of excess assets
within a fund, if any. These valuations are currently carried out quarterly and
changes from one period to the next are analysed. In between periodic valuations
solvency is monitored on an approximate basis allowing for market movements
and other known changes.
5.1.2 As described in section 3.2, the Board aims to maintain an internal margin over
and above the minimum solvency standard required by the regulations.
5.1.3 If the internal margin is breached then no action will be taken to reduce the capital
of Phoenix Life Limited, such as the payment of dividends, until the breach has
been rectified. Immediate action to restore the internal margin will be considered.
Immediate action means that changes may be made to, but are not restricted to,
investment strategy, bonus declarations and surrender values.
5.1.4 The capital requirements and the capital available are regularly assessed and
monitored to ensure that adequate levels of capital are maintained.
5.1.5 Key insurance risks and operational risks are regularly monitored.
5.1.6 Treating customers fairly from a financial perspective is achieved through the
monitoring of compliance with the Principles and Practices of Financial
Management.
5.1.7 The long-term business fund is operated in accordance with the 2023 Scheme,
(see Appendix 2). These govern practices relating to the following:
• maintenance of separate assets for each fund;
• allocation of surplus between policyholders and shareholders;
• allocation of tax between funds; and
• the Buffer Reserve as it affects the Britannic With-Profits Fund and the
Britannic Industrial Branch Fund.
PLL PPFM Page 23 January 2024
Principle
5.2
Basic Fund Concepts
Subject only to Principle 5.1, the interests of with-profits policyholders extend to,
but are also limited to, the assets of the fund to which the policy belongs (other
than in respect of the shareholders’ entitlement to a share of the cost of bonuses
as indicated in the Principles for each fund and the Buffer Reserve for the
Britannic With-Profits Fund and Britannic Industrial Branch Fund).
Each of the with-profits funds is operated as a stand-alone fund and investment
and bonus policy set accordingly. Separate revenue accounts and balance sheets
are maintained for each fund within the long-term business fund.
Assets may be loaned by, or made available by a contribution arrangement with,
the Non-Profit Fund and Shareholder Fund to eliminate any deficit in the with-
profits funds. For the purposes of managing the funds the assets of the with-
profits funds will be treated as being permanently increased from shareholder
resources to the extent that there is no realistic prospect of the deficit being
reversed. However, this does not preclude the repayment of such loans should
the actual experience be such that surplus emerges and repayment becomes due
under the terms of the loans.
In the highly unlikely event that the assets of any of the with-profits funds of
Phoenix Life Limited, the surplus assets in the Non-Profit Fund and the surplus
assets in the Shareholder Fund are insufficient to enable that with-profits fund to
meet its guaranteed benefits, then assets from the other with-profits funds would
be used, but only to the extent that such assets were not required to meet the
guaranteed benefits in the other with-profits funds.
Items of income and outgo (revenue items) within Phoenix Life Limited are
allocated to funds in a manner which is considered fair. The allocation
methodology is regularly reviewed by the Board or in the case of the SPI With-
Profits Fund the With-Profits Committee, and may change.
Premiums are directly associated with a specific policy and are allocated to the
fund which contains that policy.
Separate asset pools are maintained in respect of each fund and the investment
income and gains arising are allocated to originating asset pools. Policy benefits
and claim payments are directly associated with a specific policy and are allocated
to the fund which contains that policy.
The overall aim when apportioning expenses to different funds is to reflect the
actual costs incurred in respect of each fund, always maintaining consistency with
the 2023 Scheme and with any commitments made to the regulator.
Expenses allocated to the long-term business fund which are not directly
attributable to a fund, are allocated across the funds in the following way:
• Where significant value added projects are undertaken or the benefits are not
clearly attributable to a particular fund, the Board or in the case of the SPI
With-Profits Fund the With-Profits Committee, determines a fair and
reasonable apportionment, for example in proportion to the fees paid to the
outsourced service providers or in proportion to the benefits which may accrue
from the expenditure or in proportion to another key driver of the cost.
• Other costs directly incurred by Phoenix Life Limited, but which are not directly
incurred by a fund, are allocated in a fair and reasonable way based on the
drivers of those costs.
PLL PPFM Page 24 January 2024
Should PGMS be unable to meet any of its obligations to provide services then
Phoenix Life Limited would request that Phoenix Group, as owners of PGMS step
in to restore the position. Should Phoenix Group not do this, then Phoenix Life
Limited would attribute any losses to the Shareholder Fund or Non-Profit Fund,
and the with-profits funds would only be affected if the Shareholder Fund or Non-
Profit Fund had insufficient excess assets to bear the losses.
Should the agreement with PGMS be terminated then, in circumstances where the
interests of with-profits policyholders in a with-profits fund (or funds) had not been
the cause of such termination, Phoenix Life Limited would aim to manage its
business in such a way that expenses would be allocated to that (or those) with-
profits fund(s) as if the agreement with PGMS had continued in full force, and that
(or those) with-profits fund(s) would only be affected if the Shareholder Fund or
Non-Profit Fund had insufficient excess assets to support this aim.
Subject to Principle 5.1, the tax allocated to each of the with-profits funds is
assessed as the amount of tax which the with-profits fund would have incurred
had it been the whole of the long-term business fund of Phoenix Life Limited.
Practices
5.2.1 The Buffer Reserve is available to support the Britannic Industrial Branch Fund
and the Britannic With-Profits Fund. Its mechanics are covered in sections 9.12
and 10.12.
5.2.2 Shareholder’s entitlements and other potential benefits are covered in the
principles and associated practices for each fund.
5.2.3 Each with-profits fund is operated as a stand-alone fund. In formulating
investment and bonus policy for a particular with-profits fund, no account is taken
of the availability of potential support from outside the fund, except to the extent
that the 2023 Scheme requires such consideration to be taken or support existed
and was being utilised at 27 October 2023, or is drawn down in the future, or
where the Board decides is otherwise appropriate.
5.2.4 The assets, liabilities and capital requirements of each fund are reviewed no less
frequently than four times a year, using realistic assumptions and generally
accepted methodologies. If the assets and liabilities are materially different action
is taken. This action may include, but is not restricted to, changes to investment
strategy, bonus declarations, asset shares and surrender values. In this context,
materiality is determined by the Board or in the case of the SPI With-Profits Fund
the With-Profits Committee.
5.2.5 In the event that the with-profits asset value of any of the with-profits funds falls
below (or is likely to fall below) the threshold amount for that fund support will be
provided to that fund by way of a loan or other contribution arrangement from the
Non-Profit Fund or the Shareholder Fund to the extent that the Board determines
there are assets in those funds available to make such a loan.
The loan would be repayable with the approval of the Board if the with-profits
asset value is more than the threshold amount.
In considering whether to approve any such transfer or repayment to the Board
shall have regard to matters including, but not limited to:
• the presumption that any support will be repaid to the extent that the with-
profits asset value is greater than the threshold amount,
• the Scheme Capital Policy,
• the financial needs of the relevant with-profits fund,
• the company’s duty to treat its customers fairly, and
• advice from the With-Profits Actuary.
PLL PPFM Page 25 January 2024
Whether or not interest would be payable by the fund on any loan received, and
the interest rate payable if applicable will vary depending on the with-profits fund
receiving the loan.
5.2.6 In the event that any of the with-profits funds cannot meet its regulatory capital
requirements from its own capital resources, the With-Profits Committee can
recommend, or in the case of the SPI With-Profits Fund request, that the Board
holds additional capital in the Non-Profit Fund or the Shareholder Fund to meet
any shortfall. To the extent that the Board does not or cannot make sufficient
assets available, then it will be necessary to take other actions within the relevant
with-profits fund to ensure that it can meet its regulatory capital requirements from
its own capital resources.
5.2.7 The assets of one with-profits fund may be used to support another with-profits
fund in Phoenix Life Limited if the fund which is to provide the support has
sufficient assets to cover its contractual obligations and, both the following unlikely
situations prevail:
• there are no surplus assets available in the Non-Profit Fund and Shareholder
Fund; and
• the regulatory regime has been ineffective. The regulatory regime is aimed at
ensuring that life assurance companies do not become insolvent on a
Companies Act basis and there are prudential margins and intervention points
incorporated into the PRA’s rules that are aimed at preventing this.
Similarly the assets of one with-profits fund may be required to be used to support
another fund in Phoenix Life Limited if Phoenix Life Limited has become insolvent
on a Companies Act basis.
5.2.8 Should a fund trigger the fund closure provisions incorporated into the 2023
Scheme, then the fund will be closed in accordance with those provisions. See
paragraphs 3.1.2. On closure of the 90% With-Profits Fund, Alba With-Profits
Fund, Phoenix With-Profits Fund or the SPI With-Profits Fund, the reinsured Irish
business from PLAE will be recaptured and transferred to the PLAE Non-Profit
Fund.
5.2.9 Future non-profit annuities arising from policies in the with-profits funds may
remain in the with-profits fund or, alternatively may be set up in the Non-Profit
Fund using the open market option under such policies or the powers incorporated
in the 2023 Scheme to re-allocate non-profit policies. Where the latter is the case
the With-Profits Committee will periodically review the terms to ensure that they
are consistent with the fair treatment of the with-profits policyholders. See
paragraph 3.1.3.
5.2.10 Other than for the non-profit annuities per paragraph 5.2.9, the powers to re-
allocate non-profit policies in the with-profits funds will not be regularly used. If a
re-allocation is made, it is expected that it would be on commercial terms with the
Non-Profit Fund receiving an adequate return for the risks it was taking on. If the
total value of such a re-allocation exceeds a minimum size (currently £500m), then
an independent actuary will normally be appointed to consider the proposed terms,
unless the With-Profits Committee decided that the terms were clearly fair and
equitable and that no such review was therefore needed.
5.2.11 The allocation of revenue items and the underlying methodology is reviewed at
least once a year by the With-Profits Committee.
PLL PPFM Page 26 January 2024
5.2.12 The allocation methods and any changes are approved by the Board or in the
case of the SPI With-Profits Fund the With-Profits Committee. Changes would
typically be due to:
• changes in regulations; and
• maintaining equity between the with-profits funds and the shareholders.
5.2.13 Most revenue account items are directly received or incurred in respect of one
fund and so are directly allocated to that fund.
5.2.14 Expenses allocated to the long-term business fund that are directly incurred by or
associated with a particular fund are allocated to that fund. This includes
commission, the charges made under the Management Services Agreements by
PGMS and the fees payable to the investment managers in connection with the
management of the investments of the fund, or any fees payable to third parties for
services.
5.2.15 The Board may approve limiting expenses charged to asset shares where this is
felt to be fairer. Any such expenses not charged to asset shares will fall to the
estate.
5.2.16 Other charges and benefits relating to business risks as described in the principles
and associated practices for each fund are allocated to the relevant fund to which
that risk relates as determined by the Board (or the With-Profits Committee for the
SPI With-Profits Fund).
5.2.17 The Board (or the With-Profits Committee for the SPI With-Profits Fund) may also
change the method of apportioning expenses between funds if it was possible to
do so without ceasing to treat customers fairly and to do so assisted in meeting
one of Phoenix Group’s other corporate objectives. However such changes would
only be made if they were consistent with the 2023 Scheme and with any
commitments made to our regulator.
5.2.18 Fines levied by the regulators or costs incurred on the instruction of the regulator
will be charged to the Shareholder Fund or a particular fund within the long-term
business fund in accordance with guidance from our regulator and the terms of the
2023 Scheme.
5.2.19 In particular, actual regulatory penalties (fines) and compensation payments
relating to events which occurred after 31 July 2009 are paid directly from the
Shareholder Fund and so will impact neither asset shares nor the excess assets in
the with-profits funds.
5.2.20 The principles and associated practices for each fund give more information on
expenses and charges that are specific to that fund.
5.2.21 Tax will be attributed to each with-profits fund, so far as is practicable, on the basis
that the 100% With-Profits Fund, the Scottish Mutual With-Profits Fund, the SPI
With-Profits Fund, SERP Fund, London Life With-Profits Fund and National
Provident Life With-Profits Fund are separate mutual life assurance companies
and each of the other with-profits funds is a separate proprietary life assurance
company.
5.2.22 The tax allocated to one or more of the with-profits funds may be reduced if the
Board believes this to be necessary to treat customers fairly in accordance with
regulator’s rules.
5.2.23 If any tax benefits are allocated to a with-profits fund in accordance with paragraph
5.2.20, the With-Profits Committee will recommend to the Board whether these
benefits should accrue to the estate or should be credited to the asset shares of
policies within that fund or to the asset share of a group of policies within that fund.
PLL PPFM Page 27 January 2024
5.2.24 Phoenix Life Limited has issued subordinated loan notes (debt). The with-profits
funds are managed so that the discretionary benefits under with-profits policies are
calculated and paid disregarding, to the extent necessary to treat customers fairly,
any liability Phoenix Life Limited may have to make payments under these
subordinated loan notes.
PLL PPFM Page 28 January 2024
Principle
5.3
Fair Treatment
Phoenix Life Limited aims to treat its with-profits policyholders fairly. The
approach used may involve the pooling of risks and rewards across and within
policy classes and sometimes across generations of policyholders. We do not
pool risks across the different with-profits funds in Phoenix Life Limited. Different
risks may be pooled at different levels.
The overall aim when determining the bonus rates to apply to different with-profits
policies is to broadly reflect the actual profits, losses and costs incurred over the
lifetime of the policies, but allowing for any pooling and smoothing.
Costs may be recovered from policies directly, for example by the cancellation of
units of unitised policies, or indirectly via bonuses and early termination values.
Practices
5.3.1 With-profits business in each with-profits fund is split into various types of business
and classes when determining benefits and bonuses. The primary aim is to
ensure fair treatment of policyholders at this broad level.
5.3.2 Risks and rewards are pooled at different levels. Some are pooled at fund level,
others are pooled at type of business, class and bonus series levels.
5.3.3 Within this pooling, experience is aggregated. This aggregation includes:
• Combining large and small policies, with the only differentiation between the
policy benefits being set at the policy outset via the sum assured, annuity or
product charges, thus having the same bonus rates applied regardless of policy
size.
• Mortality, morbidity and surrender experience are based on investigations
which cover various groups and types of policies.
• Asset share models and assumptions contain approximations, but are not
intended to prejudice the overall fair treatment of policyholders.
5.3.4 The broad level of fair treatment means some cross subsidy between different
groups of policyholders, but this is an inherent feature of the with-profits business
and is not considered prejudicial to the overall fair treatment of policyholders.
5.3.5 Where costs are specific to a class of policy then, allowing for approximations,
such costs will be taken into account in assessing the bonuses added to that
policy class and in assessing the early termination value payable.
5.3.6 Where costs are not specific to a single policy class, they will be apportioned
across the policy classes to which they are relevant in a reasonable manner.
5.3.7 Implicit charges for mortality, sickness and other benefits will generally reflect
Phoenix Life Limited’s own or insurance industry actual claims experience.
Explicit charges for such benefits will be determined in line with policy conditions
and, where this requires periodic reviews in the light of experience, such reviews
will be carried out and charges adjusted accordingly.
5.3.8 The way in which charges are apportioned between or allocated to policies or
classes of policy and between different funds or subsidiary companies could,
subject to the 2023 Scheme, be changed if the Board (or the With-Profits
Committee for the SPI With-Profits Fund) considered that this was necessary to
enable it to continue to treat customers fairly.
PLL PPFM Page 29 January 2024
5.3.9 Charges for guarantees or smoothing may be made annually or by retention from
maturity or early termination values, or costs may impact any estate in the relevant
with-profits fund, or by a combination of these methods.
5.3.10 Where the shareholder or other group companies provide services to the with-
profits funds, they may make commercial profits from the arrangements and this
will be additional to any share of bonus. Examples of such arrangements are:
• Management services agreement with PGMS.
• The terms for transfers of vesting annuities out of the with-profits funds.
• Interest charged on loan arrangements from the Non-Profit Fund or the
Shareholder Fund to a with-profits fund under the capital policy. See section
3.8 Capital Policy.
• Business reassured to the Non-Profit Fund from the with-profits funds.
If assets are traded between a with-profits fund and the Non-Profit Fund or
between a with-profits fund and the Shareholder Fund, then this will be done at fair
value.
In addition the with-profits funds are charged tax as if they were stand alone
entities. The Non-Profit Fund pays the difference between the tax for Phoenix Life
Limited as a whole and the total allocated to the with-profits funds. This will
normally result in the Non-Profit Fund paying a different amount of tax than if it
was a stand alone entity.
Where there are material transactions that involve both shareholder and with-
profits policyholder interests these are considered by the appropriate governance
committees including the With-Profits Committee before implementation. This will
include any changes to commercial arrangements with PGMS, as well as the
terms of any transactions between the with-profits funds and the Non-Profit Fund.
PLL PPFM Page 30 January 2024
6 Principles and Practices – 90% With-Profits Fund
The Principles and Practices given in sections 6.4 to 6.14 together with the Guiding Principles
and Practices form the Principles and Practices of Financial Management for the 90% With-
Profits Fund. Sections 6.1 to 6.3 give background information specific to the 90% With-Profits
Fund. Subsequently in this section the use of the term ‘the fund’ generally means the 90%
With-Profits Fund.
6.1 Fund History
6.1.1 The 90% With-Profits Fund comprises with-profits business that was transferred
into it from Swiss Life and from Britannic Unit Linked Assurance.
6.1.2 Swiss Life ceased issuing new with-profits policies in 1992 (apart from policies
arising from options on existing with-profits business). The with-profits business of
Swiss Life included policies written on its own account and policies transferred in
by previous court schemes from Pioneer Mutual Insurance Company and the
former UK branch of Swiss Life (a company based in Switzerland). Pioneer
Mutual had itself been formed through the merger of the Stamford Mutual
Insurance Company, the Blackburn Assurance Company and the Pioneer Life
Assurance Company.
6.1.3 The with-profits funds within Swiss Life were internally separated into three sub-
funds, the OB Fund, the IB Fund and the With Profit Fund. The OB Fund
contained all of the Ordinary Branch policies emanating from the former Pioneer
Mutual together with any subsequent new policies of such type, including the
Pension With-Profits Fund element of personal pension plan and free standing
additional voluntary contribution (AVC) policies. The IB Fund contained all of the
Industrial Branch policies emanating from the former Pioneer Mutual together with
any subsequent new policies of such type. The With Profit Fund contained a small
number of traditional life policies of the type that had been written prior to the
merger with Pioneer Mutual.
6.1.4 Originally the with-profits (Pension With-Profits Fund) element of Libra Personal
Pension Plans and similar policies was transferred to the 100% With-Profits Fund
but as part of the 2009 Scheme it was transferred to the 90% With-Profits Fund.
The with-profits business in the Swiss Life OB Fund and the IB Fund was
transferred into the 90% With-Profits Fund, whilst the business in the Swiss Life
With Profit Fund was transferred into the 100% With-Profits Fund. See
paragraphs 3.2.3 and 3.4.4.
6.1.5 Britannic Unit Linked Assurance (BULA) was formed in 1982 as a wholly owned
subsidiary of Britannic Assurance and until 2005 was used mainly as the vehicle
for its unit-linked business with unit liabilities being passed from Britannic
Assurance to Britannic Unit Linked Assurance by way of a reassurance treaty.
Britannic Unit Linked Assurance wrote little business in its own right.
The life business of Allianz Cornhill Insurance plc (ACI) was transferred to
Britannic Unit Linked Assurance by way of an insurance business transfer scheme
in 2005. As a result of this, Britannic Unit Linked Assurance acquired the with-
profits business that had previously been sold by ACI. This business was
contained separately in the Britannic Unit Linked Assurance With Profits Fund and
transferred to the 90% With-Profits Fund as part of the 2006 Scheme.
6.1.6 In 2022 policies sold in Ireland were transferred to PLAE, an Irish company within
the Group, and immediately reinsured back into the 90% With-Profits Fund. PLAE
is responsible for paying claims under these policies. For as long as the
reinsurance remains in force, amounts payable to PLAE on these policies under
the reinsurance will continue to reflect participation in the 90% With-Profits Fund at
the same level as before.
PLL PPFM Page 31 January 2024
6.2 Types of Business
The with-profits policies transferred from Swiss Life are mainly traditional
endowments and whole life policies. In addition, there are a substantial number of
non-profit Industrial Branch policies which are paid-up and on which the sum
assured is very small in comparison to the with-profits policies.
Former Swiss Life Libra Personal Pension Plans and similar policies are written in
the Non-Profit Fund. However, any investment through these contracts in former
Swiss Life Pension With-Profits Fund unitised with-profits units is reassured to the
90% With-Profits Fund under an internal reinsurance agreement. Only the
operation of the with-profits (former Pension With-Profits Fund) units is described
here.
The former Britannic Unit Linked Assurance with-profits policies are mainly
traditional endowments and whole life policies. There are some with-profits
deferred annuities. When these come into payment, they no longer participate in
profits (in accordance with the policy conditions) and are transferred to the Non-
Profit Fund. Former Britannic Unit Linked Assurance low cost endowment policies
constructed as a with-profits endowment plus term assurance are separated into
those constituents, with just the with-profits component allocated to the 90% With-
Profits Fund, albeit they are single policies. Other non-profit rider benefits are
similarly separated. Some former Britannic Unit Linked Assurance non-profit
policies have options to convert to a with-profits policy. When such options are
exercised the policy and an appropriate amount of assets are transferred to the
90% With-Profits Fund.
6.3 Capital Support to the Fund
The capital policy is described in section 3.2.
In certain circumstances, the shareholders will loan money to this fund. The
practices relating to receipt of support are detailed in sections 3.3 and 5.2.
PLL PPFM Page 32 January 2024
Principle
6.4
Amounts Payable Under a With-Profits Policy
The aim of the methods employed in determining the amounts payable under a
with-profits policy is the fair treatment of all with-profits policyholders consistent
with the guiding principles.
The main guide used for determining the amounts payable under with-profits
policies is asset share calculations which are carried out for certain specimen
policies. The amounts payable will allow for a fair share of any surplus distributed,
which may be in the form of annual or final bonuses.
In putting into practice the aims set out in the guiding principles and in the
application of the with-profits principles generally, various approximations are
applied in a number of different areas, the major ones being described in
paragraph 6.4.4. The Board endeavours to ensure that these approximations:
• are applied consistently;
• have a broadly neutral effect between policyholder and shareholder interests
and between the different with-profits funds;
• where appropriate, have a broadly neutral effect over time (that is between one
generation of policyholders and another); and
• for the larger classes of business, are of broadly neutral effect within that class.
This may mean that for some smaller classes of business, a different result would
result if less approximate methods were used.
Any of the assumptions used in previous years (such as investment returns,
charges and allocations of miscellaneous profits and losses) can be changed at
any time:
• should they be shown to have been incorrect;
• should legal or regulatory change render it necessary to do so; or
• if their continued application unchanged could put at risk the achievement of
the aims set out in the guiding principles in section 5.
Changes to the methods used to determine the amounts payable under a with-
profits policy are controlled by:
• requesting and considering the advice of the Chief Actuary and the With-Profits
Actuary and the opinion of the With-Profits Committee before making any
changes;
• assigning to the Chief Actuary the executive responsibility to continue to apply
the currently agreed methods until advised differently; and
• following legal or regulatory requirements to obtain independent expert input
where necessary.
Policyholders have no entitlement to receive the asset shares, if any, used to
determine the bonuses for their policies.
Bonuses can only be declared if there is surplus available for distribution.
Asset shares are only calculated for certain specimen policies for the purpose of
determining the amounts payable under with-profits policies.
Should the excess assets in the fund be exhausted then we intend, if at all
possible, that any further losses arising from that point onwards in respect of
former Swiss Life OB Fund policies will not affect the amounts payable to former
Swiss Life IB Fund policies or former Britannic Unit Linked Assurance policies in
the fund.
PLL PPFM Page 33 January 2024
Practices
Asset Share Methodology
6.4.1 The basic method for asset shares calculations for with-profits business in the fund
uses an apportionment of actual investment returns net of tax and the actual
underlying experience.
Asset shares are generally not smoothed. In particular, the investment returns
and experience elements contributing to asset shares are not smoothed, other
than that inherent in the processes used in the derivation of the assumption or in
respect of large profits and losses from other business per paragraph 6.4.2(s).
PLL PPFM Page 34 January 2024
6.4.2 The following table describes the elements currently credited or charged to asset
shares for specimen policies.
Element
Traditional With-Profits
Business
Unitised With-Profits
Business
(a)
Premiums
Premiums paid under the
policy
Premiums paid under the
policy
(b)
Investment return
Allocated return
Note (b)
Allocated return
Note (b)
(c)
Investment
expenses
Note (c)
Implicit in product charges
(d)
Initial expenses
Actual allocated
Note (d)
Implicit in product charges
(e)
Renewal expenses
Actual allocated
Note (e)
Implicit in product charges
Note (e)
(f)
Other expenses
Actual allocated
Note (f)
Not charged
Note (f)
(g)
Tax on investment
return
Actual allocated
Note (g)
Actual allocated
Note (g)
(h)
Tax relief on
expenses
Actual allocated
Note (h)
Implicit in product charges
(i)
Mortality &
morbidity costs
Experience
Note (i)
Implicit in product charges
(j)
Early terminations
Not charged
Note (j)
Not charged
(k)
Paid-up policies
Not charged
Not applicable
(l)
Partial and regular
withdrawals
Not applicable
Not applicable
(m)
Surrenders at
protected dates
Not applicable
Not applicable
(n)
Annuity payments
Not applicable
Not applicable
(o)
Charges for the
cost of guarantees
Charged
Note (o)
Charged
Note (o)
(p)
Charges for the
cost of capital
Note (p)
Charged
Note (p)
(q)
Distributions to
shareholders
Sometimes
Note (q)
Not applicable
(r)
Tax on
distributions to
shareholders
Not charged
Not applicable
(s)
Profit and losses
from other
business
Profits or losses are credited
Note (s)
Not charged
(t)
Estate distribution
or charge
Note (t)
Note (t)
(u)
Exceptional items
Not applicable
Not applicable
PLL PPFM Page 35 January 2024
Notes
(b) Investment return
This is based on the total return, income and capital gains / losses, made on the
assets of the fund.
The investment strategy is described in section 6.9. In accordance with this,
different proportions of each type of asset are attributed to the specimen with-
profits policies. Current practice is for all specimen policies of a particular product
type to have the same proportions of each type of asset. However different
product types may have different proportions of each type of asset.
The return attributed to each specimen policy is then the weighted average return
from each asset type using those proportions.
For former Swiss Life traditional with-profits policies the return on fixed interest
securities will be that of the subclass of such securities issued by the UK
government with a time to redemption which matches most closely the term
remaining of the specimen policy. For former Swiss Life unitised with-profits
policies the return on fixed interest securities is not differentiated by term
remaining and the same return is allocated across all specimen policies. Any
difference in return between UK government fixed interest securities and the other
fixed interest securities within the asset share is applied as a uniform percentage
adjustment across the fixed interest part of the asset shares of all policies,
irrespective of the term remaining.
A return may be attributed on some types of asset, particularly derivative
securities, to the class of policy, if any, in respect of which they have been
specifically purchased.
The ratio of overseas equities to UK equities and of government guaranteed to
other fixed interest securities is the same for all specimen former Britannic Unit
Linked Assurance policies.
The ratio of overseas equities to UK equities and of government guaranteed to
other fixed interest securities is the same for all specimen former Swiss Life
policies.
(c) Investment expenses
For former Swiss Life traditional with-profits policies, actual investment expenses
are charged based on those allocated in respect of the fund in accordance with
section 6.11. For former Britannic Unit Linked Assurance policies, investment
expenses are not charged to asset shares and investment management costs in
respect of these will be borne by the excess assets within the fund.
The investment expenses are expressed as a percentage charge to be applied to
the assets.
(d) Initial expenses
Initial expenses are based on PGMS charges and an uplift to cover direct costs.
These are all per policy expenses, allocated in accordance with sections 5.2 and
6.11.
PLL PPFM Page 36 January 2024
(e) Renewal expenses
Renewal expenses are based on PGMS charges and an uplift to cover direct
costs. These are all per policy expenses, allocated in accordance with sections
5.2 and 6.11.
For former Swiss Life unitised with-profits pension policies the annual
management charge of 0.875% is deducted within the asset share calculation.
(f) Other expenses
Project and other one-off expenses incurred are included in the actual renewal
expenses charged to asset shares.
Significant future project, additional activity and other one-off costs will only be
charged to asset shares following approval by the Board.
For former Swiss Life traditional with-profits business such other expenses will
only apply if the additional expenses arise from major regulatory change.
(g) Tax on investment return
Tax on both income and capital gains is charged to the specimen asset shares of
life policies. It is calculated by applying the current rates applicable to life
insurance companies in respect of income and gains attributable to policyholders
to the different elements of the investment return, less the tax relief on expenses
at the applicable rate. Approximate allowance is made for any deferment in tax
payment or relief.
No tax is currently charged to the asset shares of pension policies.
The tax attributable to the asset shares of all types of policy is subject to change
should there be a change in relevant tax rules or rates.
(h) Tax relief on expenses
Tax relief due on the actual expenses charged is allowed for in those classes of
business that are subject to tax. Where the tax relief in respect of expenses is
deferred this is allowed for. The rates of tax relief are the average rates
applicable.
(i) Mortality and morbidity costs
Amounts to cover the cost of payments in excess of asset share on death or
illness are deducted.
Where a life policy is designed to pay a benefit on death that exceeds asset share
at that time, an annual charge is made to cover the cost of making those
enhanced payments.
The estimated annual cost of providing such benefits is determined periodically
from an analysis of recent actual costs incurred and from other insurance industry
and national statistics. These costs are expressed as rates dependent upon
various factors including age. The charge on each specimen policy in each year is
determined by applying the appropriate mortality rate to the current difference
between the benefit payable on death and the asset share.
PLL PPFM Page 37 January 2024
(j) Early terminations
It is not current practice to attribute to the asset share of specimen policies any
differences between the amount paid on the early termination of with-profits
policies and their estimated asset share.
(o) Charges for the cost of guarantees
For traditional with-profits business no explicit charge is currently made and all
costs of meeting guarantees will reduce the excess assets in the fund. This does
not preclude the possibility that such a charge may be introduced in the future if it
was appropriate.
The costs of meeting guarantees for the unitised with-profits business is
periodically assessed and any change in such expected costs that is not offset by
a change in the value of the backing assets may be allocated to the asset shares
through a guarantee charge.
(p) Charges for the cost of capital
No charge is currently made to the fund for the cost of capital. However, from time
to time, one or more loan agreements may be in place in accordance with section
5.2. Interest at a commercial rate will be payable on such loans. Where part of
such a loan is required to eliminate a deficit in the fund, then the interest payable
on that part of the loan will not be charged to asset shares. Where part of such a
loan is not required to cover a deficit, then a deduction will be made from asset
shares to reflect the excess of the interest payable on that part of the loan above
the return achieved by the fund from investing that part of the loan.
No charge is currently made to the fund for any capital that it is necessary to retain
in the Non-Profit Fund and Shareholder Fund in order that Phoenix Life Limited
continues to have adequate capital in accordance with paragraph 5.2.6.
The asset shares of specimen policies do not receive any credit for the return
earned on excess assets held within the fund.
(q) Distributions to shareholders
The cost of distributions to shareholders resulting from the cost of bonus allocated
to policies is charged to asset shares for former Swiss Life OB Fund bonus series
C policies and former Britannic Unit Linked Assurance policies only. It is not
charged for other policy types and such costs are met from the excess assets in
the fund.
(s) Other business profit or losses
For former Swiss Life traditional with-profits policies, it is the practice to allocate an
estimated amount to asset shares of specimen life policies in respect of any other
business profits or losses arising in a year, expressed each year as an addition to
the investment return.
Profits and losses from non-profit business are not currently added to asset shares
as the only remaining non-profit policies in the fund are paid-up former with-profits
policies, from which profits are expected to be minimal. Any profits or losses
arising on the non-profit business will increase or reduce the excess assets in the
fund.
Some larger business profits or losses may be spread over a number of future
years.
PLL PPFM Page 38 January 2024
The asset shares for former Swiss Life OB Fund policies include an allowance for
a proportion of the actuarially assessed value of future profits from the non-profit
business in the Swiss Life OB Fund at the date of transfer into Phoenix Life
Limited calculated consistently with the 2005 Scheme.
Expected profits or losses from changes in the proportion of ex Swiss Life IB Fund
policies not expected to claim are added to or deducted from the asset shares of
ex Swiss Life IB and ex Swiss Life OB life policies as miscellaneous surplus or
miscellaneous losses.
Nothing is added for former Britannic Unit Linked Assurance policies.
(t) Estate distribution or charge
For former Swiss Life traditional with-profits policies and former Britannic Unit
Linked Assurance policies, asset shares may be increased by distributions from
the estate or reduced by charges from the estate. However, these estate
distributions are not guaranteed. In the event of the assets in the fund being
insufficient to cover the liabilities, then any past asset share enhancements out of
the estate will be removed to the extent needed to remove the deficit. See section
6.12.
Former Swiss Life unitised with-profits policies do not share in any estate
distribution or charge.
6.4.3 For traditional with-profits policies the specimen policies are policies which are
about to reach maturity.
Both single premium and regular premium specimen policies may be used.
Specimen policies generally reflect the average size remaining in force for the year
of issue. Generally specimen endowment policies of the terms which contain a
significant volume of policies are used. For other terms approximations may be
used. Where final bonus rates are shared by policies of different years of issue or
different premium types, the specimen policies may be grouped or otherwise
averaged.
Asset shares are generally not calculated for specimen whole of life, altered and
paid-up policies, though may be for former Britannic Unit Linked Assurance
policies. As a result the target ranges described in sections 6.6 and 6.8 do not
apply to policies of these types.
For unitised with-profits pensions business, the specimen policies referred to are
tranches of units issued within calendar years to give final bonus rates which are
applied to units within the policy.
6.4.4 Various approximations are inherent in the asset share method described above
and in the general applications of the principles in practice. These include:
• Investment returns are calculated monthly but may be applied uniformly over
the period within the model which is usually quarterly or six-monthly.
• The investment return itself is only calculated approximately during the course
of a year (by the use of appropriate indices) and is updated after the end of
each year to reflect the actual performance earned.
• Carrying out the calculations (and hence changing final bonus rates) only
infrequently (such as twice a year or annually),
• An inevitable time delay before actual experience is reflected in bonus rates
and their application to policies,
• The use of bonus rates determined using a specimen policy of one type to
policies of another type (such as the use of final bonus rates determined for
standard endowment policies for some whole of life policies).
PLL PPFM Page 39 January 2024
• Where the premium rate for a specimen policy changed in the middle of a year
of issue, the final bonus may be based on either the pre or the post change
rate.
• The use of specimen policies will usually mean that small premium policies
receive more than asset share per unit premium (as many administration costs
are independent of premium size) and large premium policies less.
• The use of specimen policies only for selected terms of policy and the
interpolation of final bonus rates for intermediate terms will mean that the
amounts paid on policies of those intermediate terms will not necessarily equal
the target proportion of asset share. Similarly the final bonus rate calculated
for the longest term specimen policy is applied to any policies that claim after a
longer term.
• For policies, which have earlier been made paid up, the use of final bonus rates
applicable to policies, which have been premium paying throughout. Or,
alternatively, the application to both types of policy of final bonus rates
calculated using both model paid-up policies and model premium paying
throughout policies. Similarly bonuses will only be approximate for policies that
have been altered in other ways.
• Determining bonus rates by reference to asset shares is a relatively recent
development. Most of the in force traditional life policies commenced before
such an approach was established practice. When the asset share basis was
implemented it was necessary to quantify such items as investment returns,
investment mixes, expenses and business profits from many years into the
past. Best endeavours were made using all available historic information but
some of the amounts are inevitably best estimates rather than accurate
amounts.
• Profits or losses arising from policies that were formerly in the Swiss Life IB
Fund are particularly difficult to assess as many deaths that occur are not
notified, or are notified at a later date.
• For former Swiss Life IB Fund policies, premium tax relief and associated
increased sums assured and relief sums assured are allowed for in an
approximate manner.
Some of these approximations, as well as others not listed, will also be present in
the calculations of the excess assets of the fund from time to time.
6.4.5 Items not charged to asset shares, the effects of the approximations in the
experience assumptions and the effects of other approximations in the methods
employed feed through to the estate as described in section 6.12.
6.4.6 Documented procedures exist that set out how the asset share calculations
described above are to be carried out and how the parameters to be used in the
calculation are to be derived each year. A permanent record is kept of the historic
parameters used. Some of the instructions for the detailed computations are
embedded within a number of computer programs.
6.4.7 Any change to the practices used, including those used to determine the excess
assets in the fund, would be subject to the procedure described in principle 6.4.
Any material changes to the historical parameters used would, if a result of the
identification of a past inaccuracy, be notified to the Board and the With-Profits
Committee at the time of the next recommended change in bonus rates. If
considered appropriate, any changes may be phased in over a period rather than
implemented at once.
Any proposed changes to the historical parameters for other reasons would be
subject to the same processes as a change in practice.
6.4.8 Asset share practices are not guaranteed and may be changed in future.
PLL PPFM Page 40 January 2024
Asset share methodology and processes will be regularly reviewed by the Board
and may change. This may include changes to the historical aspects of the
calculations as a result of a variety of factors, including changes in regulations,
improvements in the degree of approximations, maintaining equity between
classes and groups of policyholders and significant changes in the financial
condition of Phoenix Life Limited.
Bonus Declarations
6.4.9 Bonus declarations are approved by the Board or committee of the Board or
delegated to senior management and then retrospectively approved by the Board.
6.4.10 The amount payable on traditional with-profits policies on maturity is the total of:
• the sum assured;
• the annual bonuses added whilst the policy has been in force; and
• final bonus, if any.
The amount payable at maturity on former Swiss Life Pension With-Profits Fund
investments is the total of:
• the value of the with-profits units; and
• final bonus, if any.
The rate, if any, of final bonus which applies to a particular policy class, date of
issue and date of maturity or retirement is currently determined in most cases with
reference to the asset share of a representative range of specimen policies.
6.4.11 Bonuses are reviewed regularly at least once a year.
The timing of annual bonus reviews is described in paragraph 6.5.4.
The timing of final bonus reviews is described in paragraph 6.6.8.
6.4.12 The timing of final bonus declarations may be varied.
6.4.13 Final bonuses are expected to, but are not guaranteed to, apply until the next
planned review date. These bonuses may be reviewed at any time between
normal planned review dates. Additional reviews would normally only be in
response to exceptional investment market movements.
6.4.14 Final bonus reviews also affect the amount of final bonus paid on non-protected
exits (surrenders) for policies where the surrender value calculation makes explicit
use of the current final bonus scale.
6.4.15 Bonuses are declared out of surplus arising in the year or in anticipation of surplus
arising. If there is no surplus or no expectation of surplus arising, no bonuses can
be declared.
PLL PPFM Page 41 January 2024
Principle
6.5
Annual Bonus Rates
If the value of assets is more than reasonably sufficient to enable the fund to meet
the aims described in the guiding principles in section 5, then annual bonuses are
likely to be added. In circumstances where the value of assets is fairly close to
the minimum amount required to enable the fund to meet the aims described in
the guiding principles, low or nil rates of annual bonus are likely to be added for
most classes of with-profits policy. Conversely, if the value of assets is more than
reasonably sufficient, higher rates of annual bonus are likely to be added for many
classes.
Separate annual bonus rates are applied to different policy classes to reflect the
different aspects of the products, including tax treatment, country of issue, form of
benefit and extent of guaranteed benefit. Currently there is no differentiation
between different dates of issue, although this may be done in the future if it
helped to better satisfy the aims described in the guiding principles in section 5.
Although most classes of new business are no longer accepted, other than under
options on existing policies, alternative products might at some time be introduced
into which existing customers could switch their benefits at their discretion, which
might receive different bonus rates.
Practices
6.5.1 Annual bonus rates currently take the form set out in the tables below. There are
linkages applying to the rates on different types of former Swiss Life traditional with-
profits policies issued prior to 21 May 1974 and these are also set out below.
Former Swiss Life OB Fund business
Bonus
series
Policies included
Bonus type
Stamford
Policies issued on or before
20 May 1974 that were then
insured by Stamford Mutual
Simple. A percentage applied to
the sum assured only. The rate is
expressed as R per £100 sum
assured for linkage purposes.
Blackburn
Policies issued on or before
20 May 1974 that were then
insured by Blackburn
Simple. A percentage applied to
the sum assured only. The rate is
determined as 1.5 x R – 0.10 per
£100 sum assured.
Pioneer Life
Simple
Policies issued on or before
20 May 1974 that were then
insured by Pioneer Life and
entitled to the standard rate
of simple bonus
Simple. A percentage applied to
the sum assured or annuity only.
The rate is determined as 1.5 x R
+ 0.30 per £100 sum assured.
Pioneer Life
Double
Policies issued on or before
20 May 1974 that were then
insured by Pioneer Life and
entitled to twice the standard
rate of simple bonus
Simple. A percentage applied to
the sum assured only. The
percentage is double that applied
to the Pioneer Life Simple.
PLL PPFM Page 42 January 2024
Former Swiss Life OB Fund business (continued)
Bonus
series
Policies included
Bonus type
Pioneer Life
Compound
Policies issued on or before
20 May 1974 that were then
insured by Pioneer Life and
entitled to compound bonus
Compound. A single percentage
applying to both the sum assured
or annuity and the attaching
bonus. The rate is determined as
the lesser of R + 1.30 or 1.5 x R +
0.30 per £100 sum assured and
bonuses.
Series A
Policies issued by Pioneer
Mutual between 21 May
1974 and 31 December 1990
and originally receiving
simple bonus
Simple. A percentage applied to
the sum assured only.
Series B
Policies issued by Pioneer
Mutual between 21 May
1974 and 31 December 1990
and originally receiving
compound bonus
Compound. A single percentage
applying to both the sum assured
and the attaching bonus.
Series C
Policies issued by Swiss
Pioneer Life or Swiss Life
(UK) on or after 1 January
1991
Compound. A single percentage
applying to both the sum assured
and the attaching bonus.
Former Swiss Life IB Fund business
Bonus
series
Policies included
Bonus type
M
Policies issued by Pioneer
Mutual from 21 May 1974
Simple. A percentage applied to
the sum assured only.
S
Policies with periodical cash
payments issued on or
before 20 May 1974 that
were then insured by
Stamford Mutual
Simple. A percentage applied to
the sum assured only. The rate is
one half of the rate for the former
Swiss Life IB bonus series A.
B
Policies with periodical cash
payments issued on or
before 20 May 1974 that
were then insured by
Blackburn
Simple. A percentage applied to
the sum assured only. The rate is
the same as for the former Swiss
Life IB bonus series A.
P
Policies with periodical cash
payments issued on or
before 20 May 1974 that
were then insured by Pioneer
Life
Simple. A percentage applied to
the sum assured only. The rate is
the same as for the former Swiss
Life IB bonus series A.
A
All other policies issued on or
before 20 May 1974
Simple. A percentage applied to
the sum assured only.
PLL PPFM Page 43 January 2024
Former Swiss Life Pension With-Profits Fund business
Bonus
series
Policies included
Bonus type
Pension
With-Profits
Fund
All policies with an
investment in the former
Swiss Life Pension With-
Profits Fund.
Compound. Bonus is added as
an increase in the unit price.
Former BULA policies
Bonus
series
Policies included
Bonus type
Life
All life policies
Compound. Different
percentages applying to both sum
assured and the attaching bonus.
Pension
All pension policies
Compound. Different
percentages applying to both fund
and the attaching bonus.
For all policy types the circumstances most likely to generate future increases in
annual bonus rates would be favourable future investment performance.
6.5.2 For each class of business, the level of annual bonus is set so as to maintain a
buffer for final bonus. The future claim payouts are estimated using realistic
assumptions and the annual bonuses are set at such a level that if experience
turns out to be in line with those assumptions, the overall amount of the payout
paid in the form of final bonus will be in line with a target proportion. Under current
investment conditions, the overall target is that 25% of the overall value of
payouts, calculated before any future augmentation provided by a release of the
estate, will be in the form of final bonus. Given the aggregate nature of this target,
for an individual policy, this final bonus buffer may be more or less than 25%. This
overall target is itself subject to review and may be changed. If experience does
not turn out to be in line with the assumptions then the 25% target might not be
met.
Annual bonus rates will be adjusted to keep the overall level of projected final
bonus broadly in line with the target. If necessary to remain on target, annual
bonus rates will be reduced to nil, or close to nil. However, some small annual
bonuses may be declared even if the final bonus buffer is below target. For
unitised with-profits pension policies, there is a guaranteed minimum annual bonus
rate of 4.00%.
There is no maximum change in the annual bonus rate; however, in the normal
course of events the declared annual bonus rates would not be expected to
change by more than 2% from one declaration to the next.
6.5.3 Where the financial position of the fund is weak the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus buffer being above the 25% target.
6.5.4 Currently for traditional with-profits business annual bonus rates are reviewed
towards the end of each year, with changes taking effect from 1 January for other
than former Britannic Unit Linked Assurance policies where changes take effect
from 1 April for the previous calendar year. However, rates may be reviewed at
other times should the Board consider this to be necessary to continue to adhere
to the principles.
Currently for unitised with-profits business annual bonus rates are reviewed in time
for the new rates to take effect from the 1 January.
PLL PPFM Page 44 January 2024
6.5.5 Where annual bonuses are declared in arrears, interim bonus rates are set with
reference to the most recent annual bonuses declared and any future anticipated
direction of these rates and may be higher or lower than the latest annual bonus
rates declared. The annual bonus rate may, however, eventually be set at a level
that differs from the interim rate.
6.5.6 For former Swiss Life IB Fund policies, the increased sum assured arising from the
premium tax relief is increased each year after considering changes in the RPI
index and short term interest rates.
PLL PPFM Page 45 January 2024
Principle
6.6
Final Bonus Rates
Subject to the guiding principles set out in section 5, final bonus may be added to
policies when they terminate or when benefits are encashed for other purposes,
with the aim of ensuring, if they do not already do so, that benefits reflect fairly a
share in the profits (and losses) which have been generated within the fund whilst
the policy has been in force.
Separate final bonus rates are applied to different policy classes to reflect the
different aspects of the products, including tax treatment, country of issue, form of
benefit and extent of guaranteed benefit (although not the presence or absence of
guaranteed annuity options). For most policy classes, differentiation is also made
between different dates of issue and different periods in force. On death and on
early termination, the final bonus added may be higher or lower than indicated
above, for reasons explained in the practices.
Practices
6.6.1 For each specimen policy, we determine a proportion of asset share that it is
appropriate to use to best meet the guiding principles. This proportion will vary
from time to time, may be greater or less than 100% and may vary by class of
policy, date of issue, term remaining to a date at which a guarantee or option
applies or other relevant factor.
For each specimen policy the following are compared:
(i) the appropriate proportion of each specimen policy’s asset share (the asset
share for this purpose being inclusive of any enhancement as described in
paragraph 6.4.2); and
(ii) the total of the sum assured and the annual bonuses already added to that
specimen policy (or the value of units for a unitised policy).
If (i) is the larger, then a final bonus is normally set for the specimen policy using
the methods described below. If (ii) is the larger, then no final bonus will normally
be set for that specimen policy.
The target for the proportion in (i) above is 100%. The proportion used for
particular specimen policies may be affected by smoothing (see section 6.7). The
aim is to maintain the proportions in (i) within the range 80% to 120% for most
specimen policies before the effects of smoothing.
For each specimen policy where a final bonus is to be set, the excess of (i) over
(ii), after any smoothing, is expressed as set out in the tables below.
Former Swiss Life OB Fund business
Bonus series
Policies included
Excess of (i) over (ii)
expressed as:
Stamford
Policies issued on or before
20 May 1974 that were then
insured by Stamford Mutual
A percentage of the sum
assured
Blackburn
Policies issued on or before
20 May 1974 that were then
insured by Blackburn
A percentage of the sum
assured
PLL PPFM Page 46 January 2024
Former Swiss Life OB Fund business (continued)
Bonus series
Policies included
Excess of (i) over (ii)
expressed as:
Pioneer Life
Simple
Policies issued on or before
20 May 1974 that were then
insured by Pioneer Life and
entitled to the standard rate
of simple bonus
A percentage of the sum
assured or annuity
Pioneer Life
Double
Policies issued on or before
20 May 1974 that were then
insured by Pioneer Life and
entitled to twice the standard
rate of simple bonus
A percentage of the sum
assured
Pioneer Life
Compound
Policies issued on or before
20 May 1974 that were then
insured by Pioneer Life and
entitled to compound bonus
A percentage of the sum
assured or annuity and attaching
annual bonus
Series A
Policies issued by Pioneer
Mutual between 21 May
1974 and 31 December 1990
and originally receiving
simple bonus
A percentage of the attaching
annual bonus for each year in
force as a with-profits policy,
subject to the exclusion of a
number of years.
Series B
Policies issued by Pioneer
Mutual between 21 May
1974 and 31 December 1990
and originally receiving
compound bonus
A percentage of the sum
assured and attaching annual
bonus for each year in force as
a with-profits policy, subject to
the exclusion of a number of
years.
Series C
Policies issued by Swiss
Pioneer Life or Swiss Life
(UK) on or after 1 January
1991
A percentage of the sum
assured and attaching annual
bonus for each year in force as
a with-profits policy, subject to
the exclusion of a number of
years.
Former Swiss Life IB Fund business
Bonus series
Policies included
Excess of (i) over (ii)
expressed as:
M, S, B, P and
A
All policies
The amount required to make
the total bonus, including annual
bonus but excluding the special
bonus declared at 31 December
1990, equal to a specified
percentage of the sum assured
for each complete year the
policy has been in force, subject
to a maximum number of years.
PLL PPFM Page 47 January 2024
Former Swiss Life Pension With-Profits Fund business
Bonus series
Policies included
Excess of (i) over (ii)
expressed as:
Pension With-
Profits Fund
All policies with an
investment in the former
Swiss Life Pension With-
Profits Fund
A percentage of the value of
units
Former BULA business
Bonus series
Policies included
Excess of (i) over (ii)
expressed as:
Life
endowments
All life endowment policies
A percentage of the sum
assured and attaching annual
bonus.
Life
whole life
All whole life policies
A percentage of the sum
assured and attaching annual
bonus.
Pensions
All pension policies
A percentage of the fund and
attaching annual bonus.
This is then the new final bonus rate for all policies of the same type and duration
in force as the specimen policy.
Where a rate is not derived for every duration, the rates applicable for other
durations are determined by interpolation or extrapolation between the rates
derived as above.
6.6.2 For former Swiss Life OB Fund business, the final bonus rates are determined
based on a linkage between bonus rates declared in respect of different bonus
series applying to business issued prior to 21 May 1974. The linkage is based on
the rate declared on Stamford policies, represented by T in the table below.
Bonus linkage for policies issued prior to 21 May 1974
Bonus series
Amount
payable
Final Bonus based on each
Stamford
T
£100 original sum assured
Blackburn
1.5 x T
£100 original sum assured
Pioneer simple
1.5 x T
£100 original sum assured
Pioneer double
3.0 x T
£100 original sum assured
Pioneer
compound
T
£100 original sum assured and attaching
annual bonus
PLL PPFM Page 48 January 2024
6.6.3 For former Swiss Life IB Fund business, final bonus rates for business issued prior
to 21 May 1974, that is bonus series A, B, P and S, are subject to a minimum rate
based on the annual bonus rate declared for former Swiss Life IB Fund bonus
series A as set out in the table below.
Minimum final bonus rates for bonus series A, B, P and S
if the annual bonus rate for bonus series A is at least 1.25%
Complete years in
force
Bonus Series A, B and P
(% of sum assured)
Bonus Series S
(% of sum assured)
20 – 24 years
40%
20%
25 – 29 years
50%
25%
30 – 34 years
60%
30%
35 – 39 years
70%
35%
40 – 44 years
80%
40%
45 – 49 years
90%
45%
50 – 54 years
100%
50%
55 – 59 years
110%
55%
60 – 64 years
120%
60%
65 years or more
130%
65%
If the annual bonus rate for bonus series A is less than 1.25%, then the minimum
final bonus rates for bonus series A, B, P and S are reduced in proportion.
6.6.4 For former Swiss Life IB Fund business entitled to periodic cash payments, a final
bonus is declared on each cash payment. Final bonus rate changes are prorated
based on changes in the normal former Swiss Life IB Fund business final bonus
rates, except that there is a linkage between the annual bonus rate declared for
former Swiss Life IB Fund bonus series A and the minimum final bonus rates on
periodic cash payments for series B, P and S.
The linkage is based on the annual bonus rate for series A. If this is at least
1.25%, then the minimum final bonus rates for series B, P and S are as set out in
the table below.
Minimum final bonus rate on cash payments for bonus series B, P and S
if the annual bonus rate for bonus series A is at least 1.25%
Cash payment policy type
Final bonus rate
(% of cash payment)
Bonus series S and B, with cash payments every 10 years
10.0%
Bonus series S and B – other
5.0%
Bonus series P, in force for 20 - 24 years
10.0%
Bonus series P, in force for 25 - 29 years
12.5%
Bonus series P, in force for 30 years or more
15.0%
If the annual bonus rate for bonus series A is less than 1.25%, then the minimum
final bonus rates on cash payments for bonus series B, P and S are reduced in
proportion.
6.6.5 For former Swiss Life unitised with-profits Pension With-Profits Fund policies, the
final bonus rate is currently differentiated by the calendar year in which the units
were issued.
Final bonus and a market value reduction may apply at the same time to former
Swiss Life unitised with-profits Pension With-Profits Fund units.
PLL PPFM Page 49 January 2024
6.6.6 For former Britannic Unit Linked Assurance policies, final bonuses take the form of
a percentage increase in the total payable from the sum assured and annual
bonuses. Different rates are used for pension policies, whole life policies, and for
endowment policies where a scale of rates depending on policy term is used to
broadly reflect the differences in asset shares between those groups.
6.6.7 Other than for former Britannic Unit Linked Assurance whole life policies, final
bonus is paid on death claims on traditional whole life and endowment policies at
the rate that applied to endowment policies which commenced at the same time
and reached maturity at the date of death.
For former Britannic Unit Linked Assurance whole life policies, the final bonus is
calculated to distribute the excess, if any, of the asset shares over the sum
assured and declared annual bonuses.
For unitised with-profits policies, the final bonus scale applies on a death claim.
6.6.8 For all classes of policy final bonus rates may be changed at any time. At times
when the value of the excess assets in the fund is not changing rapidly, this is
likely to mean that changes, if any, are made one or two times per year, normally
from 1 January and 1 July. However, a sudden change in the value of those
excess assets (such as because of a significant change in the value of equity
share markets) may cause final bonus rates to be changed on other occasions.
Changes to surrender and transfer values may be less frequent than changes to
final bonus rates for maturities.
6.6.9 As the value of assets change every day but final bonus rates are only
recalculated infrequently, there will frequently and inevitably be times when, if
asset shares were recalculated for the specimen policies, then final bonuses
would, in effect, be based on slightly larger or smaller percentages of those asset
shares than the practices would in theory dictate. Normally an investment return
variation of up to 10% compared to that assumed when the final bonuses were last
reviewed, would be allowed before there would be an additional final bonus
review. However, where the proportion of asset shares at the latest final bonus
review was near the top or bottom of the range described in paragraph 6.6.1, a
lower level of investment return variance may lead to an additional final bonus
review.
PLL PPFM Page 50 January 2024
Principle
6.7
Smoothing
Smoothing refers to the practice of limiting the change in final bonus rates on any
one occasion so that the benefits paid to policyholders differ from those which
would otherwise apply and also to the practice of limiting the frequency of such
changes. Smoothing means that the value on similar policies maturing at different
times either vary little (between changes in final bonus rates) or change by no
more than a specified amount over a given period. Smoothing is applied to all
classes of policy which are eligible for final bonus and to all types of claim.
However, more frequent and generally smaller changes are made to some
classes of unitised with-profits policies.
Smoothing is intended to have a neutral effect over time. In other words, if
applying the limitation on changes in the rate of final bonus, results for a period in
different amounts of discretionary benefits than would otherwise have been paid,
then in a subsequent period discretionary benefits would be adjusted by a broadly
equal and opposite amount when circumstances and the practices allow.
Other than on death or early termination, the aim at all times is to pay policy
benefits that are close to those described under section 6.6. Accordingly,
smoothing is limited and final bonus rates and total policy benefits may change by
relatively large amounts both on any one occasion and over a 12 month or longer
period. The cost of smoothing is not expected to be material at any time and so
no specific upper limit is imposed on it.
The smoothing principles also generally underlie the market value reductions,
which may apply to the unitised policies. However, these principles are not
necessarily applied when determining the amount payable on traditional policies,
which are terminated significantly early.
Practices
6.7.1 For all classes of policy where final bonus changes are normally made twice a
year, smoothing is applied to maturity or retirement values, it is done by limiting
the change in final bonus rates. Normally the change in final bonus rates for a
specimen policy will be limited so that the increase or reduction in total maturity or
retirement payout compared to a position where bonus rates are not changed is
not more than 7.5% at each six monthly review.
For traditional classes of policy where surrender value bases changes are
normally made twice a year, smoothing is applied by limiting the change in the
immediate surrender value for specimen policies. Normally the surrender value for
specimen model policies will not change by more than 10% at each six monthly
review. Surrender values may change in between reviews because in many cases
the surrender values are calculated using formulae that depend upon factors such
as term remaining which change over time.
However, if it is necessary to enable the fund to continue to meet the objectives
set out in the guiding principles in section 5, larger changes in final bonus rates
and surrender values will sometimes be made.
If there has been a significant change in premium rates then larger changes than
those described above may be made so that final bonus rates and surrender
bases remain consistent with the premium rates on which the business was
generally written. Where premium rates were revised with the intention of
changing payouts, then smoothing will not be applied, so that the change in
payouts intended by the premium rate change does occur.
PLL PPFM Page 51 January 2024
Calculations may also be carried out for specimen policies which are due to reach
their maturity date in the following few years. If these calculations show a trend in
payouts which could not be accommodated by following the normal limits on
change described above, the final bonus rate or surrender value being determined
may be adjusted so that the trend may more easily be accommodated.
For both maturity and retirement values and surrender values, any change to
payouts that results from changes in the distributable estate, if any, will be
additional to the limits described and will not be subject to smoothing. Also where
there have been significant changes in methodologies and practices, the impact
may not be managed within the normal smoothing rules,
6.7.2 The period over which smoothing will be of neutral effect on a class of policies is
indirectly determined by the application of the above practices.
6.7.3 Applying smoothing does mean that on occasions more or less than the target
proportion of asset share is paid out. This difference will reduce or increase the
excess assets of the fund. There is no particular maximum accumulated cost of or
benefit to the fund, which is allowed, although no smoothing accumulation would
be allowed to build up which was inconsistent with the achievements of the
objectives set out in the guiding principles in section 5.
6.7.4 For traditional with-profits policies the approach to surrender values described in
section 6.8 depends upon a number of factors. In some cases, changes in these
factors may lead to quite large proportionate changes in values for policies with a
long time to go to maturity or retirement. Smoothing is not necessarily applied to
these changes. These changes may also take place at different times to the
changes in final bonus rates. Where the method uses the final bonus rates
payable at maturity or retirement on other policies, the final bonus rates will allow
for smoothing as described in paragraph 6.7.1.
6.7.5 For unitised with-profits business, surrender values will target a proportion of asset
share, as described in section 6.8. Surrender values on unitised policies may be
subject to the application of a market value reduction. Market value reductions are
regularly reviewed, at least monthly and may be revised to reflect market
movements between normal final bonus reviews. Also it is probable that during a
period of adverse conditions, unitised final bonuses might be changed sooner and
possibly also more frequently than might apply to the traditional business.
6.7.6 Any cost to the fund of payments under unitised with-profits pension policies to
which a market value reduction does not apply, does not affect the remaining
value of the policies concerned. Rather, it reduces the value of the excess assets
in the fund (although the value of the excess assets in the fund is increased by any
deductions made from asset shares for guarantees as described in paragraph
6.4.2(o)).
PLL PPFM Page 52 January 2024
Principle
6.8
Surrender Values
The aim in setting non-protected exit values will be to minimise any adverse effect
on the interests of continuing policyholders and subject to this, the aim is to set
non-protected exit values so that payouts for specimen policies or groups of
specimen policies in aggregate achieve a target payout ratio over time.
Practices
6.8.1 Non-protected exits refer to surrenders and transfers for pension business.
6.8.2 For traditional policies that surrender early, the aim is to make payments that are
in aggregate and over time, across all specimen policies that are used for
determining surrender bases, the targeted proportion of asset share. This
proportion is currently 100%.
6.8.3 Actual surrender payments on individual policies will not generally be in line with
the target proportion because:
• Individual asset shares are not calculated or held on the administration
systems for use in surrender value calculations. Rather surrender values are
calculated in a variety of ways for different types of policy. Typically surrender
values are based on a discounted value of the guaranteed sum at maturity or
retirement (reduced to allow for non-payment of future premiums in the case of
annual premium policies) including attaching annual bonus, together with an
allowance, where appropriate for final bonus.
• Specimen policies are used to determine the parameters in the surrender value
calculations. The outcome for a particular individual policy may be different
from that of the specimen policy.
• There are a limited number of parameters that may be altered in the surrender
formulae for certain products which means that the parameters are set in
aggregate across a range of specimen policies.
• As the value of assets are changing every day but the parameters in the
surrender value formulae are only reviewed infrequently, there will inevitably
often be times when, if the asset share for the specimen policies were to be
recalculated, then it would be found that, in effect, surrender values were being
based on slightly larger or smaller percentages of those asset shares than the
practices would in theory dictate.
6.8.4 For the reasons given above, it is expected that surrender values, when expressed
as a proportion of asset share, will fall in a wide range around the target
proportion. However, the parameters in the surrender value bases are reviewed
periodically with the aim that the majority of surrender values for the range of
specimen policies that are analysed, will fall within the range of 80% to 120% of
asset share, before the effects of smoothing.
6.8.5 In some cases, values in excess of the upper limit of the range may be payable
when policies are surrendered close to maturity and the asset share of the
relevant specimen policy is less than the guaranteed benefits at maturity, or the
maturity payout is in excess of the asset share due to smoothing.
PLL PPFM Page 53 January 2024
6.8.6 For traditional with-profits policies the method used to derive the surrender or
transfer value may not involve the explicit application of final bonus. Where the
value paid is larger than the discounted value of the guaranteed sum assured and
annual bonuses already added, an element equivalent to final bonus will be
implicit in the value. For the purposes of determining the shareholder’s entitlement
to profit in respect of any surrender or transfer, it may be deemed an appropriate
proportion of the value paid as representing final bonus.
6.8.7 For unitised policies, a market value reduction will be applied to claims in respect
of full or partial discontinuances or special benefit enhancements in most
circumstances where the calculation described in section 6.6 results in a shortfall
of the determined proportion of asset share (after any guarantee charge described
in 6.4.2(o)) relative to the value of units. The amount of the market value
reduction will not exceed the amount of the shortfall. As the value of assets are
changing every day but market value reductions are only reviewed periodically,
there will inevitably often be times when, if the asset share for the specimen
policies were to be recalculated then surrender values would, in effect, be based
on slightly larger or smaller percentages of those asset shares than the practices
would in theory dictate. Normally an investment return variation of up to 10%,
compared to that assumed when market value reductions were last reviewed,
would be allowed before there would be an additional market value reduction
review.
6.8.8 Final bonus on surrenders are normally reviewed and changed with the same
frequency as final bonus rates for the relevant policy type (see paragraph 6.6.8)
although reviews and changes for traditional life policies may sometimes be less
frequent or implemented later than the corresponding final bonus rate change.
Where bulk surrenders of unitised with-profits pension policies are being made at
a time when investment values are falling then market value reductions may be
reviewed more frequently. For former Swiss Life Pension With-Profits Fund units,
market value reductions are reviewed on a regular basis, usually monthly.
6.8.9 The percentages described in paragraphs 6.8.2 and 6.8.4 may be changed at any
time, as may the methods of calculation. However, before any changes are made,
the Board will formally consult with and take into account the opinions of the With-
Profits Actuary and the With-Profits Committee.
PLL PPFM Page 54 January 2024
Principle
6.9
Investment Strategy
Overall, the strategy will be to invest in fixed interest securities but with exposure
to equity shares and commercial property, either directly or through vehicles such
as unit trusts, OEICS or derivatives when and to the extent to which this is
possible without unduly putting at risk the fund’s ability to meet guaranteed
benefits as they arise. Although the assets are invested and managed as a single
pool, different investment returns may be apportioned to different groups of
policies as described below. The returns attributed to former BULA policies will
reflect an exposure to volatile assets that is consistent with past practice. Some
cash or equivalent assets will be held for liquidity purposes. For former Swiss Life
policies when the assets in the fund are significantly in excess of the value of the
guaranteed benefits then the exposure to equity and property investments could
be high and the exposure to such assets could significantly exceed the exposure
to fixed interest securities.
From time to time assets outside the fund may be relied upon to provide some or
all of a margin against future adverse change in investment markets. The
investment strategy is, however, based upon the intention that the fund will meet
its aims using only the assets of the fund after repayment of any loans or other
financial support received.
Derivatives may be used from time to time to make changes in investment
dispositions more rapidly or cheaply than could be done directly through the
markets. They may also be used from time to time to reduce the risk of loss, for
example from share price falls, interest rate changes or exchange rate
fluctuations.
The proportion of shares and property deemed to be held for the purpose of
allocating investment returns may differ between different products, between
originating company, dates of issue or terms remaining to reflect the different risks
to both the specific policyholders and to policyholders and the shareholder more
generally. For some with-profits policies with relatively high guaranteed benefits,
this may mean that no returns on shares or property will be allocated. The
proportion of shares and property deemed to be allocated to different groups of
policies will in aggregate be broadly consistent with amount of equity and property
investments held, excluding any such investments deemed to form part the
excess assets, if any. Fixed interest securities are broadly matched to the term
remaining.
Non-profit, non-linked policies are backed by fixed interest securities of
appropriate duration.
The maximum loss, which the fund could suffer from the complete default of any
one external counterparty, is limited whether through reinsurance, direct
investment, stock lending or derivatives by dealing with a wide range of
counterparties. This usually means that the total exposure to any one
counterparty is significantly below the maximum levels for which value may be
taken under our regulator’s rules. In some cases, additional precautions such as
daily marking to market with deposit back are used.
Larger, unprotected exposures are permitted to sister companies (regulated UK
life insurers) through internal reinsurance arrangements.
There are no assets that are not expected to be traded should that be an
appropriate investment decision.
PLL PPFM Page 55 January 2024
Practices
6.9.1 The investment strategy is regularly reviewed taking account of a variety of
considerations, including our approach to responsible investment. In particular,
reports from the investment managers, the Chief Actuary, the With-Profits Actuary
and the With-Profits Committee, and recommendations for change are considered
and, if appropriate, implemented.
6.9.2 Guarantees to policyholders and liabilities to other creditors are not completely
matched with assets that provide a similar guarantee or payment. In particular, a
proportion of the assets is invested in equity shares and commercial property
because it is considered that, over most longer periods of time, a better return will
result. There are separate investment strategies for assets equal in amount to the
aggregate asset shares of policies and for assets representing additional
provisions for liabilities under non-profit policies, for guarantees on with-profits
policies, for other liabilities and for the capital margins and excess capital. Each of
these strategies is described in more detail below.
It is not possible to implement the strategies described below with absolute
precision and any difference between the actual outcome and the theoretical
outcome may be treated as described in paragraph 6.4.2(s).
Asset Shares
6.9.3 It is the current practice that all specimen policies of a particular class will be
deemed to have the same asset mix in that the asset shares for all specimen
policies within a class will be deemed to be invested in the same proportions of
equity shares, property, fixed interest and other investments.
The asset mix will however vary by product class to reflect both the past practice
and the differing nature of the guarantees given.
For former Swiss Life policies, the fixed interest assets attributed to a specimen
policy will reflect the term remaining of that policy other than former Swiss Life
Pension With-Profits Fund policies. Returns on emerging market debt do not
reflect the term remaining, but rather reflect the overall return on such debt.
The aim is to maintain a reasonable degree of similarity between the overall
duration of the fixed interest assets and the overall duration of the liabilities.
If the value of assets in the fund is more than reasonably sufficient to enable the
fund to meet its aims as described in section 5, then the overall proportion of
shares and property is likely to be significant. Conversely in circumstances where
the value of assets is fairly close to the minimum amount required, the overall
proportion of shares and property is generally likely to be low.
It is the intention that the proportion invested in equities will be reduced from
current levels over time to reflect the increasing maturity of the business. This will
be a gradual process over many years. For former Swiss Life policies a
reasonably significant exposure to equities will remain. The equity exposure for
former Britannic Unit Linked Assurance business will be lower reflecting past
practice.
PLL PPFM Page 56 January 2024
In future other changes may be made to the equity exposure for different classes
of policy, or for sub-groups of policies within a class. However any such changes
to the equity exposure will be made by reference the factors referred to in Principle
6.9 that is the date of issue, the term remaining and the level of the guaranteed
benefits. Currently there is no intention to change the equity exposure for different
groups or sub-groups of policies other than to reflect these factors.
6.9.4 All policies are grouped according to the specimen policy that most closely
represents them and the total asset share for each group is determined. That total
is then invested in the proportions determined for the specimen according to the
rules in paragraph 6.9.3.
6.9.5 The guideline asset mix range for asset shares is:
Former Swiss Life
business
Former Britannic Unit
Linked Assurance
business
Fixed interest and cash
45% to 55%
65% to 75%
Equities including private
equity and alternative
assets
35% to 45%
20% to 30%
Property
5% to 15%
0% to 10%
From time to time the actual asset mix will be different from the guideline mix due
to market movements and active management decisions taken by the investment
managers or the Investment Committee. For former Swiss Life business, and
former Britannic Unit Linked Assurance business, the equity investments will be a
mixture of UK and overseas shares, including emerging markets and may also
include private equity and alternative assets such as hedge funds. Fixed interest
assets will be a mixture of approved fixed interest securities, such as British
Government gilts and other government and supranational bonds, and other fixed
interest securities, such as corporate bonds, debentures, loan notes and emerging
market debt.
Sufficient assets would be disposable at short notice without material loss in value
to meet foreseeable additional liquidity requirements.
The agreements with the investment managers set out any limits on matters such
as:
• The types of investment that may be held.
• The maximum amount that can be invested in any single company.
• The maximum amount that can be invested in any single asset class / industry
sector / country.
• The maximum amount to which the manager might hold assets which are
different to the benchmark (guideline) portfolio in order to enhance returns.
(These include restrictions in terms of credit quality, term/duration and
amounts of individual holdings).
• The minimum credit rating quality of assets (as specified by the main rating
agencies such as Standard & Poor’s and Moody’s).
• Exposure to sectors or companies that do not align with our approach to
responsible investment, for example Tobacco.
PLL PPFM Page 57 January 2024
Guarantee Reserves
6.9.6 Guarantee reserves are the additional reserves that are necessary, over and
above the asset share, to ensure that guaranteed benefits can be met. The
current practice is to invest the assets covering the guarantee reserves in a long
position in fixed interest investments and a short position in equities. This aims to
provide a broad match as the guarantee reserves will tend to increase or reduce
as the value of the equity investments within the asset share fall or rise with
market movements. The matching will not be perfect and any surpluses or
shortfalls arising from this mismatch will act to reduce or increase amount of
excess assets in the fund. The assets backing guarantee reserves will be
periodically reassessed.
Other Liabilities and Excess Assets
6.9.7 Assets representing short-term liabilities are invested in cash or short-term debt.
Assets representing the reserves for non-profit policies are invested in fixed
interest securities of appropriate duration. Assets representing the estate of the
90% With-Profits Fund are mostly invested in fixed interest securities. However, if
the estate is large in relation to the potential risks facing the fund, then part of the
estate may be invested in growth investments in line with the asset mix for the
asset shares.
Miscellaneous
6.9.8 The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
6.9.9 The fund does not hold any assets which are not normally traded.
6.9.10 Before investing in new or novel investment instruments, the Board would obtain
the advice of the Chief Actuary and of the investment managers on the benefits
and risks of the proposition. This would include an analysis of the nature and
proportion of future outcomes in which the instrument would prove materially
disadvantageous relative to other more traditional investments. If they were to be
held in material amounts in respect of with-profits policies, the Board would also
seek the opinion of the With-Profits Actuary and the With-Profits Committee.
PLL PPFM Page 58 January 2024
Principle
6.10
Business Risks
As well as investment performance and counterparty exposure, and amounts
transferred to the Shareholder Fund (see section 6.14), the fund’s future ability to
continue to pay all guaranteed benefits when due, and the amounts of annual and
final bonus, will be affected by a number of other factors, ‘business risks’, that may
arise from the existing portfolio of with-profits and non-profit business. These are
listed, together with the controls which are applied, in paragraph 6.10.1.
Any compensation costs relating to business that was formerly part of the Swiss
Life IB and OB Funds will be charged to this fund irrespective of where that
business resides within Phoenix Life Limited. However, the amount of such costs
to be charged to the fund in respect of policies that were formerly part of the Swiss
Life OB Fund will be limited to a maximum amount of £2 million. Any amounts in
excess of this will be met from the Non-Profit Fund or the Shareholder Fund.
Any compensation costs relating to business that was formerly part of the
Britannic Unit Linked Assurance With Profit Fund will be charged to the fund
irrespective of where that business resides within Phoenix Life Limited.
It is not currently envisaged that any business risks would be taken on in addition
to those to which the fund is already exposed although, if it appears to be
potentially beneficial to policyholders to do so, then this might be done or the
exposure to risks to which the fund is already exposed (such as by cancelling
reinsurance arrangements) could be increased. If this did take place, it would only
be done if the reward was expected to be better than that from other investments
with broadly equivalent risks (such as investing in shares or property). The Board
would formally consult and take account of the opinions of the Chief Actuary, the
With-Profits Actuary and the With-Profits Committee before doing so.
The Board will annually review existing business risk exposures as part of
assessing the formal regulatory capital requirement and take appropriate
measures to limit risk to amounts to which it is fair for the with-profits business to
remain exposed.
Practices
6.10.1 The main business risks of the fund, and the controls that are applied to those that
Phoenix Life Limited can influence, include:
• Expenses of management – controlled mainly by outsourcing all business
activities, including policy administration and investment management. Normal
activities are outsourced on an agreed pricing basis. The main residual costs
not subject to an agreed pricing basis are project activity and certain direct
costs and fees.
• Failure of non-group outsourced services provider – part of the administration
services provided by PGMS are sub-contracted to Diligenta, – controlled by
having exit plans. Should PGMS be unable to meet any of its obligations to
provide services then Phoenix Life Limited would request that Phoenix Group,
as owners of PGMS step in to restore the position. Should Phoenix Group not
do this, then Phoenix Life Limited would attribute any losses to the shareholder
fund or Non-Profit Fund, and the fund would only be affected if the shareholder
fund or Non-Profit Fund had insufficient excess assets to bear the losses.
• Meeting minimum guaranteed policy benefits (where these costs are
reasonably attributable to the fund) and the cost of smoothing – controlled by
having an appropriate rate of annual bonus, limiting the extent of smoothing
and investing primarily to meet the guarantees, all whilst ensuring that
customers continue to be treated fairly.
PLL PPFM Page 59 January 2024
• Fluctuations and long-term trends in death rates – fluctuations are constrained
by the use of reinsurance contracts to limit exposure on any one policy.
• Changes in taxation.
• Profits or losses from investments backing non-profit business or other
liabilities and from investments which represent additional capital.
• Profits or losses from the early or late termination of policies.
• Provision of compensation for past legal or regulatory infringements, especially
due to inadequate sales practices – controlled in part by ensuring that
compensation is only paid where a legal entitlement exists.
• The cost of additional capital needed to be held for regulatory purposes or for
the optimal management of the business – controlled by regularly reviewing the
level of excess capital and by ensuring that only a commercial cost for capital is
being paid.
• Failure of reassurers – the reassurance credit risk is monitored.
6.10.2 Currently it is not envisaged that the fund would take on any business risks in
addition to those to which it is already exposed although it may do so, if it appears
to be potentially beneficial to the fund.
6.10.3 How and to what extent business profits and losses to which the fund is already
exposed are incorporated in the asset share calculations for specimen policies and
so how they affect the amounts payable under with-profits policies is described in
section 6.4.
To the extent that business profits or losses are not incorporated in asset share
calculations, they will increase or reduce the excess assets in the fund.
6.10.4 If the fund experienced or identified a particularly large business profit or loss in
any one year, its incorporation in asset share calculations may be spread over a
number of future years to avoid excessive impact on policy values in the short
term.
6.10.5 There is no predetermined minimum value below which business profits or losses
will not be applied, sooner or later, as a determinant of the bonuses payable under
with-profits policies.
6.10.6 As described in section 6.4, no amounts are currently being attributed to asset
shares in respect of business risk as the amounts are involved are minimal. If this
were to change in the future then the outcome from all business risk will be pooled
across all with-profits policies in the relevant fund, although this has not always
been the practice in the past.
PLL PPFM Page 60 January 2024
Principle
6.11
Expenses and Charges
Charges and expenses attributed to the fund in respect of former Swiss Life
policies will be in line with the 2023 Scheme and with the commitments made to
the regulator.
Charges and expenses attributed to the fund in respect of former Britannic Unit
Linked Assurance policies will be done in a manner that reflects as closely as is
reasonably practical the costs of administering those policies, subject to the terms
of the 2023 Scheme.
Where costs are specific to a policy or class of policy then, taking into account the
approximations referred to in section 6.4, such costs will be taken into account in
assessing the bonuses added to that policy or class and in assessing the early
termination value payable. Where costs are not specific to a single policy or class,
they will be apportioned across the policies or classes to which they are relevant
in a reasonable manner.
Practices
6.11.1 For former Swiss Life traditional with-profits policies the expenses charged to the
fund in any one year in respect of those policies will be:
(a) investment management expenses of 10 basis points per annum of the
average market value of the assets of the fund during the year;
(b) a specified amount for each policy in force on 30 June in that year in respect
of administration costs;
(c) for former Swiss Life IB Fund policies 30% of premiums received;
(d) certain other costs which are charged to the fund directly or where the fund
is charged a share of Phoenix Life Limited’s direct costs and which are
expected to be restricted to:
• Audit Fees
• Regulator Fees
• ABI Fees
• Non-executive director costs
• Financial Services Compensation Scheme levies
• Any other levies incurred directly in respect of the business
• Ex-gratia payments to policyholders
• Custodian fees
• Void property costs
• Legal costs and other external costs in relation to any proceedings in
connection with the policies; and
(e) compensation paid and associated costs in respect of errors and omissions
pertaining to the issue and maintenance of policies currently in the fund and
policies previously in Swiss Life’s OB Fund or IB Fund that are not currently
in the 90% With-Profits Fund insofar as such errors and omissions arose
while those policies were in Swiss Life’s OB Fund or IB Fund.
For with-profits units in the former Swiss Life Pension With-Profits Fund, no
expenses or investment management costs are charged to the fund. All of the
expenses for this type of business will be met from the Non-Profit Fund as all
policy charges on the underlying contracts arise in the Non-Profit Fund.
PLL PPFM Page 61 January 2024
6.11.2 The specified amounts per policy per annum referred to above will be as follows:
Amount (£) per
annum
Former Swiss Life OB Fund – Investment Type Policy
40.00
Former Swiss Life OB Fund – Other Policy
20.00
Former Swiss Life IB Fund Policy
0.30
Other than in the event of major regulatory change, these specified expenses per
policy will increase in subsequent years only in line with the increase in the Retail
Prices Index excluding Mortgage Interest Payments (RPIX) since 30 June 2005
plus 1.40% per annum.
6.11.3 For former BULA policies the expenses charged to the fund in any one year in
respect of those policies will be:
(a) investment management expenses of 10 basis points per annum of the
average market value of the assets of the fund during the year;
(b) a specified amount per annum for each policy in force on a monthly basis in
respect of administration costs; and
(c) certain other costs which are charged to the fund directly or where the fund
is charged a share of Phoenix Life Limited’s direct costs and which are
expected to be restricted to:
• Audit Fees
• Regulator Fees
• ABI Fees
• Financial Services Compensation Scheme levies
• Any other levies incurred directly in respect of the business
• Ex-gratia payments to policyholders
• Custodian fees
• Legal costs and other external costs in relation to any proceedings in
connection with the policies.
(d) PGMS may provide additional services to the fund in respect of former
Britannic Unit Linked Assurance policies. The costs for such additional
services will be charged to the fund (in addition to those described in (a) to
(c) above) where those services are required by the fund or where those
services are expected to bring a benefit to the fund, as determined on a fair
basis.
6.11.4 The specified amounts per policy per annum referred to above in respect of former
Britannic Unit Linked Assurance policies will be as follows:
• £78.68 for each regular premium paying with-profits policy
• £39.34 for each single premium with-profits policy
• £39.34 for each paid-up with-profits policy
These are amounts as at 1 July 2022 and will inflate on 1 July each year in line
with the change in the Retail Prices Index over the previous year for the increase
in subsequent years, plus one per cent per year.
6.11.5 Costs attributable to the fund, which are not apportioned to asset shares or to non-
profit business, will reduce the excess assets of the fund.
6.11.6 An agreement exists with PGMS to supply administration services to the fund.
This is a perpetual agreement and is not expected to be renegotiated, but charges
may be amended in respect of major regulatory change. The agreement can
however be terminated early for material failure to meet service standards or other
non compliance with the agreement. We regularly monitor service standards.
PLL PPFM Page 62 January 2024
Value added fees for work outside the service level agreements are changed
separately.
PLL PPFM Page 63 January 2024
Principle
6.12
Estate Management
The aim is to manage the fund so that there is always a small excess of the value
of the assets over the amount considered necessary on market consistent
assumptions to enable it to meet the aims described in the guiding principles in
section 5.
The excess at the targeted level is maintained by:
• controlling the addition of annual and final bonuses to policies;
• maintaining an appropriate investment strategy;
• limiting, where possible, the business risks faced;
• exercising discretion in other areas in moderation; and
• drawing on, or repaying, additional financial support from the Non-Profit Fund
or the Shareholder Fund in the form of loans to the fund or otherwise.
The aim is to distribute the existing surplus and any surplus arising in the fund in
future over the expected future lifetime of the currently in force policies.
Practices
6.12.1 The former Swiss Life Pension With-Profits Fund business does not have any
interest in the estate arising in the fund and references in this section to potential
benefit enhancements from estate distribution do not apply to this business.
6.12.2 The estate is the estimated realistic value of the assets less the estimated realistic
value of the liabilities. It is calculated using realistic assumptions and generally
accepted methodologies on a basis determined by the Board.
6.12.3 To the extent that any profits or losses arising in the fund are not allocated to asset
shares in accordance with section 6.4, they will act to increase or reduce the
estate. To the extent that the amounts charged to asset shares are based on
estimates or assumptions, then any difference between these and the actual
amounts will act to increase or reduce the estate.
.
6.12.4 The estate in the fund will be used to:
(a) assist the fund in demonstrating it has access to sufficient capital resources
to meet its liabilities and treat customers fairly;
(b) provide a buffer in the fund should adverse experience mean that the
reserves held to cover the liabilities prove insufficient;
(c) meet any costs which are charged directly to the estate rather than to asset
shares;
(d) meet the costs of any changes which the Board believe are necessary to
improve fairness between policyholders and / or enhance the run-off of the
fund; and
(e) enhance the benefits payable to those with-profits policies which have an
interest in the estate but always aiming to retain sufficient estate to meet the
expected amounts required for (a), (b), (c) and (d). The amount considered
by the Board to be available from time to time for such enhancements will be
referred to as the distributable estate.
6.12.5 Any enhancement in benefits on account of the distributable estate referred to in
6.12.4(e) will generally be achieved by including a temporary uplift to the asset
share for the purpose of setting final bonus rates and surrender values. However
if the distributable estate is large then consideration would be given to making
additions to the asset shares from the estate.
PLL PPFM Page 64 January 2024
6.12.6 The amount of the estate, the distributable estate, and the potential for any
enhancements to policyholder benefits will be subject to review at least once a
year.
6.12.7 In the event of a risk of the assets in the fund being insufficient to cover the
liabilities, charges may be made to the asset shares to restore the estate to a
target minimum level. However such charges could not be applied to any part of
the deficit caused by regulatory penalties (fines) or compensation payments
relating to events which occurred before 31 July 2009, see paragraph 5.2.18,
except to the extent that such charges are effectively reversing any estate
previously added into asset shares.
6.12.8 Providing that it is possible to do so whilst still treating policyholders fairly, it is
intended to manage the excess assets using solely the resources of the fund and
avoiding the need to draw on any external sources of capital.
In the event of the assets in the fund being insufficient to cover the liabilities, then
any past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit.
Arrangements exist for monies to be transferred from the Non-Profit Fund or
Shareholder Fund to the fund with the aim that the amount of assets in the fund
exceeds the liabilities by a small margin, should the charges described in 6.12.7
be insufficient to restore the estate. For this purpose, the possibility of distributing
any surplus assets to policyholders will not be regarded as a liability.
Transfer of such amounts back to the Non-Profit Fund or the Shareholder Fund
will be made whenever emerging surplus in the fund permits.
The exercise of discretion in respect of with-profits policies will be managed with
the aim that the amounts transferred to the fund will be repaid to the extent that is
possible whilst still meeting the aims described in section 5. In determining
benefits under with-profits policies, the Board will disregard any liability to transfer
such amounts back to the Non-Profit Fund or Shareholder Fund to the extent that
this is necessary to treat customers fairly (that is in accordance with these
Principles and Practices).
PLL PPFM Page 65 January 2024
Principle
6.13
New Business
Apart from as a result of the exercise of options under existing policies, and
contractual increments, new business is no longer accepted. The future business
risk from this source is expected to be small.
Practices
6.13.1 The fund is no longer actively seeking new business, but continues to write a small
amount of new business relating to policy options under existing contracts.
Currently there are no plans to reopen the fund to new business.
PLL PPFM Page 66 January 2024
Principle
6.14
Equity Between the Fund and Shareholders
The requirements of the 2023 Scheme are such that holders of with-profits
policies in the fund are entitled to receive at least 90% of the total distributable
profits arising from the fund. The shareholder is entitled to receive the balance.
Payments from the fund are therefore limited to those amounts required to meet
obligations under policies and reassurance agreements written in the fund and to
transferring to the Shareholder Fund the shareholders’ share of the divisible
profits. None of the divisible profits arising in the fund are attributed to the other
with-profits funds.
If the Board were considering making changes to the current position, it would first
request and consider the advice of the Chief Actuary and take into account the
opinions of the With-Profits Actuary and the With-Profits Committee. If it still
decided to proceed, then policyholders would be notified at least three months in
advance. The agreement of Phoenix Group and the High Court would also be
required to make such a change.
If a position arose where either the fund required financial support from the Non-
Profit Fund or Shareholder Fund to enable the fund to meet the target excess
assets described in section 6.12, the terms on which such support is provided will
be fair and reasonable to all parties, taking into account prevailing market
conditions and the risks involved. If such support forms part of the fund, then it
will be treated as a liability to the extent that it would otherwise increase the
excess assets.
Services may be provided by the shareholders to the fund but terms for such
services will be on commercial terms which are considered to be consistent with
the risks of providing those services, or considered to be consistent with terms
which would be available for such services on an arm’s length commercial basis.
Practices
6.14.1 For former Swiss Life unitised with-profits policies, no transfer is made to the
Shareholder Fund in respect of any bonuses added to these policies.
For traditional with-profits policies, the value of annual bonus added to policies,
discounted at the risk free yield is determined. One ninth of that value is
transferred to the Shareholder Fund together with one ninth of the discounted
value of any interim bonus and one ninth of any final bonus. This means that the
transfer to the Shareholder Fund is 10% of the distributed surplus.
6.14.2 Any compensation costs relating to business that was formerly part of the Swiss
Life IB and OB Funds will be charged to the fund irrespective of where that
business resides within Phoenix Life Limited. However, the amount of such costs
to be attributed to the 90% With-Profits Fund in respect of policies that were
formerly part of the Swiss Life OB Fund will be limited to a maximum amount of
£2 million. Any amounts in excess of this will be met from the Non-Profit Fund or
the Shareholder Fund.
6.14.3 Any compensation costs relating to business that was formerly part of the BULA
With Profits Fund will be charged to the fund irrespective of where that business
resides within Phoenix Life Limited.
6.14.4 Where mis-selling costs are charged to the fund they will be met from the excess
assets in the fund so long as such excess assets exist.
PLL PPFM Page 67 January 2024
6.14.5 Additional tax arising from transfers to shareholders is allocated to the fund (but is
not charged to asset shares). In considering the allocation of tax and any tax
impacts that may arise from time to time fairness between the stakeholders is
considered.
6.14.6 The Board are not aware of any external or internal factors, which, if they were to
change, would have a material effect on the apportionment of surplus as described
above.
PLL PPFM Page 68 January 2024
7 Principles and Practices – 100% With-Profits Fund
The Principles and Practices given in sections 7.4 to 7.14 together with the Guiding Principles
and Practices form the Principles and Practices of Financial Management for the 100% With-
Profits Fund. Sections 7.1 to 7.3 give background information specific to the 100% With-
Profits Fund. Subsequently in this section the use of the term ‘the fund’ generally means the
100% With-Profits Fund.
7.1 Fund History
7.1.1 The 100% With-Profits Fund comprises with-profits business that was transferred
into it from Swiss Life, PAL and Bradford.
7.1.2 PAL last issued new with-profits policies directly to new customers in the 1980s.
Since that time it continued to write new with-profits business through
reassurances accepted under reassurance agreements with Phoenix & London
Assurance Limited (PALAL). These reassurance agreements transferred to
Phoenix Life Limited at the same time as the PAL with-profits policies were
transferred. PALAL ceased to issue with-profits policies to new customers in
January 2002 and ceased to issue any type of policy to new customers in
December 2002. As a result, no new business has been ceded under the
reassurance agreements with PALAL from these dates. Existing customers
continue to be able to exercise options under their policies, including those to
increase premiums payable, to pay additional single premiums and to allow new
members to occupational pension schemes. The exercise of any of these options
is not actively solicited.
The former PAL business included unitised with-profits pension policies reassured
from PALAL. However, this reassurance was recaptured by PALAL at the end of
2008.
From February 2011 the SAL With-Profits Fund comprises the business that was
transferred into Phoenix Life Limited from the long-term business fund of PALAL
under the 2011 Scheme.
7.1.3 Bradford last issued new with-profits policies directly to new customers in 1971
and there are only a very small number of former Bradford policies remaining.
7.1.4 Swiss Life ceased issuing new with-profits policies in 1992 (apart from policies
arising from options on existing with-profits business). The with-profits business of
Swiss Life included policies written on its own account and policies transferred in
by previous court schemes from the Pioneer Mutual Insurance Company and the
former UK branch of Swiss Life (a company based in Switzerland). Pioneer
Mutual had itself been formed through the merger of the Stamford Mutual
Insurance Company, the Blackburn Assurance Company and the Pioneer Life
Assurance Company.
7.1.5 The with-profits funds within Swiss Life were internally separated into three sub-
funds, the OB Fund, the IB Fund and the With Profit Fund. The OB Fund
contained all of the Ordinary Branch policies emanating from the former Pioneer
Mutual together with any subsequent new policies of such type, including the
Pension With-Profits Fund element of personal pension plan and free standing
AVC policies. The IB Fund contained all of the Industrial Branch policies
emanating from the former Pioneer Mutual together with any subsequent new
policies of such type. The With-Profits Fund contained a small number of
traditional life policies that had been written prior to the merger with Pioneer
Mutual.
PLL PPFM Page 69 January 2024
7.1.6 The with-profits business in the Swiss Life OB Fund and the Swiss Life IB Fund
was transferred into the 90% With-Profits Fund except for the Pension With-Profits
Fund element of personal pension plan and free standing AVC policies which was
transferred into the Non-Profit Fund and internally reassured into the 100% With-
Profits Fund. The business in the Swiss Life With Profit Fund was transferred into
the 100% With-Profits Fund. As part of the 2009 Scheme, the former Swiss Life
Pension With-Profits Fund with-profits element of Libra Personal Pension Plans
and similar policies is now internally reassured to the 90% With-Profits Fund rather
than to the 100% With-Profits Fund.
7.2 Types of Business
The with-profits policies are mainly traditional endowments and whole life policies.
There are a few traditional with-profits deferred annuity group pension policies.
When these policies mature, the annuity is set up in the Non-Profit Fund and the
cost of providing the annuity is paid to Non-Profit Fund.
7.3 Capital Support to the Fund
The capital policy is described in section 3.2.
In certain circumstances, the shareholders will loan money to this fund. The
practices relating to receipt of support are detailed in sections 3.3 and 5.2.
PLL PPFM Page 70 January 2024
Principle
7.4
Amounts Payable Under a With-Profits Policy
The aim of the methods employed in determining the amounts payable under a
with-profits policy is the fair treatment of all with-profits policyholders consistent
with the guiding principles.
The main guide used for determining the amounts payable under with-profits
policies is asset share calculations which are carried out for certain specimen
policies. The amounts payable will allow for a fair share of any surplus distributed,
which may be in the form of annual or final bonuses.
In putting into practice the aims set out in the guiding principles and in the
application of the with-profits principles generally, various degrees of
approximation are applied in a number of different areas, the major ones being
described in paragraph 7.4.4. The Board will endeavour to ensure that these
approximations:
• are applied consistently;
• have a broadly neutral effect between policyholder and shareholder interests
and between the different with-profits funds; and
• where appropriate, have a broadly neutral effect over time (that is between
one generation of policyholders and another).
Any of the assumptions used in previous years (such as investment returns,
charges and allocations of miscellaneous profits and losses) can be changed at
any time:
• should they be shown to have been incorrect;
• should legal or regulatory change render it necessary to do so; or
• if their continued application unchanged could put at risk the achievement of
the aims as set out in the guiding principles in section 5.
Changes to the methods used to determine the amounts payable under a with-
profits policy are controlled by:
• requesting and considering the advice of the Chief Actuary and the With-
Profits Actuary and the opinion of the With-Profits Committee before making
any changes;
• assigning to the Chief Actuary the executive responsibility to continue to apply
the currently agreed methods until advised differently; and
• following legal or regulatory requirements to obtain independent expert input
where necessary.
Policyholders have no entitlement to receive the asset shares, if any, used to
determine the bonuses for their policies.
Bonuses can only be declared if there is surplus available for distribution.
Asset shares are only calculated for certain specimen policies for the purpose of
determining the amounts payable under with-profits policies.
Practices
Asset Share Methodology
7.4.1 The basic method for asset share calculations for with-profits business in the fund
uses an apportionment of actual investment returns net of tax and the actual
underlying experience.
PLL PPFM Page 71 January 2024
Asset shares are generally not smoothed. In particular, the investment returns
and experience elements contributing to asset shares are generally not smoothed,
other than that inherent in the processes used in the derivation of the assumptions
or in respect of large profits and losses from other business per paragraph
7.4.2(s).
7.4.2 The following table describes the elements currently credited or charged to asset
shares for specimen policies.
Element
Description of Allowance
(a)
Premiums
Premiums paid under the policy
(b)
Investment return
Allocated return – note (b)
(c)
Investment
expenses
Actual allocated – note (c)
(d)
Initial expenses
Actual allocated – note (d)
(e)
Renewal expenses
Actual allocated – note (e)
(f)
Other expenses
Actual allocated – note (f)
(g)
Tax on investment
return
Actual allocated – note (g)
(h)
Tax relief on expenses
Actual allocated – note (h)
(i)
Mortality & morbidity
costs
Based on underlying experience – note (i)
(j)
Early terminations
No profits or losses are credited – note (j)
(k)
Paid-up policies
No profits or losses are credited
(l)
Partial and regular
withdrawals
Not applicable
(m)
Surrenders at
protected dates
No profits or losses are credited
(n)
Annuity payments
Not applicable
(o)
Charges for the cost of
guarantees
Charged - note (o)
(p)
Charges for the cost of
capital
Note (p)
(q)
Distributions to
shareholders
Not applicable
(r)
Tax on distributions to
shareholders
Not charged
(s)
Profit and losses from
other business
Profits or losses are credited – note (s)
(t)
Estate distribution or
charge
Distributions from or charges to the estate as
determined – note (t)
(u)
Exceptional items
Not applicable
The way in which the above items are taken into account is described in the notes
below.
PLL PPFM Page 72 January 2024
(b) Investment return
This is based on the total return, income and capital gains / losses, made on the
assets of the fund.
The investment strategy is described in section 7.9. In accordance with this,
different proportions of each type of asset are attributed to the specimen policies.
Current practice is for all specimen policies of a particular product type to have the
same proportions of each type of asset. However different product types may
have different proportions of each type of asset.
The return attributed to each specimen policy is then the weighted average return
from each asset type using those proportions. For former PAL traditional with-
profits life policies, the return on fixed interest securities will be that of the subclass
of such securities issued by the UK government with a time to redemption which
matches most closely the term remaining of the specimen policy. Any difference
in return between UK government fixed interest securities and the other fixed
interest securities within the asset share is applied as a uniform percentage
adjustment across the fixed interest part of the asset shares of all policies,
irrespective of the term remaining.
A return may be attributed on some types of asset, particularly derivative
securities, to the class of policy, if any, in respect of which they have been
specifically purchased.
Within each class, the ratio of UK government to other fixed interest securities is
the same for all specimen policies.
For former Bradford policies, the investment return may be approximated using
indices.
(c) Investment expenses
Actual investment expenses are charged based on those allocated to the fund in
accordance with sections 5.2 and 7.11.
The investment expenses are expressed as a percentage charge to be applied to
the assets.
(d) Initial expenses
Initial expenses are based on PGMS charges and an uplift to cover direct costs.
These are all per policy expenses, allocated in accordance with sections 5.2 and
7.11. For most classes, these are approximated by inflating previous values.
(e) Renewal expenses
Renewal expenses are based on PGMS charges and an uplift to cover direct
costs. These are all per policy expenses, allocated in accordance with sections
5.2 and 7.11.
In the past, a proportion of expenses for former PAL traditional life policies have
been met from the excess assets and so that proportion is not taken into account
when calculating the asset shares of specimen policies of those classes. For
former PAL traditional life policies only 98.5% of non commission expenses will be
allocated to asset shares.
For former Bradford policies, these are approximated by inflating previous values.
PLL PPFM Page 73 January 2024
(f) Other expenses
Project and other one-off expenses incurred are included in the actual renewal
expenses charged to asset shares.
The historic costs of establishing policy administration outsource arrangements
over the period 2003 to 2005 were spread over a five year period.
Significant future project, additional activity and other one-off costs will only be
charged to asset shares following approval by the Board.
(g) Tax on investment return
Tax on both income and capital gains is charged to the specimen asset shares of
life policies. It is calculated by applying the current rates applicable to life
insurance companies in respect of income and gains attributable to policyholders
to the different elements of the investment return, less the tax relief on expenses
at the applicable rate. Approximate allowance is made for any deferment in tax
payment or relief. No tax is currently charged to the asset shares of pension
policies. The tax attributable to the asset shares of all types of policy is subject to
change should there be a change in relevant tax rules or rates.
(h) Tax relief on expenses
Tax relief due on the actual expenses charged is allowed for in those classes of
business that are subject to tax. Where the tax relief in respect of expenses is
deferred this is allowed for. The rates of tax relief are the average rates
applicable.
(i) Mortality and morbidity costs
Where a traditional life policy is designed to pay a benefit on death that exceeds
asset share at that time, an annual charge is made to cover the cost of making
those enhanced payments.
The estimated annual cost of providing such benefits is determined periodically
from an analysis of recent actual costs incurred by the fund and from other
insurance industry and national statistics. These costs are expressed as rates
dependent upon various factors including age. The charge on each specimen
policy in each year is determined by applying the appropriate mortality rate to the
current difference between the benefit payable on death and the asset share.
(j) Early terminations
It is the practice to attribute to the asset share of former PAL specimen traditional
life policies the estimated difference between the amount paid on the early
termination of such policies and their estimated asset share arising in a year.
Such amounts are expressed as an addition to the investment return and act to
increase the asset shares of the remaining policyholders. Such allocations are not
however made in years when the target payout upon early termination is in excess
of 100% of asset share. For this reason such allocations have not been made in
recent years.
No such allocations are made in respect of former Bradford policies or former
Swiss Life policies.
PLL PPFM Page 74 January 2024
(o) Charges for the cost of guarantees
No explicit charge is currently made and all costs of meeting guarantees will
reduce the excess assets in the fund. This does not preclude the possibility that
such a charge may be introduced in the future if it was appropriate.
(p) Charges for the cost of capital
No charge is currently made to the fund for the cost of capital. However, from time
to time, one or more loan agreements may be in place in accordance with 5.2.
Interest at a commercial rate will be payable on such loans. Where part of such a
loan is required to eliminate a deficit in the fund, then the interest payable on that
part of the loan will not be charged to asset shares. Where part of such a loan is
not required to cover a deficit, then a deduction will be made from asset shares to
reflect the excess of the interest payable on that part of the loan above the return
achieved by the fund from investing that part of the loan.
No charge is currently made to the fund for the capital that it is necessary to retain
in the Non-Profit Fund and Shareholder Fund in order that Phoenix Life Limited
continues to have adequate capital in accordance with paragraph 5.2.6.
The asset shares of specimen policies do not receive any credit for the return
earned on excess assets held within the fund.
(s) Other business profit or losses
It is the practice to allocate an estimated amount to asset shares of specimen
traditional life policies in respect of any other business profits or losses arising in a
year, other than those described in paragraph 7.4.2(j), expressed each year as an
addition to the investment return.
Profits and losses from non-profit business are not currently added as there are no
longer any non-profit policies remaining in the fund.
Some larger business profits or losses may be spread over a number of future
years.
At 31 December 2005, the date of transfer into Phoenix Life Limited, a one-off
addition was made to the asset shares of traditional life policies in Bradford
representing the actuarially assessed value of future profits from non-profit
business in Bradford.
(t) Estate distribution or charge
For former PAL traditional life policies (both direct written and reassurances
accepted), asset shares may be increased by distributions from the estate or
reduced by charges to the estate. However, these estate distributions are not
guaranteed. In the event of the assets in the fund being insufficient to cover the
liabilities, then any past asset share enhancements out of the estate will be
removed to the extent needed to remove the deficit. See section 7.12.
Former Bradford and former Swiss Life policies do not share in any estate
distribution or charge.
7.4.3 The specimen policies are traditional policies which generally reflect the average
size remaining in force for the year of issue for the terms which contain a
significant volume of policies. For other terms approximations may be used.
Where final bonus rates are shared by policies of different years of issue or
different premium types, the specimen policies may be grouped or otherwise
averaged.
PLL PPFM Page 75 January 2024
For former Bradford and Swiss Life policies, specimen policies are not used and
the calculations are made on an individual policy basis. Similar principles are
used to those described below for specimen policies but actual policy details are
used rather than typical averages.
Asset shares are not calculated for specimen whole life, paid-up and altered
policies. As a result the target ranges described in sections 7.6 and 7.8 do not
apply to policies of these types.
7.4.4 Various approximations are inherent in the asset share method described above
and in the general applications of the principles in practice. These include:
• Investment returns are calculated monthly but may be applied uniformly over
the period within the model which is usually quarterly or six-monthly.
• The investment return itself is only calculated approximately during the course
of a year (by the use of appropriate indices) and is updated after the end of
each year to reflect the actual performance earned.
• Carrying out the calculations (and hence changing final bonus rates) only
infrequently (such as half yearly or annually).
• An inevitable time delay before actual experience is reflected in bonus rates
and their application to policies.
• The use of bonus rates determined using a specimen policy of one type to
policies of another type. Prior to 2019 the majority of policies claiming were
endowment policies and it was the practice to use final bonus rates determined
for standard endowment policies for whole of life policies. From 2019 the
majority of claims are expected to be on whole of life policies and the specimen
policies were updated to reflect this. Asset shares for whole of life policies had
not previously been calculated and so asset shares for specimen whole of life
policies were derived from the benefits payable under the endowment based
bonus scale, but with approximate adjustments to broadly reflect the different
terms on which the whole of life policies were written.
• Where the standard office premium rate for a policy type changed in the middle
of a year, the final bonus may be based on either the pre or the post change
rate.
• The use of specimen policies will usually mean that small premium policies
receive more than the target proportion of asset share (as many administration
costs are independent of premium size) and large premium policies less.
• The use of specimen policies only for selected terms of policy and the
interpolation of final bonus rates for intermediate terms will mean that the
amounts paid on policies of those intermediate terms will not necessarily equal
the target proportion of asset share. Similarly the final bonus rate calculated
for the longest term specimen policy is applied to any policies that claim after a
longer term.
• For policies which have earlier been made paid-up, the use of final bonus rates
applicable to policies, which have been premium paying throughout. Or,
alternatively, the application to both types of policy of final bonus rates
calculated using both model paid-up policies and model premium paying
throughout policies. Similarly bonuses will only be approximate for policies that
have been altered in other ways.
• Determining bonus rates by reference to asset shares is a relatively recent
development. Most of the in force traditional life policies commenced before
such an approach was established practice. When the asset share basis was
implemented it was necessary to quantify such items as investment returns,
investment mixes, expenses and business profits from many years into the
past. Best endeavours were made using all available historic information but
some of the amounts are inevitably best estimates rather than accurate
amounts.
• For former Bradford policies, additional approximations may be used, such as
basing investment return on indices and inflating previous expenses.
PLL PPFM Page 76 January 2024
Some of these approximations, as well as others not listed, will also be present in
the calculations of the excess assets of the fund from time to time.
7.4.5 Items not charged to asset shares, the effects of the approximations in the
experience assumptions and the effects of other approximations in the methods
employed feed through to the estate as described in section 7.12.
7.4.6 Documented procedures exist that set out how the asset share calculations
described above are to be carried out and how the parameters to be used in the
calculation are to be derived each year. A permanent record is kept of the historic
parameters used. Some of the instructions for the detailed computations are
embedded within a number of computer programs.
7.4.7 Any change to the practices used, including those used to determine the excess
assets in the fund, would be subject to the procedure described in principle 7.4.
Any material changes to the historical parameters used would, if a result of the
identification of a past inaccuracy, be notified to the Board and the With-Profits
Committee at the time of the next recommended change in bonus rates. If
considered appropriate, any changes may be phased in over a period rather than
implemented at once.
Any proposed changes to the historical parameters for other reasons would be
subject to the same processes as a change in practice.
7.4.8 Asset share practices are not guaranteed and may be changed in future.
Asset share methodology and processes will be regularly reviewed by the Board
and may change. This may include changes to the historical aspects of the
calculations as a result of a variety of factors, including changes in regulations,
improvements in the degree of approximations, maintaining equity between
classes and groups of policyholders and significant changes in the financial
condition of Phoenix Life Limited.
Bonus Declarations
7.4.9 Bonus declarations are approved by the Board or committee of the Board or
delegated to senior management and then retrospectively approved by the Board.
7.4.10 The amount payable on traditional with-profits policies on maturity is the total of:
• the sum assured;
• the annual bonuses added whilst the policy has been in force; and
• final bonus, if any.
The rate, if any, of final bonus which applies to a particular policy class, date of
issue and date of maturity or retirement is currently determined in most cases with
reference to the asset share of a representative range of specimen policies.
7.4.11 Bonuses are reviewed regularly at least once a year.
The timing of annual bonus reviews is described in paragraph 7.5.6.
The timing of final bonus reviews is described in paragraph 7.6.4.
7.4.12 The timing of final bonus declarations may be varied.
7.4.13 Final bonuses are expected to, but are not guaranteed to, apply until the next
planned review date. These bonuses may be reviewed at any time between
PLL PPFM Page 77 January 2024
normal planned review dates. Additional reviews would normally only be in
response to exceptional investment market movements.
7.4.14 Final bonus reviews also affect the amount of final bonus paid on non-protected
exits (surrenders) for policies where the surrender value calculation makes explicit
use of the current final bonus scale.
7.4.15 Bonuses are declared out of surplus arising in the year or in anticipation of surplus
arising. If there is no surplus or no expectation of surplus arising, no bonuses can
be declared.
PLL PPFM Page 78 January 2024
Principle
7.5
Annual Bonus Rates
If the value of assets is more than reasonably sufficient to enable the fund to meet
the aims described in section 5, then annual bonuses are likely to be added. In
circumstances where the value of assets is fairly close to the minimum amount
required to enable the fund to meet its aims described in section 5, low or nil rates
of annual bonus are likely to be added. In circumstances where the value of
assets for a particular class of policy is fairly close to the minimum amount
required to enable the fund to meet the aims described in section 5 for that class
of policy, then low or nil rates of annual bonus are likely to be added for that class
of with-profits policy.
Separate annual bonus rates are applied to different policy classes to reflect the
different aspects of the products, including tax treatment and extent of guaranteed
benefit (although no differentiation is made between policies of the same class
with and without guaranteed annuity options). Currently no differentiation is made
between different dates of issue, although this may be done in the future if it
helped to better satisfy the aims described in section 5.
Although most classes of new business are no longer accepted, other than under
options on existing policies, alternative products might at some time be introduced
into which existing customers could switch their benefits at their discretion, which
might receive different bonus rates.
Practices
7.5.1 The Board makes decisions on annual bonus declarations taking into account a
number of factors. These factors are set out in paragraphs 7.5.2 to 7.5.6.
7.5.2 Annual bonus rates currently take the form set out in the table below.
Bonus series
Policies included
Bonus type
PAL Life
All former PAL traditional
life policies
Compound. A percentage of the
sum assured and a separate
percentage of the attaching bonus.
Bradford
All former Bradford
policies
Compound. A single percentage
applying to both the sum assured
and the attaching bonus.
Swiss Life
All former Swiss Life
traditional with-profits
policies transferred into
the fund
Compound. A single percentage
applying to both the sum assured
and the attaching bonus.
7.5.3 For each class of business, the level of annual bonus is set so as to maintain a
buffer for final bonus. The future claim payouts are estimated using realistic
assumptions and the annual bonuses are set at such a level that if experience
turns out to be in line with those assumptions, the overall amount of the payout
paid in the form of final bonus will be in line with a target proportion. Under current
investment conditions, the overall target is that 25% of the overall value of
payouts, calculated before any future augmentation provided by a release of the
estate, will be in the form of final bonus. Given the aggregate nature of this target,
for an individual policy, this final bonus buffer may be more or less than 25%. This
overall target is itself subject to review and may be changed. If experience does
not turn out to be in line with the assumptions then the 25% target might not be
met.
7.5.4 At present, for former PAL traditional life policies relatively high amounts of annual
bonus are declared, both in relation to current interest rates and current inflation
PLL PPFM Page 79 January 2024
rates, and also in relation to many other life offices. The Board does not expect to
increase annual bonus rates significantly, if at all, for a number of years.
Annual bonus rates will be adjusted to keep the overall level of projected final
bonus broadly in line with the target. If necessary to remain on target, annual
bonus rates will be reduced to nil, or close to nil. However, some small annual
bonuses may be declared even if the final bonus buffer is below target.
There is no maximum change in the annual bonus rate; however, in the normal
course of events the declared annual bonus rates would not be expected to
change by more than 2% from one declaration to the next.
7.5.5 Where the financial position of the fund is weak, the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus buffer being above the 25% target.
7.5.6 Currently annual bonus rates are reviewed towards the end of each year, with
changes taking effect from 1 January.
However, rates may be reviewed at other times should it be considered necessary
to continue to adhere to the principles.
7.5.7 Where annual bonuses are declared in arrears, interim bonus rates are set with
reference to the most recent annual bonuses declared and any future anticipated
direction of these rates and may be higher or lower than the latest annual bonus
rates declared. The annual bonus rate may, however, eventually be set at a level
that differs from the interim rate.
PLL PPFM Page 80 January 2024
Principle
7.6
Final Bonus Rates
Final bonus may be added to policies when they terminate or when benefits are
encashed for other purposes, with the aim of ensuring, if they do not already do
so, that benefits reflect fairly and proportionately a share in the profits (and losses)
which have been generated within the fund whilst the policy has been in force.
Where policy benefits include an amount resulting from excess assets in the fund
(see section 7.12) then this is also reflected in the final bonus.
Separate final bonus rates are applied to different policy classes to reflect the
different aspects of the products, including tax treatment, form of benefit and
extent of guaranteed benefit. Differentiation is also made between different dates
of issue and different periods in force. On death and on early termination, the final
bonus added may be higher or lower than indicated above for reasons explained
in the practices. For former Bradford and Swiss Life traditional policies the final
bonus rates are individually calculated by reference to the individual asset share.
Practices
7.6.1 For each specimen policy, we determine a proportion of asset share that it is
appropriate to use to best meet the guiding principles. This proportion will vary
from time to time, may be greater or less than 100% and may vary by class of
policy, date of issue, term remaining to a date at which a guarantee or option
applies or other relevant factor.
For each specimen policy the following are compared:
(i) the appropriate proportion of each specimen policy’s asset share (the asset
share for this purpose being inclusive of any enhancement as described in
paragraph 7.4.2); and
(ii) the total of the sum assured and the annual bonuses already added to that
specimen policy.
If (i) is the larger, a final bonus for the specimen policy will normally be set using
the methods described below. If (ii) is the larger, then no final bonus will normally
be set for that specimen policy.
The target for the proportion in (i) above is 100%. The proportion used for
particular specimen policies may be affected by smoothing (see section 7.7). The
aim is to maintain the proportions in (i) within the range 80% and 120% for most
specimen policies before the effects of smoothing.
For each specimen policy where a final bonus is to be set, the excess of (i) over
(ii), after any smoothing, is expressed as follows:
Bonus series
Policies included
Excess of (i) over (ii)
expressed as:
PAL Life
All former PAL traditional life
policies
A percentage of the sum
assured
Bradford
All former Bradford policies
An addition to the sum
assured and attaching bonus
Swiss Life
All former Swiss Life traditional
with-profits policies transferred
into the fund
An addition to the sum
assured and attaching bonus
This is then the new final bonus rate for all policies of the same type and duration
in force as the specimen policy.
PLL PPFM Page 81 January 2024
Where a rate is not derived for every duration, the rates applicable for other
durations are determined by interpolation or extrapolation between the rates
derived as above.
7.6.2 The original term for final bonus rates is currently differentiated by year.
7.6.3 For all classes of policy final bonus rates may be changed at any time. At times
when the value of the excess assets in the fund is not changing rapidly, this is
likely to mean that changes, if any, are made twice per year, normally from 1
January and 1 July. However, a sudden change in the value of those excess
assets (such as because of a significant change in the value of equity share
markets) may cause final bonus rates to be changed on other occasions.
Changes to surrender and transfer values may be less frequent than changes to
final bonus rates for maturities.
7.6.4 As the value of the assets are changing every day but final bonus rates are
recalculated infrequently, there will frequently and inevitably be times when, if the
asset share were recalculated for the specimen policies, then final bonuses would,
in effect, be based on slightly larger or smaller percentages of those asset shares
than the practices would in theory dictate. Normally an investment return variation
of up to 10% compared to that assumed when the final bonuses were last
reviewed, would be allowed before there would be an additional final bonus
review. However, where the proportion of asset shares at the latest final bonus
review was near the top or bottom of the range described in paragraph 7.6.1, a
lower level of investment return variance may lead to an additional final bonus
review.
PLL PPFM Page 82 January 2024
Principle
7.7
Smoothing
Smoothing refers to the practice of limiting the change in final bonus rates on any
one occasion so that the benefits paid to policyholders differ from those, which
would otherwise apply. Smoothing is applied to all classes of policy which are
eligible for final bonus and to all types of claim apart from former Bradford and
Swiss Life policies.
Smoothing is intended to have a neutral effect over time. In other words, if
applying the limitation on changes in the rate of final bonus, results for a period in
different amounts of discretionary benefits than would otherwise have been paid,
then in a subsequent period discretionary benefits would be adjusted by a broadly
equal and opposite amount when circumstances and the practices allow.
Other than on death or early termination, the aim is at all times to pay policy
benefits that are close to those described under section 7.6. Accordingly,
smoothing is not particularly vigorous and final bonus rates may change by
relatively large amounts both on any one occasion and over a 12 month or longer
period. The cost of smoothing is not expected to be material at any time and so
no specific upper limit is imposed on it.
These principles are not necessarily applied when determining the amount
payable on traditional policies, which are terminated significantly early.
Practices
7.7.1 No smoothing is applied to maturity values on former Bradford and Swiss Life
policies as these policies receive benefits based on an individually calculated
asset share due to the small number of such policies.
For other policies, where final bonus changes are normally made twice a year,
smoothing is applied to maturity or retirement values by limiting the change in final
bonus rates. Normally the change in final bonus rates for a specimen policy will
be limited so that the increase or reduction in total maturity or retirement payout
compared to a position where bonus rates are not changed is not more than 7.5%
at each six monthly review.
For these policies, surrender value bases are normally reviewed twice a year and
smoothing is applied by limiting the change in immediate surrender value for
specimen policies. Normally the surrender value for specimen model policies will
not change by more than 10% at each six monthly review. Surrender values may
change in between reviews because in many cases the surrender values are
calculated using formulae that depend upon factors such as term remaining which
change over time.
However, if it is necessary to enable the fund to continue to meet the objectives
set out in the guiding principles in section 5, sometimes larger changes are made
in final bonus rates and surrender values.
If there has been a significant change in premium rates then larger changes than
those described above may be made so that the final bonus rates and surrender
bases remain consistent with the premium rates on which the business was
generally written. Where premium rates were revised with the intention of
changing payouts, then smoothing will not be applied, so that the change in
payouts intended by the premium rate change does occur.
Calculations may also be carried out for specimen policies which are due to reach
their maturity date in the following few years. If these calculations show a trend in
PLL PPFM Page 83 January 2024
payouts which could not be accommodated by following the normal limits on
change described above, the final bonus rate or surrender value being determined
may be adjusted so that the trend may more easily be accommodated.
For both maturity and retirement values and surrender values, any change to
payouts that results from changes in the distributable estate, if any, will be
additional to the limits described and will not be subject to smoothing. Also where
there have been significant changes in methodologies and practices, the impact
may not be managed within the normal smoothing rules.
7.7.2 Applying smoothing does mean that, on occasions, more or less than the target
proportion of asset share is paid out. This difference will reduce or increase the
excess assets of the fund. There is no particular maximum accumulated cost of or
benefit to the fund, which is allowed, although no smoothing accumulation would be
allowed to build up which was inconsistent with the achievements of the objectives
of the guiding principles set out in section 5.
PLL PPFM Page 84 January 2024
Principle
7.8
Surrender Values
The aim in setting non-protected exit values will be to minimise any adverse effect
on the interests of continuing policyholders and subject to this, the aim is to set
non-protected exit values so that payouts for specimen policies or groups of
specimen policies in aggregate achieve a target payout ratio over time.
Practices
7.8.1 Non-protected exits refer to surrenders and transfers for pension business.
7.8.2 For policies that surrender early, the aim is to make payments that are, in
aggregate and over time, across all specimen policies that are used for
determining surrender bases, a targeted proportion of asset share. This
proportion is currently 100%. For former PAL traditional life policies (including
reassurances accepted) the asset share allows for the enhancements described in
paragraph 7.4.2.
7.8.3 Actual surrender payments on individual policies will not generally be in line with
the target proportion because:
• Individual asset shares are not calculated or held on the administration
systems for use in surrender value calculations. Rather surrender values are
calculated in a variety of ways for different types of policy. Typically surrender
values are based on a discounted value of the guaranteed sum at maturity or
retirement (reduced to allow for non-payment of future premiums in the case of
regular premium policies) including attaching annual bonus, together with an
allowance, where appropriate for final bonus.
• Specimen policies are used to determine the parameters in the surrender value
calculations. The outcome for a particular individual policy may be different
from that of the specimen policy.
• There are a limited number of parameters that may be altered in the surrender
formulae for certain products which means that the parameters are set in
aggregate across a range of specimen policies.
• As the value of assets are changing every day but the parameters in the
surrender value formulae are only reviewed infrequently, there will inevitably
often be times when, if the asset share for the specimen policies were
recalculated, surrender values would, in effect, be based on slightly larger or
smaller percentages of those asset shares than the practices would in theory
dictate.
7.8.4 For the reasons given above it is expected that surrender values, when expressed
as a proportion of asset share, will fall in a wide range around the target
proportion. The parameters in the surrender value bases are reviewed periodically
with the aim that the majority of surrender values for the range of specimen
policies that are analysed, will fall within the range of 80% to 120% of asset share
for former PAL traditional policies, including reassurances of this type accepted
and 100% of asset share for former Bradford and Swiss Life With Profit Fund
policies, before the effects of smoothing.
7.8.5 In some cases, values in excess of the upper limit of the range may be payable
when policies are surrendered close to maturity and the asset share of the
relevant specimen policy is less than the guaranteed benefits at maturity, or the
maturity payout is in excess of the asset share due to smoothing.
PLL PPFM Page 85 January 2024
7.8.6 The method used to derive the surrender value may not involve the explicit
application of final bonus. Where the value paid is larger than the discounted
value of the guaranteed sum assured and annual bonuses already added, an
element equivalent to final bonus will be implicit in the value.
7.8.7 Final bonuses on surrenders are normally reviewed and changed with the same
frequency as final bonus rates for the relevant policy type (see paragraph 7.6.4)
Reviews and changes may sometimes be less frequent or implemented later than
the corresponding final bonus rate change.
7.8.8 The percentages described in paragraphs 7.8.2 and 7.8.4 may be changed at any
time, as may the methods of calculation. However, before any changes are made,
the Board will formally consult with and take into account the opinions of the With-
Profits Actuary and the With-Profits Committee.
PLL PPFM Page 86 January 2024
Principle
7.9
Investment Strategy
Overall, the strategy will be to invest in fixed interest securities but with exposure
to equity shares and commercial property, either directly or through vehicles such
as unit trusts, OEICS or derivatives when and to the extent to which this is
possible without unduly putting at risk the fund’s ability to meet guaranteed
benefits as they arise. Some cash or equivalent assets will be held for liquidity
purposes. When the assets in the fund are significantly in excess of the value of
the guaranteed benefits then the exposure to equity and property investments
could be high and the exposure to such assets could significantly exceed the
exposure to fixed interest securities.
From time to time assets outside the fund may be relied on to provide some or all
of a margin against future adverse change in investment markets. The investment
strategy is, however, based upon the intention that the aims will be met using only
the assets of the fund after repayment of any loans or other financial support
received.
Derivatives may be used from time to time to make changes in investment
dispositions more rapidly or cheaply than could be done directly through the
markets. They may also be used from time to time to reduce the risk of loss, for
example from share price falls, interest rate changes or exchange rate
fluctuations.
The proportion of shares and property held at any time may differ between
different products, dates of issue or terms remaining to reflect the different risks to
both the specific policyholders and to policyholders and the shareholder more
generally. For some with-profits policies with relatively high guaranteed benefits,
this may mean that no shares or property will be held. Fixed interest securities
are broadly matched to the term remaining.
The maximum loss, which the fund could suffer from the complete default of any
one external counterparty, whether through reinsurance, direct investment, stock
lending or derivatives is restricted by dealing with a wide range of counterparties.
This usually means that the total exposure to any one counterparty is significantly
below the maximum levels for which value may be taken under our regulator’s
rules. In some cases, additional precautions such as daily marking to market with
deposit back are used.
Larger, unprotected exposures are permitted to sister companies (regulated UK
life insurers) through internal reinsurance arrangements.
There are no assets that are not expected to be traded should that be an
appropriate investment decision.
Practices
7.9.1 The investment strategy is regularly reviewed taking account of a variety of
considerations, including our approach to responsible investment. In particular,
reports from the investment managers, the Chief Actuary, the With-Profits Actuary
and the With-Profits Committee, and recommendations for changes are
considered and, if appropriate, implemented.
7.9.2 Guarantees to policyholders and liabilities to other creditors are not completely
matched with assets that provide a similar guarantee or payment. In particular, a
proportion of assets are invested in equity shares and commercial property
because it is considered that, over most longer periods of time, a better return will
result. There are separate investment strategies for assets equal in amount to the
PLL PPFM Page 87 January 2024
aggregate asset shares of policies and for assets representing additional
provisions for liabilities under non-profit policies, for guarantees on with-profits
policies, for other liabilities and for the capital margins and excess capital. Each of
these strategies is described in more detail below.
It is not possible to implement the strategies described below with absolute
precision and any difference between the actual outcome and the theoretical
outcome may be treated as described in paragraph 7.4.2(s).
Asset Shares
7.9.3 It is the current practice that all specimen policies of a particular class will be
deemed to have the same asset mix in that they will be deemed to be invested in
the same proportions of equity shares, property, fixed interest and other
investments.
The asset mix may however vary by product class to reflect both the past practice
and the differing nature of the guarantees given.
For former PAL traditional with-profits life business, the fixed interest assets
attributed to a specimen policy will reflect the term remaining of that policy.
Returns on emerging market debt do not reflect the term remaining, but rather
reflect the overall return on such debt.
The aim is to maintain a reasonable degree of similarity between the overall
duration of the fixed interest assets and the overall duration of the liabilities.
If the value of assets in the fund is more than reasonably sufficient to enable the
fund to meet its aims for the fund, as described in the guiding principles in section
5, then the overall proportion of shares and property is likely to be significant.
Conversely in circumstances where the value of the assets is fairly close to the
minimum amount required, the overall proportion of shares and property is
generally likely to be low.
It is the intention that the proportion invested in equities will be reduced from
current levels over time to reflect the increasing maturity of the business. This will
be a gradual process over many years. A reasonably significant exposure to
equities will remain.
In future other changes to the equity-backing ratio for different classes of policy, or
for sub-groups of policies within a class, may be made. However any such
changes to the equity-backing ratio will be made by reference the factors referred
to in Principle 7.9, that is the date of issue, the term remaining and the level of the
guaranteed benefits. There is currently no intention of changing the equity-
backing ratio for different groups or sub-groups of policies other than to reflect
these factors.
7.9.4 All policies are grouped according to the specimen policy that most closely
represents them and the total asset share for each group is determined. The total
is then invested in the proportions determined for the specimen according to the
rules in paragraph 7.9.3.
PLL PPFM Page 88 January 2024
7.9.5 The guideline asset mix range for asset shares is:
Former PAL
Life
Former
Bradford
Former
Swiss Life
With Profit
Fund
Fixed interest and cash
45% to 55%
45% to 55%
45% to 55%
Equities including private equity
and alternative assets
35% to 45%
35% to 45%
35% to 45%
Property
5% to 15%
5% to 15%
5% to 15%
From time to time the actual asset mix will be different from the guideline mix due
to market movements and active management decisions taken by the investment
managers or the Investment Committee. The equity investments will be a mixture
of UK and overseas shares, including emerging markets and may also include
private equity and alternative assets such as hedge funds. Fixed interest assets
will be a mixture of approved fixed interest securities, such as British Government
gilts and other government and supranational bonds, and other fixed interest
securities, such as corporate bonds, debentures, loan notes and emerging market
debt.
Sufficient assets would be disposable at short notice without material loss in value
to meet foreseeable additional liquidity requirements.
The agreements with the investment managers set out any limits on matters such
as:
• The types of investment that may be held.
• The maximum amount that can be invested in any single company.
• The maximum amount that can be invested in any single asset class / industry
sector / country.
• The maximum amount to which the manager might hold assets which are
different to the benchmark (guideline) portfolio in order to enhance returns.
(These include restrictions in terms of credit quality, term/duration and
amounts of individual holdings).
• The minimum credit rating quality of assets (as specified by the main rating
agencies such as Standard & Poor’s and Moody’s).
• Exposure to sectors or companies that do not align with our approach to
responsible investment, for example Tobacco.
Guarantee Reserves
7.9.6 Guarantee reserves are the additional reserves that are necessary, over and
above the asset share, to ensure that guaranteed benefits can be met. The
current practice is to invest the assets covering the guarantee reserves in fixed
interest investments. This does not provide a perfect match as the guarantee
reserves will tend to increase / reduce as the value of the equity and property
investments within the asset share fall / rise with market movements. Any
surpluses or shortfalls arising from this mismatch will act to reduce or increase
amount of excess assets in the fund.
Other Liabilities and Excess Assets
7.9.7 Assets representing short-term liabilities are invested in cash or short-term debt.
Assets representing the estate of the 100% With-Profits Fund are mostly invested
in fixed interest securities. However if the estate is large in relation to the potential
risks facing the fund then part of the estate may be invested in line with the asset
mix for the asset shares.
PLL PPFM Page 89 January 2024
Miscellaneous
7.9.8 The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
7.9.9 The fund does not hold any assets which are not normally traded.
7.9.10 Before investing in new or novel investment instruments, the Board would obtain
the advice of the Chief Actuary and the investment managers on the benefits and
risks of the proposition. This would include an analysis of the nature and
proportion of future outcomes in which the instrument would prove materially
disadvantageous relative to other more traditional investments. If these are to be
held in material amounts in respect of with-profits policies, the Board would also
seek the opinion of the With-Profits Actuary and the With-Profits Committee.
PLL PPFM Page 90 January 2024
Principle
7.10
Business Risks
As well as investment performance and counterparty exposure the fund’s future
ability to continue to pay all guaranteed benefits when due will be affected by a
number of other factors ‘business risks’ that may arise from running off the
existing portfolio. These are listed, together with the controls which are applied, in
paragraph 7.10.1.
It is not currently envisaged that any business risks would be taken on in addition
to those to which the fund is already exposed although, if it appears to be
potentially beneficial to policyholders to do so, then this might be done or the
exposure to risks to which the fund is already exposed (such as by cancelling
reinsurance arrangements) could be increased. If this did take place, it would only
be done if the reward was expected to be better than that from other investments
with broadly equivalent risks (such as investing in shares or property). The Board
would formally consult and take account of the opinions of the Chief Actuary, the
With-Profits Actuary and the With-Profits Committee before doing so.
The Board will annually review existing business risk exposures as part of
assessing the formal regulatory capital requirement and take appropriate
measures to limit risk to amounts to which it is fair for the with-profits business to
remain exposed.
Practices
7.10.1 The main business risks of the fund, and the controls that are applied to those that
Phoenix Life Limited can influence, include:
• Expenses of management – controlled mainly by outsourcing all business
activities, including policy administration and investment management. Normal
activities are outsourced on an agreed pricing basis. The main residual costs
not subject to an agreed pricing basis are project activity and certain direct
costs and fees.
• Failure of non-group outsourced services provider – part of the administration
services provided by PGMS are sub-contracted to Diligenta– controlled by
having exit plans. PGMS is liable for any additional cost of providing these
services which might arise if Diligenta were to default. Should PGMS be
unable to meet any of its obligations to provide services then Phoenix Life
Limited would request that Phoenix Group, as owners of PGMS step in to
restore the position. Should Phoenix Group not do this, then Phoenix Life
Limited would attribute any losses to the shareholder fund or Non-Profit Fund,
and the fund would only be affected if the shareholder fund or Non-Profit Fund
had insufficient excess assets to bear the losses.
• Meeting minimum guaranteed policy benefits (where these costs are
reasonably attributable to the fund) and the cost of smoothing – controlled by
having an appropriate rate of annual bonus, limiting the extent of smoothing
and investing primarily to meet the guarantees, all whilst ensuring that
customers continue to be treated fairly.
• Fluctuations and long-term trends in death rates – fluctuations are constrained
by the use of reinsurance contracts to limit exposure on any one policy.
• Changes in taxation.
• Profits or losses from investments backing non-profit business or other
liabilities and from investments which represent additional capital.
• Profits or losses from the early or late termination of policies.
• Provision of compensation for past legal or regulatory infringements.
• The cost of additional capital needed to be held for regulatory purposes or for
the optimal management of the business – controlled by regularly reviewing the
level of excess capital and by ensuring that only a commercial cost for capital is
being paid.
PLL PPFM Page 91 January 2024
• Failure of reassurers – the reassurance credit risk is monitored.
7.10.2 Currently it is not envisaged that the fund would take on any business risks in
addition to those to which it is already exposed although it may do so, if it appears
to be potentially beneficial to the fund.
7.10.3 How and to what extent business profits and losses to which the fund is already
exposed are incorporated in the asset share calculations for specimen policies and
so how they affect the amounts payable under with-profits policies is described in
section 7.4.
To the extent that business profits or losses are not incorporated in asset share
calculations, they will increase or reduce the excess assets in the fund.
7.10.4 If the fund experienced or identified a particularly large business profit or loss in
any one year, its incorporation in asset share calculations may be spread over a
number of future years to avoid excessive impact on policy values in the short
term.
7.10.5 There is no predetermined minimum value below which business profits or losses
will not be applied, sooner or later, as a determinant of the bonuses payable under
with-profits policies.
7.10.6 As described in section 7.4, no amounts are currently being attributed to asset
shares in respect of business risk as the amounts are involved are minimal. If this
were to change in the future then the outcome from all business risk will be pooled
across all with-profits policies in the fund, although this has not always been the
practice in the past.
PLL PPFM Page 92 January 2024
Principle
7.11
Expenses and Charges
These are governed by guiding Principle 2 in section 5.
In addition, charges and expenses attributed to the fund in respect of former Swiss
Life policies will be in line with the 2023 Scheme and with the commitments made
to the regulator.
Where costs are specific to a policy or class of policy then, taking into account the
approximations referred to in section 7.4, such costs will be taken into account in
assessing the bonuses added to that policy or class and in assessing the early
termination value payable. Where costs are not specific to a single policy or class,
they will be apportioned across the policies or classes to which they are relevant
in a reasonable manner.
Practices
Former Swiss Life Policies
7.11.1 For former Swiss Life With Profit Fund policies, the expense charged to the fund in
any year is a specified amount for each policy in force on 30 June in that year.
The specified amount is £20, increased in line with the increase in the Average
Earnings Index from 30 June 1989 to 30 June 2010. Thereafter the specified
amount increases in line with increases in Average Weekly Earnings which
replaced the Average Earnings Index.
7.11.2 An agreement exists with PGMS to supply administration services to the fund.
This is a perpetual agreement and is not expected to be renegotiated, but charges
may be amended in respect of major regulatory change. The agreement can
however be terminated early for material failure to meet service standards or other
non compliance with the agreement. We regularly monitor service standards.
Value added fees for work outside the service level agreements are changed
separately.
Former PAL and Bradford Policies
7.11.3 The main expenses that are apportioned to the asset shares of specimen with-
profits policies relate to the fees paid to PGMS in connection with all business
activities. The PGMS charges are mainly expressed as an annual amount per
policy, irrespective of type (other than non-profit annuities, for which the fee is
lower), increasing each year by RPI + 1%. For policies with more than one
benefit, including premium increments, the charge is only made once. They are
apportioned on this basis.
Additional fees are payable for certain other one-off activities and developments.
Such costs are generally apportioned in proportion to the PGMS fees.
Fees are also payable to the investment managers in connection with the
management of the investments. These amounts are expressed as a percentage
of the investments under management. Where investments are via a collective
investment vehicle operated by the investment managers, the total fees payable to
the investment managers are not materially different than if those investments
were directly held.
Commission is also payable to intermediaries on some contracts.
PLL PPFM Page 93 January 2024
7.11.4 Costs attributable to the fund that are not apportioned to asset shares will reduce
the excess assets of the fund.
PLL PPFM Page 94 January 2024
Principle
7.12
Estate Management
The aim is to manage the fund so that there is always a small excess of the value
of the assets over the amount considered necessary on market-consistent
assumptions to enable it to meet the aims described in the guiding principles in
section 5.
The excess at the targeted level is maintained by:
• controlling the addition of annual bonuses to policies;
• maintaining an appropriate investment strategy;
• limiting, where possible, the business risks faced;
• exercising discretion in other areas with moderation; and
• drawing on or repaying additional financial support from the Non-Profit Fund or
Shareholder Fund in the form of loans to the fund or otherwise.
Where the assets of the fund are in excess of the amounts required to meet the
aims described in the guiding principles in section 5, it is intended that the
enhancement factor applied to asset shares on former PAL with-profits traditional
life policies, both direct written and reassurances accepted, will be adjusted over
time so that the excess is brought into line with the adequate but not excessive
margin. Such an adjustment will not be applied to the other policies in the fund.
The effect of this approach is that within the fund:
• the amounts payable upon death, maturity or early termination of a former PAL
with-profits traditional life policy (either direct written or reassurance accepted)
will be significantly in excess of the amounts that would be payable had the
excess assets been only sufficient to meet the minimum aims described in the
guiding principles in section 5; and
• the amounts payable under other policies will not be affected by any excess
assets.
Practices
7.12.1 The former Bradford and former Swiss Life business does not have any interest in
the estate arising in the fund and references in this section to potential benefit
enhancements from estate distribution do not apply to this business.
7.12.2 The estate is the estimated realistic value of the assets less the estimated realistic
value of the liabilities. It is calculated using realistic assumptions and generally
accepted methodologies on a basis determined by the Board.
7.12.3 To the extent that any profits or losses arising in the fund are not allocated to asset
shares in accordance with section 7.4, they will act to increase or reduce the
estate. To the extent that the amounts charged to asset shares are based on
estimates or assumptions, then any difference between these and the actual
amounts will act to increase or reduce the estate.
7.12.4 The estate will be used to:
(a) assist the fund in demonstrating it has access to sufficient capital resources
to meet its liabilities and treat customers fairly;
(b) provide a buffer in the fund should adverse experience mean that the
reserves held to cover the liabilities prove insufficient;
(c) meet any costs which are charged directly to the estate, rather than to asset
shares;
(d) meet the costs of any changes which the Board believe are necessary to
improve fairness between policyholders and / or enhance the run-off of the
fund; and
PLL PPFM Page 95 January 2024
(e) enhance the benefits payable to those with-profits policies which have an
interest in the estate but always aiming to retain sufficient estate to meet the
expected, amounts required for (a), (b), (c) and (d). The amount considered
by the Board to be available from time to time for such enhancements will
be referred to as the distributable estate.
7.12.5 Any enhancement in benefits on account of the distributable estate referred to in
7.12.4(e) will generally be achieved by including a temporary uplift to the asset
share for the purpose of setting final bonus rates and surrender values. However
if the distributable estate is large then consideration would be given to making
additions to the asset shares from the estate.
7.12.6 The amount of the estate, the distributable estate, and the potential for any
enhancements to policyholder benefits will be subject to review at least once a
year.
7.12.7 In the event of a risk of the assets in the fund being insufficient to cover the
liabilities, charges may be made to the asset shares to restore the estate to a
target minimum level. However such charges could not be applied to any part of
the deficit caused by regulatory penalties (fines) or compensation payments
relating to events which occurred before 31 July 2009, see paragraph 5.2.18,
except to the extent that such charges are effectively reversing any estate
previously added into asset shares.
7.12.8 Providing that it is possible to do so whilst still treating policyholders fairly, it is
intended to manage the excess assets using solely the resources of the fund and
avoiding the need to draw on any external sources of capital.
In the event of the assets in the fund being insufficient to cover the liabilities, then
any past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit.
Arrangements exist for monies to be transferred from the Non-Profit Fund or
Shareholder Fund to the fund with the aim that the amount of assets in the fund
exceeds the liabilities by a small margin, should the charges described in 7.12.7
be insufficient to restore the estate. For this purpose, the possibility of distributing
any surplus assets to policyholders will not be regarded as a liability.
Transfer of such amounts back to the Non-Profit Fund or the Shareholder Fund
will be made whenever emerging surplus in the fund permits.
The exercise of discretion in respect of with-profits policies will be managed with
the aim that the amounts transferred to the fund will be repaid to the extent that is
possible whilst still meeting the aims described in section 5. In determining
benefits under with-profits policies, the Board will disregard any liability to transfer
such amounts back to the Non-Profit Fund or Shareholder Fund to the extent that
this is necessary to treat customers fairly (that is in accordance with these
Principles and Practices).
PLL PPFM Page 96 January 2024
Principle
7.13
New Business
Apart from as a result of the exercise of options under existing policies and
contractual increments, new business is no longer accepted. The future business
risk from this source is expected to be small.
Practices
7.13.1 The fund is no longer actively seeking new business, but continues to write a small
amount of new business relating to policy options under existing contracts.
Currently there are no plans to reopen the fund to new business.
PLL PPFM Page 97 January 2024
Principle
7.14
Equity Between the Fund and Shareholders
The 2023 Scheme provides that holders of with-profits policies in the fund are
entitled to receive the whole of the divisible profits arising from the fund.
Payments from the fund are therefore limited to those amounts required to meet
obligations under policies and reassurance agreements written in the fund. None
of the divisible profits arising in the fund are attributed to the other with-profits
funds, the Non-Profit Fund or to the Shareholder Fund.
If the Board were considering making changes to the current position, it would first
request and consider the advice of the Chief Actuary and take into account the
opinions of the With-Profits Actuary and the With-Profits Committee. If it decided
to proceed, the Board would notify policyholders at least three months in advance.
It would also need to seek the agreement of Phoenix Group and the High Court to
make such a change.
If a position arose where the fund required financial support from the Non-Profit
Fund or Shareholder Fund, whether in the form of a loan or otherwise, to enable it
to meet the target excess assets described in section 7.12, the terms on which
such support is provided will be fair and reasonable to all parties, taking into
account prevailing market conditions and the risks involved. If such support forms
part of the fund, then it will be treated as a liability to the extent that it would
otherwise increase the excess assets (disregarding for this purpose any
requirement under the relevant rules or actuarial standards to recognise as a
liability the requirement to distribute any surplus).
Services may be provided by the shareholders to the fund but terms for such
services will be on commercial terms which are considered to be consistent with
the risks of providing those services, or considered to be consistent with terms
which would be available for such services on an arm’s length commercial basis.
Practices
7.14.1 Payments from the fund are limited to those amounts required to meet obligations
under policies and reassurance agreements written in the fund. None of the
divisible profits arising in the fund are attributed to the Non-Profit Fund or to the
Shareholder Fund.
7.14.2 The expenses allocated will be that part of the expenses of the long-term business
fund as a whole which are deemed to have been incurred in respect of policies
written in the fund. These expenses are determined by an analysis of the costs
incurred by Phoenix Life Limited including the costs under the agreements for
policy administration and other services for the business written by all the funds.
For former Swiss Life policies, the expenses allocated will be by reference to the
specified charging structure set out in section 7.11. Phoenix Life Limited believes
that it is fair that the fund should bear its share of any overheads and expense
overruns to the extent that these can reasonably be attributed to the business
written in that fund.
7.14.3 The Board are not aware of any external or internal factors, which, if they were to
change, would have a material effect on the apportionment of surplus as described
above.
7.14.4 Where mis-selling costs are charged to the fund they will be met from the excess
assets in the fund so long as such excess assets exist.
PLL PPFM Page 98 January 2024
7.14.5 When deferred annuity policies mature, the annuity is set up in the Non-Profit
Fund and the reasonable cost of setting up the annuity is paid to the Non-Profit
Fund.
PLL PPFM Page 99 January 2024
8 Principles and Practices – Alba With-Profits Fund
The Principles and Practices given in sections 8.4 to 8.14 together with the Guiding Principles
and Practices form the Principles and Practices of Financial Management for the Alba With-
Profits Fund. Sections 8.1 to 8.3 give background information specific to the Alba With-Profits
Fund. Subsequently in this section the use of the term ‘the fund’ generally means the Alba
With-Profits Fund.
8.1 Fund History
The Alba With-Profits Fund comprises the business that was transferred to
Phoenix Life Limited under the 2006 Scheme from the Ordinary Long Term Fund
of Alba Life Limited.
It includes business previously written by FS Assurance (FS), the Life Association
of Scotland Limited (LAS) and Crusader Insurance plc (subsequently renamed
Britannia Life Assurance (BLA)) as well as Britannia Life Limited (BLL). These
were merged in 1994 through a transfer, under a scheme made under Section 49
of the Insurance Companies Act 1982.
Alba announced its closure to new business on 4 December 1997 and finally
closed to all new business in July 1998.
Alba was previously called Britannia Life Limited, the name changed on
6 December 1999 following its acquisition by Britannic Assurance from the
Britannia Building Society.
On 4 December 2003, Alba entered into an agreement with Britannic Assurance
whereby a basis was agreed upon which Britannic Assurance would provide
capital support for Alba to manage its deficit. In April 2006 Britannic Assurance
sold Alba to Resolution Life Limited and the capital support agreement with
Britannic Assurance was replaced by an equivalent one with Resolution Life
Limited. Although this agreement has ceased, the fund continues to be managed
under equivalent practices as described in section 8.3.
In 2022 policies sold in Ireland were transferred to PLAE, an Irish company within
the Group, and immediately reinsured back into the Alba With-Profits Fund. PLAE
is responsible for paying claims under these policies. For as long as the
reinsurance remains in force, amounts payable to PLAE on these policies under
the reinsurance will continue to reflect participation in the Alba With-Profits Fund at
the same level as before.
8.2 Types of Business
The with-profits business in the Alba With-Profits Fund is split into different classes
for the purposes of allocating annual bonuses, final bonuses and interest
payments based on a declared rate of return. The split into classes depends
primarily on:
• The type of product and the method by which it participates in profits, that is
traditional with-profits business, unitised with-profits business, deposit
administration business or controlled funding arrangements.
• The classification for tax purposes, that is life assurance business, general
annuity business, pensions business or overseas business.
• Whether the business is regular premium paying or single premium.
• Whether or not the business fully participates in the experience of the fund.
In practice, the with-profits business within the Alba With-Profits Fund falls within
two broad groupings – Fully Participating business and Investment Smoothing
business.
PLL PPFM Page 100 January 2024
8.2.1 Fully Participating Business
This comprises:
Traditional With-Profits Life and Pension (former BLL Bonus Series B)
These are traditional with-profits contracts covering:
• all life traditional with-profits business (mainly endowments and whole of life
contracts); and
• pension traditional with-profits business (mainly deferred annuity and cash
contracts) arising from the former Britannia Life Limited which are currently
being awarded bonus under Bonus Series B.
Traditional With-Profits Pension (other than former BLL Bonus Series B)
These are traditional with-profits contracts covering all pension traditional with-
profits business (mainly deferred annuity and cash contracts) except those arising
from the former Britannia Life Limited which are currently being awarded bonus
under Bonus Series B.
Unitised With-Profits (written prior to 1 January 1994)
These are contracts which are wholly or partially invested in a notional fund
consisting of with-profits units and which were taken out prior to 1 January 1994.
With-profits units arising from premium increases and additional premiums made
on or after 1 January 1994 where these are written under a new policy number,
are included in the unitised with-profits (written on or after 1 January 1994)
category below.
Deposit Administration (former LAS / BLA / Crusader)
These are deposit administration contracts arising from former Crusader Insurance
plc, former Britannia Life Assurance and the former Life Association of Scotland.
Controlled Funding Arrangements (former LAS / BLL / FS)
These are controlled funding arrangements which arose from the former FS
Assurance and the former Life Association of Scotland.
8.2.2 Investment Smoothing Business
This comprises:
Unitised With-Profits (written on or after 1 January 1994)
These are contracts which are wholly or partially invested in a notional fund
consisting of with-profits units and which were taken out on or after 1 January
1994. It also includes with-profits units arising from premium increases and
additional premiums made on or after 1 January 1994, in respect of policies
originally written before 1 January 1994, where the premium increases and
additional premiums have been written under a new policy number.
Unitised Capital Guaranteed Fund
These are contracts which are wholly or partially invested in a notional fund
consisting of with-profits units. Contracts are group pension arrangements or
buyouts arising from group pension arrangements.
PLL PPFM Page 101 January 2024
Deposit Administration (former FS/BLL)
These are deposit administration contracts arising from FS Assurance and
Britannia Life Limited.
Controlled Funding Arrangements (former BLA / Crusader)
These are controlled funding arrangements which arose from Britannia Life
Assurance / Crusader Insurance plc.
Former Crusader With-Profits Performance Fund and With-Profits Pension
Fund
These are contracts which are wholly or partially invested in notional funds
consisting of with-profits units.
Former Crusader Growth Bonus Series H
These policies were originally former Britannia Life Assurance / Crusader
Insurance special 10 year endowments. The maturity proceeds at the end of 10
years were left invested and have then received Growth Bonus Series H bonuses.
8.3 Capital Support to the Fund
8.3.1 (a) History
Alba and Resolution Life Limited entered into an agreement in April 2006, under
which Resolution Life Limited agreed to provide capital support for Alba’s business
and Alba gave certain undertakings in respect of the management and operation
of its business. The agreed requirements for the management and operation of
Alba’s business were reflected in Alba’s Principles and Practices of Financial
Management. The agreement aimed to take account of the interests of all
stakeholders, including policyholders of Alba and Resolution Life Limited’s
shareholders.
The long-term aim of the capital support agreement is for Alba to be able to
support its own risk-based capital from its own resources.
This agreement replaced a previous agreement dated December 2003 between
Alba and Britannic Assurance, the then owner of Alba. The terms for the
management of the Alba business remain principally unchanged.
This agreement ceased when the business of Alba was transferred into Phoenix
Life Limited. However, the 2023 Scheme provides that the policies then operating
in respect of the Alba with-profits business were carried forward within Phoenix
Life Limited. The key points of this are given in the rest of this paragraph and are
incorporated into the Principles and Practices for the Alba With-Profits Fund in
sections 8.4 to 8.14.
(b) Management of the business
The Board will seek to manage the fund such that it is able to meet its regulatory
capital requirements without drawing down further capital from the Non-Profit Fund
or Shareholder Fund.
Maturity payouts will be targeted at 100% of asset shares. For classes of policy
that participate fully in the profits and losses of the Alba With-Profits fund the asset
share targeted is after deduction of any guarantee charges (see below).
PLL PPFM Page 102 January 2024
At least once a year, calculations will be made to establish if there is a deficit in the
fund. A deficit exists if the assets in the fund are insufficient to cover its liabilities.
If there is a deficit, then guarantee charges may be applied. Guarantee charges
will only be made to the extent needed to eliminate the deficit in the fund, and will
in any event be subject to the following limits:
(a) guarantee charges will not exceed 10% of asset shares in total unless the
liabilities (allowing for the application of a 10% guarantee charge) exceed the
assets by more than £92m; and
(b) guarantee charges will not exceed 25% of asset shares in total.
If, following the application of guarantee charges, the experience of the fund is
favourable and there is no longer a deficit, then previously applied guarantee
charges will be removed, in accordance with the above rules, to the extent that is
possible without re-creating a deficit.
Surrender payouts will be targeted at 100% of assets shares, after any guarantee
charge. However if there is a deficit in the fund, consideration will be given to
paying less than 100% of asset shares to fairly balance the interests of continuing
policyholders against those exiting the fund.
Exposure to equities was nil, however from January 2017 the Board agreed that
some exposure to equities could be introduced and this is described further in
8.9.4 below.
Under the capital support agreement exposure to property was maintained at
around 15% of the fund. This has subsequently been reduced slightly to allow for
the run off of the fund. In 2022 the Board agreed to reduce the property exposure
further with offsetting increases in other types of growth assets. Also a short
position in property may be held giving an overall lower exposure.
Subject to the property and equity exposures, investment policy will be a matched
investment policy. This will be based on high grade fixed interest investments as
determined by the Board.
8.3.2 Capital Support Arrangements
The capital policy is described in section 3.2.
In certain circumstances, the shareholders will loan money to this fund. The
practices relating to receipt of support are detailed in sections 3.3 and 5.2.
The loan, capital support agreement and the management of the business
described above are generally referred to as the Capital Support Arrangements
subsequently in sections 8.4 to 8.14.
PLL PPFM Page 103 January 2024
Principle
8.4
Amounts Payable Under a With-Profits Policy
The aim of the methods employed in determining the amounts payable under a
with-profits policy is the fair treatment of all with-profits policyholders consistent
with the guiding principles.
The guaranteed benefits provide a minimum payout level.
Different bonuses are declared for different classes of with-profits business,
reflecting the specific fund within which the business is written, tax, type of with-
profits business and product features.
An existing class would only be split in exceptional circumstances. Exceptional
circumstances would include but are not limited to cases where:
• premium rates within the class have been changed historically over a period
of time and this needs to be reflected in differential bonus rates; and
• there is a distinct divergence in the experience of products sharing the same
bonus series.
Within classes, bonuses may be further differentiated by series, with additional
series being added on a timely basis.
Bonus policy can be affected by a variety of factors including investment returns
and prospects, actual and expected expense levels, the cost of guarantees, the
financial position of the fund and changes in provisions generally.
The main guide used for determining the amounts payable under a with-profits
policy is asset share calculations and the amounts payable will allow for a policy’s
fair share of any surplus distributed, which may be in the form of annual or final
bonuses or smoothed returns.
The degree of approximation used in the application of asset share methods will
be consistent with the overall fair treatment of all with-profits policyholders.
These methods may be refined from time to time with the impact reported to and
approved by the Board. The Board retains control over any changes to these
methods. Such changes may include changes to the historical aspects of the
calculations as a result of:
• Changes in regulations.
• Improvements in the degree of approximations.
• Maintaining equity between classes or groups of policyholders.
• Significant changes in the financial condition of Phoenix Life Limited.
Practices
Asset Share Methodology
8.4.1 Payout amounts are determined by reference to asset share calculations.
Asset shares aim to assess a policyholder’s fair share of the assets of fund and
are an accumulation of the various elements of the experience of the fund relevant
to the particular class of business during the lifetime of the policy.
This section should be read in conjunction with the targeting process described in
sections 8.6 and 8.12.
8.4.2 The contribution of the elements is described in more detail below, for both Fully
Participating business and Investment Smoothing business separately.
PLL PPFM Page 104 January 2024
Element
Fully Participating
Business
Investment
Smoothing
Business
(a)
Premiums
Premiums paid Note (a)
Premiums paid
Note (a)
(b)
Investment return
Allocated return Note (b)
Allocated return Note
(b)
(c)
Investment
expenses
Actual allocated Note (c)
Actual allocated Note
(c)
(d)
Initial expenses
Actual allocated Note (c)
Actual allocated Note
(c)
(e)
Renewal expenses
Actual allocated Note (c)
Actual allocated Note
(c)
(f)
Other expenses
Actual allocated Note (c)
Actual allocated Note
(c)
(g)
Tax on investment
return
Actual allocated Note (g)
Actual allocated Note
(g)
(h)
Tax relief on
expenses
Actual allocated Note (g)
Actual allocated Note
(g)
(i)
Mortality &
morbidity costs
Experience Note (i)
Experience Note (i)
(j)
Early terminations
included through item (t)
below
included through
item (t) below
(k)
Paid-up policies
Not applicable
Not applicable
(l)
Partial and regular
withdrawals
Not applicable
Not applicable
(m)
Surrenders at
protected dates
Not applicable
Not applicable
(n)
Annuity payments
Not applicable
Not applicable
(o)
Charges for the
cost of guarantees
included through item (t)
below
included through
item (t) below
(p)
Charges for the
cost of capital
Sometimes
Note (p)
Not charged
Note (p)
(q)
Distributions to
shareholders
Charged
Note (q)
Sometimes
Note (q)
(r)
Tax on distributions
to shareholders
Not applicable
Not applicable
(s)
Profit and losses
from other business
included through item (t)
below
included through
item (t) below
(t)
Estate distribution
or charge
Charged
Note (t)
Not charged
(u)
Exceptional items
Not applicable
Not applicable
The way in which the above items are taken into account is described in the notes
below, together with how they vary by type of business. Where charged is used in
the table above this means both charged and / or credited depending on whether it
is a loss or profit.
PLL PPFM Page 105 January 2024
Notes
(a) Premiums
Premiums paid under the policy. For unitised business, it is the premiums used to
purchase units which are net of any premium related policy charges. These
charges include any reduced, nil or enhanced allocation percentages, additional
initial unit charges and a bid / offer spread.
(b) Investment return
The investment return resulting from the asset allocation applied to the particular
class or sub-class of business as outlined in section 8.9.
(c) Expenses
This is the actual expenses, including commission and project, additional activity
and one-off costs, incurred by the fund allocated to the particular class of
business, unless the Board approves limiting the expenses allocated where this is
appropriate. The impact of project and one-off costs may be spread over a
number of years. Significant future project, additional activity and one-off costs will
only be charged to asset shares following approval by the Board.
For unitised business, the expenses are implicit in the product charges specified in
the policy terms and conditions and updated from time to time. These charges
include an annual management charge, policy fees and risk benefit charges.
No new business is being written in the fund other than to honour policy options.
Where traditional with-profits new policies are written for this reason, initial
expenses are generally based on inflated previous year's initial expenses and
including allowance for commissions.
(g) Tax
Allowance for the relevant rate of tax on the respective investment classes is
applied together with tax relief on expenses, where appropriate.
(i) Mortality and morbidity costs
Charge for mortality and other risk benefits where applicable. For deposit
administration business and controlled funding arrangements this reflects the cost
of risk benefits and also the value of retirement benefits paid. For unitised
business these are generally applied through cancelling units.
(p) Charges for the cost of capital
This is the charge for holding risk based capital which is currently zero. The cost
of capital is applied to the asset share by an addition to or deduction from the rate
of investment return applied in the year in which it arises. Not charged to
Investment Smoothing business or deposit administration (former LAS / Crusader /
BLA) business.
(q) Shareholder transfers
This is calculated as up to one ninth of the cost of bonus paid to policyholders
each year, as described in section 8.14.
(t) Estate distribution or charge
PLL PPFM Page 106 January 2024
Asset shares for Fully Participating deposit administration business (specified in
8.2.1) are not increased by distributions from the estate. Instead payouts for these
policies are enhanced by a final uplift to allow for any distributable estate
(described in 8.6). Asset shares may be reduced by any charges to the estate.
Asset shares for all other Fully Participating business may be increased by
distributions from the estate or reduced by charges to the estate. Where a
distribution is made, this is not guaranteed and may be removed. Where a charge
is being made, this will be calculated in accordance with 8.3.1(b) above. It is our
current practice not to apply any charges to business sold after June 2004. In the
event of the assets in the fund being insufficient to cover the liabilities, then any
past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit.
8.4.3 Asset shares are calculated for representative specimen policies when setting
bonus rates. Specimen policies are chosen to represent the business and include
a range of policy terms and years of entry. The primary emphasis in selecting
specimen policies is the size of premium or sum assured. There is however a
degree of averaging, particularly for those terms where there are relatively few
policies. For unitised with-profits business, specimen policies are for each year of
purchase of units.
8.4.4 A degree of approximation within asset share calculations is required where data
is not fully available or is only available in a pooled form, to the extent that such
approximation accords with the experience available from existing historical data.
This is particularly the case for traditional with-profits paid-up policies (especially
pensions), Unitised Capital Guaranteed Fund policies, deposit administration
policies and controlled funding arrangements. Where historical data is not
available, relevant industry experience is used instead.
8.4.5 Asset share calculations may be refined from time to time. The impact of any
changes is reported to the Board. The method, assumptions and parameters used
in asset share calculations can only change after due consideration by the Board.
Such changes and refinements can be made retrospectively. Retrospective
changes to the assumption basis are unlikely to be made prior to 2004 due to the
introduction of the capital support agreement at that time.
8.4.6 Procedure notes are maintained by PGMS. For each bonus review appropriate
documentation is produced and provides an audit trail of the process, including
sources of data, source and derivation of assumptions, backing calculations, notes
and correspondence. This audit trail normally includes retaining electronic copies
of the systems and calculations used for the review.
8.4.7 For traditional whole life policies, final bonuses and surrender value bases may be
set with reference to those applicable for endowments.
PLL PPFM Page 107 January 2024
Principle
8.5
Annual Bonus rates
Annual bonuses, other than those guaranteed to date, will only be added to any
class of with-profits business if and to the extent that the Board considers it
prudent to do so, taking account of the financial position of the fund.
In cases where final bonus rates do not apply, smoothing of the annual bonus
rates is used as a mechanism to adhere to section 8.4 where applicable.
In changing economic circumstances, the constraints on setting annual bonuses
are the level of existing guaranteed benefits, the level of assets in the fund, the
financial position of the fund and the need to retain management flexibility.
Practices
8.5.1 For traditional with-profits and unitised with-profits business where annual bonus is
guaranteed, this will continue to be paid in accordance with the policy conditions.
Consideration will be given to a future declaration of non-guaranteed annual bonus
only if there is sufficient surplus in the fund and then taking into account the factors
set out in the following paragraphs.
8.5.2 For each class of traditional with-profits and unitised with-profits business, the
level of annual bonus is set so as to maintain a buffer for final bonus. The future
claim payouts are estimated using realistic assumptions and the annual bonuses
set at such a level that if experience turns out to be in line with those assumptions,
the overall amount of the payout paid in the form of final bonus will be in line with a
target proportion. Under current investment conditions, the overall target is that
25% of the overall value of payouts, calculated before any future augmentation
provided by a release of the estate, will be in the form of final bonus. Given the
aggregate nature of this target, for an individual policy this final bonus buffer may
be more or less than 25%. This overall target is itself subject to review and may
be changed. If experience does not turn out to be in line with the assumptions
then the 25% target might not be met.
Annual bonus rates will be adjusted to keep the overall level of projected final
bonus broadly in line with the target. If necessary to remain on target, annual
bonus rates will be reduced to nil, or close to nil. However, some small annual
bonuses may be declared even if the final bonus buffer is below target. For
certain unitised with-profits pension business written prior to 1 August 1992
business there is a guaranteed minimum annual bonus rate of 4% per annum.
There is no maximum change in the annual bonus rate; however, in the normal
course of events the declared annual bonus rates would not be expected to
change by more than 2% from one declaration to the next.
8.5.3 Where the financial position of the fund is weak, the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus buffer being above the 25% target.
8.5.4 For traditional with-profits business, annual bonuses are normally reviewed once a
year. Interim bonus rates are set with reference to the most recent annual bonus
rate declared and any future anticipated direction of these rates. The annual
bonus rate may, however, eventually be set at a level that differs from the interim
rate.
For unitised with-profits business, annual bonuses are normally reviewed once a
year. Interim bonus rates are not applicable to this type of business as annual
bonus rates are declared in advance.
PLL PPFM Page 108 January 2024
8.5.5 For controlled funding arrangements (former BLA/Crusader), benefits are based
on the individual scheme asset share and no annual bonus additions are made.
For other policies not eligible for final bonus, annual bonus will be set at a level
which, using realistic assumptions but disregarding any estate distribution, will
bring the projected asset share and the value of projected policy benefits broadly
in line over a five year period.
Annual bonuses are normally reviewed once a year. Changes in annual bonuses
are limited to maintain a smooth progression.
8.5.6 For former Crusader Growth Bonus Series H business, the annual bonus rate is
based on short-term interest rates less tax and less an annual management
charge of 0.5% per annum to cover expenses. The rate is declared in advance,
added daily to the unit price and is normally reviewed twice a year from 1 January
and 1 July. If the calculated rate is within 0.5% of the current annual bonus rate,
then the current annual bonus rate is maintained. If the calculated rate is not
within 0.5% of the current annual bonus rate, then the annual bonus rate is set
equal to the calculated rate rounded to the nearer 0.25%. The annual bonus rate
may be reviewed at any time due to changing investment conditions. It is not
expected the annual bonus will be less than zero, other than in exceptional
circumstances.
8.5.7 Where annual bonuses are declared in arrears, interim bonus rates are set with
reference to the most recent annual bonuses declared and any future anticipated
direction of these rates and may be higher or lower than the latest annual bonus
rates declared. The annual bonus rate may, however, eventually be set at a level
that differs from the interim rate.
8.5.8 Different bonus scales may apply to the same contract depending on whether
regular or single premiums are paid.
PLL PPFM Page 109 January 2024
Principle
8.6
Final Bonus rates
Final bonus rates are used as a mechanism to adhere to section 8.4, where
applicable. As such, they will be based on the difference, if positive, between the
amount determined to ensure fairness to policyholders and the value of
guaranteed benefits. Final bonuses may increase or decrease and may also be
nil. Final bonuses can be reviewed at any time.
Final bonus is subject to smoothing.
In changing economic circumstances, the constraints on setting final bonus rates
are the level of existing guaranteed benefits, the level of assets in the fund, the
financial position of the fund and the need to retain management flexibility.
Practices
8.6.1 No final bonus is payable on Unitised Capital Guaranteed Fund, Investment
Smoothing deposit administration, controlled funding arrangements, former
Crusader With-Profits Performance Fund and With-Profits Pension Fund and
former Crusader Growth Bonus Series H classes of business. Therefore, the rest
of this section 8.6 is not applicable to them.
Fully Participating deposit administration business (specified in 8.2.1) is eligible for
a final uplift as described in 8.6.9.
8.6.2 For all Fully participating business (defined in 8.2.1), final bonus (and for Fully
Participating deposit administration business the final uplift) will be set with the aim
that all the assets of the fund including any distributable estate will be distributed
to policyholders after meeting emerging costs.
8.6.3 For all traditional with-profits business, final bonuses are determined for
representative specimen policy maturities based on the difference, if positive,
between asset share calculations described in section 8.4 subject to the
comments below and the value of guaranteed benefits. If this difference is
negative, final bonus rates will be nil and maturity payouts will be the guaranteed
benefits.
The resulting rates are reviewed and adjusted, if appropriate, to take account of
the actual profile of maturities over a period, generally six or twelve months from
the date at which the bonus rates are to be set.
The above calculations are generally based on specimen policies with terms which
contain a significant volume of policies. For other terms approximations may be
used.
8.6.4 For unitised with-profits business (written prior to 1 January 1994), asset share
values, as described in section 8.4, and the value of units are calculated for a
representative specimen policy for each year of purchase assuming unit purchase
at 1 July of each calendar year. Final bonus rates and market value reductions
are set for each calendar year by calculating the movement required to obtain
equality between the specimen asset shares and specimen value of units.
The final bonus rates and market value reductions so calculated are then applied
to all units purchased in that calendar year.
PLL PPFM Page 110 January 2024
8.6.5 For unitised with-profits business (written on or after 1 January 1994), asset share
values, as described in section 8.4, and the value of units are calculated for a
representative specimen policy for each year of purchase assuming unit purchase
at 1 July of each calendar year. Final bonus rates and market value reductions
are set for each calendar year by calculating the movement required to obtain
equality between the specimen asset shares and specimen value of units. The
final bonus rates and market value reductions so calculated are then applied to all
units purchased in that calendar year.
8.6.6 Final bonus rates are set taking account of recent economic experience in
accordance with paragraphs 8.6.2 to 8.6.4 above.
8.6.7 Where the benefits are expressed in the form of a pension rather than cash, the
asset share described in section 8.4 is converted to an equivalent annuity by using
annuity rates. The final bonus then calculated is expressed as an annuity. For the
majority of products conversion rates set out in the contract when the policy was
taken out are used. For former Crusader Self-Employed Deferred Annuities taken
out before 1977 current annuity rates are used.
8.6.8 Restrictions on the movement in final bonus rates for maturities due to smoothing
are described more fully in section 8.7.
8.6.9 The final uplift is a different form of bonus to the other types of bonus described.
Payouts for Fully Participating deposit administration policies may be enhanced by
a final uplift to allow for any distributable estate.
8.6.10 No final bonus or final uplift will be declared where there is insufficient surplus
available on a statutory basis in the fund to cover the cost of bonus and the
associated transfer to the Shareholder Fund.
In deciding whether a final bonus or final uplift will be declared, consideration will
be given as to whether funds require to be transferred into the fund under the
terms of the Capital Support Arrangements.
8.6.11 Final bonus rates and market value reductions, where applicable, are set at least
twice yearly, normally from 1 January and 1 July, but would be reviewed more
frequently in periods of volatile economic conditions. Normally an investment
return variation of up to 10% compared to that assumed when the final bonuses
were last reviewed, would be allowed before there would be an additional final
bonus review. However, where the maturity payout ratios at the latest final bonus
review were near the top or bottom of the range described in paragraph 8.7.1, a
lower level of investment return variance may lead to an additional final bonus
review.
8.6.12 Market value reductions are not applied at maturity or death.
8.6.13 Different final bonus scales may apply to the same contract depending on whether
regular or single premiums are paid.
PLL PPFM Page 111 January 2024
Principle
8.7
Smoothing
At protected dates, smoothing protects the amount payable from day to day
investment fluctuations. Smoothing applies across groups of policyholders and
restricts movements in equivalent payouts between different generations of
policyholders. The aim is to bring maturity payouts into line with the target
proportion of the relevant asset share in a reasonable period of time.
Smoothing leads to profits and losses which are anticipated to offset each other
over time. In the short term, if these were to become excessive, then the
smoothing policy would be reviewed. Smoothing is intended to be neutral over the
long term.
The aim is to minimize the cost of smoothing subject to treating customers fairly.
For all business except traditional business, the amounts payable at times other
than protected dates will take account of day to day market movements and as a
result may have a market value reduction applied. For traditional business,
surrender values will have a degree of smoothing.
Practices
8.7.1 The long-term target maturity payout ratio is 100% of asset share as described in
section 8.4. The target range for maturity payout ratios is to be between 80% and
120% of asset share before the effects of smoothing.
8.7.2 For traditional policies and unitised with-profits policies, where final bonus changes
are normally made twice a year, smoothing is applied to maturity or retirement
values, by limiting the change in final bonus rates. Normally the change in final
bonus rates for a specimen policy will be limited so that the increase or reduction
in total maturity or retirement payout compared to a position where bonus rates
are not changed is not more than 7.5% at each six monthly review.
For traditional policies and unitised with-profits policies, surrender value bases are
normally reviewed twice a year, smoothing is applied by limiting the change in
immediate surrender value for specimen policies. Normally the surrender value for
specimen model policies will not change by more than 10% at each six monthly
review. Surrender values may change in between reviews because in many cases
the surrender values are calculated using formulae that depend upon factors such
as term remaining which change over time.
However, if it is necessary to enable the fund to continue to meet the objectives
set out in the guiding principles in section 5 sometimes larger changes are made
in final bonus rates and surrender values.
If there has been a significant change in premium rates then larger changes than
those described above may be made so that final bonus rates and surrender
bases remain consistent with the premium rates on which the business was
generally written. Where premium rates were revised with the intention of
changing payouts, then smoothing will not be applied, so that the change in
payouts intended by the premium rate change does occur.
Calculations may also be carried out for specimen policies which are due to reach
their maturity date in the following few years. If these calculations show a trend in
payouts which could not be accommodated by following the normal limits on
change described above, the final bonus rate or surrender value being determined
may be adjusted so that the trend may more easily be accommodated.
PLL PPFM Page 112 January 2024
For all fully participating policies, both maturity and retirement values, and
surrender values, any change to payouts that results from changes in the
distributable estate, if any, will be additional to the limits described and will not be
subject to smoothing. Also where there have been significant changes in
methodologies and practices, the impact may not be managed within the normal
smoothing rules.
For other business except controlled funding arrangements, a smoothing account
is calculated by comparing the notional face value of contracts (the accumulation
of the declared interest rates) within the particular class of business to the asset
share (the accumulation of investment returns less management charge and
shareholder transfers). An over-riding practice is to remove any deficit in the
smoothing account as quickly as terms and conditions allow which is consistent
with treating customers fairly as described in section 8.5.5, and subject to the
constraint of maintaining payout ratios within the target range.
8.7.3 Smoothing is expected to be neutral over the remaining lifetime of the with-profits
business within the fund.
8.7.4 Where a partial surrender is allowed under policy conditions and business is
maintained on a tranche basis, only the surrender of one or more complete
tranches is permissible at any given time. If all tranches were sold at the same
time then smoothing would be the same for each. Where tranches are sold at
different times, smoothing would be independent.
8.7.5 The cost of smoothing claim values is allowed for in the estate distribution or
charge item as described in paragraph 8.4.2(t) and so is not met by all classes.
8.7.6 There are no specific limits applied to the cost of smoothing. However, this cost is
expected to be limited as such costs are expected to be neutral over the remaining
lifetime of the with-profits business in the fund.
PLL PPFM Page 113 January 2024
Principle
8.8
Surrender Values
Non-protected exit values will be set to ensure that there is no adverse effect on
the interests of continuing policyholders.
Market value reductions may be adjusted for non-investment related items as well
as investment related items.
Practices
8.8.1 For any contract where exit values are guaranteed through the policy terms and
conditions then that guaranteed value will form the minimum amount to be paid.
8.8.2 For all traditional with-profits business, non-protected exit values will be set to
ensure that there is no adverse effect on the interests of continuing policyholders.
Surrender values are targeted at 100% of asset share. The target range for
payout ratios is to be between 80% and 120% of asset share.
The basis for the surrender value formulae is determined by targeting the target
proportion of asset share for representative specimen policies..
Actual surrender payments on individual policies will not generally be in line with
the target proportion because:
• Individual asset shares are not calculated or held on our administration systems
for use in surrender value calculations. Rather surrender values are calculated in a
variety of ways for different types of policy. Typically surrender values are based
on a discounted value of the guaranteed sum at maturity or retirement (reduced to
allow for non-payment of future premiums for regular premium policies) together
with an allowance, where appropriate, for final bonus.
• Specimen policies are used to determine the parameters in the surrender value
calculations. The outcome for a particular individual policy may be different from
that of the specimen policy.
• There are a limited number of parameters that may be altered in the surrender
formulae for certain products which means that the parameters are set in
aggregate across a range of specimen policies.
• As the value of assets are changing every day but the parameters in the
surrender value formulae are only reviewed infrequently, there will inevitably often
be times when, if the asset share for the specimen policies were recalculated,
surrender values would, in effect, be based on slightly larger or smaller
percentages of those asset shares than the practices would in theory dictate.
8.8.3 For all unitised with-profits business, the target payout ratio for non-protected exit
values is 100% of asset share. Exit values are set using the asset share methods
described in section 8.4. On surrender, the value of units is compared to the value
of the asset share calculated. If the value of units is greater than the asset share a
market value reduction is applied to bring the proceeds down to this level. If the
opposite is true, the policyholder will be attributed a final bonus to bring the
proceeds up to the asset share. The target range for payout ratios is to be
between 80% and 120% of asset share before the effects of smoothing.
The calculation of market value reductions and final bonuses are described in
section 8.6.
8.8.4 For Unitised Capital Guaranteed Fund business, early exit values for individual
policyholders are the value of units attaching to the policy less any surrender
PLL PPFM Page 114 January 2024
charge as detailed in the policy terms and conditions, to cover unrecouped initial
expenses, less any market value reduction applicable.
The target payout ratio for non-protected exit values is 100% of asset share.
Market value reductions are calculated using the smoothing account described in
section 8.7. When the smoothing account is negative, a market value reduction
may be applied and is set at a level which would reduce the total face unit value of
all contracts within this class of business to the total asset shares of this class of
business, as described in section 8.4, based on the smoothing account. This
reduction is then applied to any individual policyholder on early exit. The target
range for payout ratios is to be between 80% and 120% of asset share.
8.8.5 For deposit administration (former FS / BLL) business, early exit values are the
account value less any market value reduction applicable.
The target payout ratio for non-protected exit values is 100% of asset share.
Market value reductions are based on the asset share methods described in
section 8.4, are scheme specific and may be applied on scheme termination and
may be applied to any individual policyholder exit. The total account values for the
specific scheme are compared to the value of the scheme asset share. If this total
account value is greater than the asset share, a market value reduction may be
applied to bring the proceeds down to this level, based on the smoothing account
as in section 8.7. The target range for payout ratios is to be between 80% and
120% of asset share.
8.8.6 For fully participating deposit administration business (specified in 8.2.1), the
target payout ratio for non-protected exit values is 100% of asset share plus any
final uplift required to reflect any estate distribution. The target range for payout
ratios is to be between 80% and 120% of asset share plus any final uplift.
Exit values for individual policyholders are the account value plus any final uplift
attaching to the individual policy.
Early exit terms for this class of business on bulk surrender are normally set out in
policy terms. For former Crusader Versatile Plans, this is the account value. For
former Crusader Nestegg Plans written prior to 1 January 1988, this is the account
value and payment may be spread over a two year period. For former Crusader
Emeritus Plans, the early exit value is the account value less an explicit surrender
charge to cover unrecouped initial costs. For former LAS Laserplan and Long
Term Accumulation System business, the early exit value is the account value less
an explicit surrender charge to cover unrecouped initial costs. In all cases, the
account value may be increased by a final uplift to reflect any estate distribution
For former Crusader Nestegg business written on or after 1 January 1988, a
market value reduction may be applied to the account value in addition to an
explicit surrender charge. Market value reductions are calculated using the
smoothing account described in section 8.7. When the smoothing account is
negative a market value reduction may be applied and is set at a level that would
reduce the total face unit value of all contracts within this class of business to the
total asset shares of this class of business as described in section 8.4, based on
the smoothing account. This reduction may then applied to any terminating
scheme.
8.8.7 For controlled funding arrangements, generally the target payout ratio for non-
protected exit values is 100% of asset share. The target range for payout ratios is
generally to be between 80% and 120% of asset share.
PLL PPFM Page 115 January 2024
For individual withdrawals the early exit value is determined by the specific
scheme rules governing the controlled funding arrangement and is not dependent
on the value of purchased pensions.
A full scheme surrender of a former LAS and former FS/BLL controlled funding
arrangement is the sum of the values of the pensions purchased.
A full scheme surrender of a former Crusader controlled funding arrangement is
based on an asset share methodology as described in section 8.4 less a charge
for early termination to cover unrecouped initial costs.
8.8.8 For former Crusader With-Profits Performance Fund and With-Profits Pension
Fund business, early exit values for individual policyholders are the value of units
attaching to the policy less any surrender charge as detailed in the policy terms
and conditions, to cover any unrecouped initial costs, less any market value
reduction.
The target payout ratio for non-protected exit values is 100% of asset share.
Market value reductions are calculated using the smoothing account described in
section 8.7. When the smoothing account is negative a market value reduction
may be applied and is set at a level that would reduce the total face unit value of
all contracts within this class of business to the total asset shares of this class of
business as described in section 8.4, based on the smoothing account. This
reduction may then be applied to any terminating policy. Separate market value
reductions are calculated for the With-Profits Performance Fund business and the
With-Profits Pension Fund business. The target range for payout ratios is to be
between 80% and 120% of asset share.
8.8.9 For former Crusader Growth Bonus Series H, the surrender value is the full value
of the benefits and no market value reduction is applicable.
8.8.10 Non-protected exit value methodology is normally reviewed annually by the With-
Profits Actuary in line with these principles and practices. However more frequent
reviews may take place, in particular in response to significant market movements.
PLL PPFM Page 116 January 2024
Principle
8.9
Investment Strategy
The fund will take investment risk only to the extent that there is a high degree of
certainty that the fund is sufficiently strong to absorb adverse experience. In
general, the size and timing of guaranteed benefits determines the investment
freedom and risk tolerance.
The degree of matching of assets with liabilities for the fund will be high, meaning
that the fund will substantially be invested in high-grade fixed interest investments
of appropriate term and credit quality. Actual holdings will be diverse and subject
to limits as to the amount held in any given stock or credit quality.
Asset allocation will vary by class of business but this does not preclude these
allocations being the same at any given time.
The use of derivatives in the fund is permitted for efficient portfolio management or
to reduce investment risk.
No assets that would not normally be traded are allowed.
Practices
8.9.1 For former Crusader With-Profits Performance Fund and With-Profits Pension
Fund business, investment is made in appropriate former Alba LAS internal linked
funds of Phoenix Life Limited. This is currently a mixture of managed and money
market funds.
For former Crusader Growth Bonus Series H business, the asset mix is 100% in
short-term cash deposits.
The rest of this section does not apply to these types of business.
8.9.2 The Alba With-Profits Fund primarily maintains three pools of investment assets.
These are called the Growth Fund, Matched Fund and Foreign Currency Fund.
The Growth Fund backs the asset shares, the Matched Fund backs the guarantee
reserve and non-profit business and the Foreign Currency Fund is used to back
the relatively small amount of Euro and US dollar denominated business. The
Matched Fund also backs the estate. Additional asset pools may be maintained
for swaps and swaptions or they may be held within the main asset pools.
These investments are managed by the investment managers in accordance with
an investment mandate specified by the Board taking account of a variety of
considerations, including our approach to responsible investment.
8.9.3 The degree of matching of assets with liabilities for the fund will be high so that the
expected cash flow arising from claims is well matched to the cash flow arising
from assets with limited risk. This will mean that the fund will substantially be
invested in fixed interest investments, such as British Government gilts, other
government and supranational bonds and other fixed interest securities, such as
corporate bonds, debentures, loan notes and emerging market debt. Investment
in swaps and swaptions may be made to reduce the risk from interest rate
movements. Variable interest securities, such as index linked gilts may be held to
back liabilities that are linked to inflation. A short position in property assets and /
or non-government fixed interest securities may be held outside of asset shares to
match the liability for guarantee costs.
8.9.4 From January 2017 equity investments were introduced into the Growth Fund.
PLL PPFM Page 117 January 2024
8.9.5 There is some exposure to property investments in the Growth Fund through
property unit trusts and collective investments. The percentage exposure will be
reviewed by the Board from time to time.
8.9.6 The asset mix varies by class (and sub-class). The current guideline asset mix
range for asset shares is shown below (with the expected end 2025 guideline
asset mix in brackets):
Class / Sub-class
Fixed Interest
%
Property
%
Equities
%
Traditional with-profits life
and pensions (former BLL
Series B)
45%-55%
(45%-55%)
15%-25%
(0%-10%)
25%-35%
(40%-50%)
Traditional with-profits
pensions (other than former
BLL Series B)
100%
(100%)
0%
(0%)
0%
(0%)
Unitised with-profits
business (written prior to 1
January 1994)
45%-55%
(45%-55%)
15%-25%
(0%-10%)
25%-35%
(40%-50%)
Unitised with-profits
business (written on or after
1 January 1994)
45%-55%
(45%-55%)
15%-25%
(0%-10%)
25%-35%
(40%-50%)
Unitised Capital
Guaranteed Fund
60%-75%
(60%-75%)
5%-15%
(0%-10%)
10%-20%
(25%-35%)
Deposit admin (former FS /
BLL)
60%-75%
(60%-75%)
5%-15%
(0%-10%)
10%-20%
(25%-35%)
Deposit admin (former BLA
/ Crusader)*
-former Nestegg, Emeritus
and Versatile business
80%-90%
(80%-90%)
5%-10%
(0%-5%)
5%-10%
(10%-20%)
Deposit admin (former
LAS)
-former Long Term
Accumulation (LTA)
business
80%-90%
(80%-90%)
5%-10%
(0%-5%)
5%-10%
(10%-20%)
Deposit admin (former
LAS)
- former LAS Laserplan
business
100%
(100%)
0%
(0%)
0%
(0%)
Controlled funding
arrangements
- former Crusader (Growth
Pension Fund)
45%-55%
(45%-55%)
20%-30%
(0%-10%)
20%-30%
(40%-50%)
Controlled funding
arrangements
- former FS/BLL and LAS
90%-95%
(90%-95%)
0%-5%
(0%-5%)
0%-5%
(5%-10%)
* For deposit administration former BLA / Crusader business, the fixed interest
investment is split 23% cash, 23% short-dated (less than 5 years) fixed interest
and 38% fixed interest, invested in the same way as the other fixed interest assets
in the Growth Fund.
PLL PPFM Page 118 January 2024
From time to time the asset mix will be different from the guideline mix due to
market movements and active management decisions taken by the investment
managers or the Investment Committee.
8.9.7 The type and degree of risk acceptable for investments in the fund is as follows.
Fixed Interest Assets
The credit risk arising from investing in non gilts is managed in a number of ways:
• There are limits on the proportion of total fixed interest that can be invested in
non-gilts. The current limits are shown below.
Growth Fund
Matched Fund
Benchmark allocation in non-
gilts
35%
50%
Minimum allocation in gilts
60%
40%
• There are limits on the exposure to any one bond issuer.
• All bond issuers must generally have a credit rating of BBB- or higher.
Unrated bonds, or bonds with a credit rating lower than BBB-, can only be
owned with the approval of the Investment Committee.
• The above limits and criteria may be relaxed where changes in market
conditions mean that they would otherwise be breached, subject to approval
by of the Investment Committee.
Fixed interest assets in both the Growth Fund and the Matched Fund must be
denominated in sterling.
The Foreign Currency Fund is relatively small and consists of Euro and US dollar
denominated government bonds with terms typically less than 10 years.
Property Assets
The majority of the property investment is through property unit trusts and
collective investments. This allows the fund a controlled exit from property
investment in line with the run off of its business.
Equity Assets
With the exception of private equity and some alternative assets, investments are
predominantly listed and traded on recognised stock exchanges.
The assets are widely diversified.
The investment guidelines cover:
• Benchmarks
• Exposures, such as minimum and maximum number of holdings and
maximum exposure to any one counterparty
• Currency matching and localisation
• The liquidity position
• Exposure to sectors or companies that do not align with our approach to
responsible investment, for example Tobacco.
PLL PPFM Page 119 January 2024
Other
Swaps and swaptions may be held to reduce the risk from interest rate
movements. These do not affect the investment returns credited to asset shares.
The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
8.9.8 Assets representing the estate of the Alba With-Profits Fund are mostly invested in
fixed interest securities. However, if the estate is large in relation to the potential
risks facing the fund, then part of the estate may be invested in growth
investments in line with the asset mix for the asset shares.
8.9.9 Should the value of the assets of the fund fall below a trigger point, the level of
which is agreed from time to time by the Board, then sufficient assets would be
transferred from the Shareholder Fund or from the Non-Profit Fund in order to
maintain the solvency of the fund.
8.9.10 The Capital Support Arrangements set out the basis upon which assets are
transferred to the fund to support it.
8.9.11 Investment strategy is reviewed by the Board at least once a year.
The Board would be required to approve the consideration of any new asset or
liability instruments.
8.9.12 A fixed charge over some of the fund’s assets has been provided to PLAE as
security under the reassurance arrangement and, whilst these assets are held in
separately identifiable accounts, this is not expected to impact the overall
investment strategy of the fund.
Possible Future Changes
8.9.13 If it is considered by the Board to be in the best interests of the policyholders,
further hypothecation of the assets in the fund may be introduced. For example
this may involve the hypothecation of different property or equity backing ratios to
further classes or groups of policies or the hypothecation of fixed interest assets
by term remaining within asset shares to reduce the volatility of policyholder
returns near maturity.
PLL PPFM Page 120 January 2024
Principle
8.10
Business Risks
UK life insurance businesses are subject to a number of inherent risks that arise
from a range of factors, including product design (such as the provision of
guarantees to policyholders), selling and marketing practices, interest rate and
market fluctuations and demographic changes. Phoenix Life Limited makes
provisions which it considers to be appropriate for the risks which it identifies in
relation to its with-profits businesses. There can be no assurance that all risks
which might emerge have been identified or that the provisions for identified risks
will prove to be adequate. In addition, the risks to which the with-profits
businesses are exposed will inevitably change over time.
The long-term aim is for the fund to support its own capital requirements from its
own resources. Thus the fund will not undertake any new business risks unless
the Board are of the view that to do so will reduce risk while maintaining or
reducing capital requirements.
Risks, as determined by the Board to be in connection with the fund’s insurance
business, are attributable to the asset shares of those classes of policyholder who
share fully in the profits and losses of the fund, except that future costs and
compensation attributable to pension mis-selling are attributable to the Non-Profit
Fund and costs and compensation arising from mortgage endowment mis-selling
are attributable to the Non-Profit Fund.
The Capital Support Arrangements set out the extent to which capital is provided
to the fund where the fund has insufficient capital to meet business risks.
Business risks are controlled by the Risk Committee of Phoenix Life Limited which
normally meets monthly and the Audit and Compliance Committee of the Board
which normally meets at least three times a year.
Practices
8.10.1 Investment Smoothing business, that is unitised with-profits business (written on or
after 1 January 1994, Unitised Capital Guaranteed Fund business, deposit
administration (former FS and BLL) business, controlled funding arrangements
(former BLA/Crusader), former Crusader With-Profits Performance Fund and With-
Profits Pension Fund business and former Crusader Growth Bonus Series H
business, are not exposed to any business risk other than the investment of
assets. The other with-profits policy classes that form the Fully Participating
business, are exposed to business risks and the remainder of this section gives
details.
8.10.2 Policyholders are exposed to business risks associated with the fund. All business
risk is pooled across with-profits policyholders who bear this risk. This exposure
includes any profits and losses in respect of:
• maintaining all non-profit business within the fund;
• maintaining all with-profits business within the fund; and
• the acquisition of new business within the fund.
This will include, but is not limited to, increases in per policy expenses.
PLL PPFM Page 121 January 2024
In particular, this business is exposed to the risk of policyholders with annuity
benefits within the fund living longer than expected and to the cost of meeting
claims under policies with guaranteed annuity options.
8.10.3 The material risks affecting with-profits business are summarised as follows:
• Potential insolvency of provider, that is the inability to fulfil payment of
contractual guaranteed benefits.
• Capital requirements of provider to maintain solvency may limit distributions
available to policyholders.
• Investment returns achieved. This is linked to the investment strategy.
• Investment strategy may be restricted due to capital requirements.
• Cost of policy guarantees and options.
• The levels of expenses and charges.
• The levels of taxation.
• Changes to the regulatory environment.
• Infrastructure risks including mis-selling.
• Mortality and morbidity risks.
• Reinsurance credit risk.
• Persistency risks.
• Operational risks including failure of third party service providers, including third
party administrators and reassurers.
• Business being written on unprofitable terms due to changes in economic
experience.
• Allocations and charges between shareholders and with-profits funds.
• Non-profit business.
• Post A-day the cap on annuities arising on pensions policies was withdrawn
and annuities were increased to the uncapped level. Previously any withheld
amount was released to surplus each year.
Regular reviews are performed to monitor these risks.
8.10.4 Future mis-selling costs and compensation and expenses in respect of the
mortgage endowment review and from the pensions review are met entirely by the
Non-Profit Fund. Any other costs and compensation in respect of the mis-selling
of policies in the fund will be paid for from the fund.
8.10.5 The fund has no appetite to take on any future additional business risk. Rather it
is committed to reducing this type of risk as far as reasonably possible within the
constraint of obtaining any risk reduction at a reasonable cost.
8.10.6 The approach described in section 8.12 will determine the amount and limits of
any profits or losses from business risk which will be used in the calculation of the
amount payable under Fully Participating policies. The practice is to spread the
present value of all expected future profits and losses from business risks over the
future claim values of business that participates in business risk.
8.10.7 Business risk from outsourcing administration and services is limited by the terms
of the relevant contracts with the outsourcing companies.
8.10.8 Business risk from outsourcing administration and services is subject to ongoing
review based on the service standards in the relevant contracts with the
outsourcing companies.
8.10.9 Business risk from outsourcing administration and services is limited in that PGMS
is liable for any additional cost of providing these services which might arise if the
outsourcer were to default. Should PGMS be unable to meet any of its obligations
to provide services then Phoenix Life Limited would request that Phoenix Group,
as owners of PGMS step in to restore the position. Should Phoenix Group not do
PLL PPFM Page 122 January 2024
this, then Phoenix Life Limited would attribute any losses to the shareholder fund
or Non-Profit Fund, and the fund would only be affected if the shareholder fund or
Non-Profit Fund had insufficient excess assets to bear the losses
8.10.10 Business risk from annuity reassurance is limited by holding assets matching the
equivalent liabilities in a custodial account under the terms of the reassurance
agreement in order to allow Phoenix Life Limited to recapture the assets in the
event of insolvency of the reassurer. However, in the event of insolvency of the
reassurer, there still remains a risk of not being able to fully recapture the assets.
8.10.11 Any business risk that is new would be considered by the Board in the context of
its benefit to policyholders and would have to carry a lower risk than an equivalent
existing risk. As a benchmark, quotations based on the risk, and also any similar
risk where available, would be sought to establish the cost of the risk and also for
comparison purposes. This applies equally to the renewal of an existing business
risk.
8.10.12 New with-profits business is exposed to investment (and thus guarantee) and
other business risks. These risks are appropriately disclosed.
8.10.13 Some of the risks of improving annuitant mortality and the impact of low interest
rates, especially where these impact on guarantees have been mitigated through
reassurance.
8.10.14 Since January 2011, in accordance with paragraph 5.2.9, any annuities coming
into payment are transferred to the Non-Profit Fund, and the fund pays the Non-
Profit Fund a premium in respect of the liability transferred. After such transfer, all
the risks in relation to the transferred annuities are borne by the Non-Profit Fund.
PLL PPFM Page 123 January 2024
Principle
8.11
Expenses and Charges
Policies will either be charged product charges or be charged amounts which
represent a fair share of the actual costs or a sub-set of the actual costs.
This approach will be adjusted where necessary in order to continue to treat
customers fairly.
Product charges may be either explicit or implicit.
Where actual costs are used and where costs are specific to a policy or policy
class, then taking into account the approximations referred to in section 8.4, such
costs will be taken into account in assessing the bonuses added to that policy or
class and in assessing the early termination value payable. Where costs are not
specific to a policy or class, they will be apportioned across the policies or classes
to which they are relevant in a reasonable manner.
Practices
8.11.1 Unitised with-profits business (written on or after 1 January 1994) and Unitised
Capital Guaranteed Fund business has been accepted under an inter-fund
arrangement with the Non-Profit Fund. As such the fund accepts the risks
associated with the investment of assets only.
The charges taken from these policies are product specific but in general are an
annual management charge of 1% of fund value and a combination of policy fees,
a bid / offer spread, nil or reduced allocation periods, reduced or enhanced
allocation rates, application of capital units with an increased management charge,
risk benefit charges and surrender charges.
Charges on these policies may be altered in future if necessary. The remainder of
this section does not apply to these policies.
8.11.2 Former Crusader With-Profits Performance Fund and With-Profits Pension Fund
business has been accepted under an inter-fund arrangement with the Non-Profit
Fund. As such the fund accepts the risks associated with the investment of assets
only.
The charges taken from the policies are product specific but in general are an
annual management charge of 1% of fund value and a combination of a bid / offer
spread, reduced or enhanced allocation rates, risk benefit charges and surrender
charges.
Charges on these policies may be altered in future if necessary. The remainder of
this section does not apply to these policies.
8.11.3 Unitised with-profits business (written prior to 1 January 1994) has been accepted
under an inter-fund arrangement with the Non-Profit Fund. As such the fund
accepts the risks associated with the investment of assets as well as any
differences between charges taken from and expenses (including commission)
apportioned to this business.
The charges taken from the policies are product specific but in general are an
annual management charge of 1% of fund value and a combination of policy fees,
a bid / offer spread, nil or reduced allocation periods, reduced or enhanced
allocation rates, application of capital units with an increased management charge,
risk benefit charges and surrender charges.
PLL PPFM Page 124 January 2024
Charges on these policies may be altered in future if necessary.
8.11.4 For other business, there are no specific charges, rather any allowance for
expenses is taken through the calculation described in section 8.4 or any interest
additions for deposit administration business or in determining the annual bonus
rate for former Crusader Growth Bonus Series H business as described in section
8.5, or in the premium rates when guaranteed benefits are purchased for
controlled funding arrangements.
8.11.5 An agreement exists with PGMS to supply administration services to the fund.
This is a perpetual agreement and is not expected to be renegotiated, but charges
may be amended in respect of major regulatory change. The agreement can
however be terminated early for material failure to meet service standards or other
non compliance with the agreement. We regularly monitor service standards.
Value added fees for work outside the service level agreements are changed
separately.
Fees will increase by RPI + 1% each year.
8.11.6 The costs apportioned to any particular group of policies will only change:
• if the formulaic bases of cost charging are altered to reflect a change in the
underlying cost of the activities supporting that group of policies; or
• if the apportioned costs are allocated on a basis which more fairly reflects the
costs of the group.
PLL PPFM Page 125 January 2024
Principle
8.12
Estate Management
The overall aim of the management of the fund will be to ensure there are
sufficient assets to meet the liabilities as they fall due. Being a closed fund means
that total assets are targeted to be paid out over the lifetime of the existing
business.
Practices
8.12.1 Investment Smoothing business, that is unitised with-profits business (written on or
after 1 January 1994), Unitised Capital Guaranteed Fund business, deposit
administration (former FS and BLL) business, controlled funding arrangements
(former BLA / Crusader), former Crusader With-Profits Performance Fund and
With-Profits Pension Fund business and former Crusader Growth Bonus Series H
business, are not exposed to the estate. However, there is an indirect exposure to
the estate in that the position of the estate may impact any future investment
strategy of the fund as a whole (see section 8.9).
The rest of this section does not apply to Investment Smoothing business.
The other with-profits policy classes, that is Fully Participating business, are
exposed to the estate and the remainder of this section gives details.
8.12.2 The estate is the estimated realistic value of the assets less the estimated realistic
value of the liabilities. It is calculated using realistic assumptions and generally
accepted methodologies on a basis determined by the Board.
The estate is expected to be paid out over the lifetime of the existing policyholders.
In practice this will be done by including the estate in asset shares for the
purposes of determining final bonus rates and surrender values using the
approach described in 8.12.4 to 8.12.6 below.
8.12.3 To the extent that any profits or losses arising in the fund are not allocated to asset
shares in accordance with section 8.4, they will act to increase or reduce the
estate. To the extent that the amounts charged to asset shares are based on
estimates or assumptions, then any difference between these and the actual
amounts will act to increase or reduce the estate.
8.12.4 The estate in the fund will be used to:
(a) assist the fund in demonstrating it has access to sufficient capital resources
to meet its liabilities and treat customers fairly;
(b) provide a buffer in the fund should adverse experience mean that the
reserves held to cover the liabilities prove insufficient;
(c) meet any costs which are charged directly to the estate rather than to asset
shares;
(d) meet the costs of any changes which the Board believe are necessary to
improve fairness between policyholders and / or enhance the run-off of the fund;
and
(e) enhance the benefits payable to those with-profits policies which have an
interest in the estate but always aiming to retain sufficient estate to meet the
expected amounts required for (a), (b), (c) and (d). The amount considered by the
Board to be available from time to time for such enhancements will be referred to
as the distributable estate.
8.12.5 Any enhancements in benefits on account of the distributable estate referred to in
8.12.4(e) will generally be achieved by including a temporary uplift to the asset
share for the purpose of setting final bonus rates and surrender values or by
PLL PPFM Page 126 January 2024
applying a final uplift for Fully Participating deposit administration business.
However if the distributable estate is large then consideration would be given to
making additions to the asset shares from the estate.
8.12.6 The amount of the estate, the distributable estate, and the potential for any
enhancements to policyholder benefits will be subject to review at least once a
year.
8.12.7 In the event of a risk of the assets in the fund being insufficient to cover the
liabilities, charges may be made to asset shares to restore the estate to a target
minimum level as described in section 8.3.1(b). However such charges could not
be applied to any part of the deficit caused by regulatory penalties (fines) or
compensation payments relating to events which occurred before 31 July 2009,
see paragraph 5.2.18, except to the extent that such charges are effectively
reversing any estate previously added into asset shares.
8.12.8 Providing that it is possible to do so whilst still treating policyholders fairly, it is
intended to manage the excess assets using solely the resources of the fund and
avoiding the need to draw on any external sources of capital.
In the event of the assets in the fund being insufficient to cover the liabilities, then
any past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit.
Arrangements exist for monies to be transferred from the Non-Profit Fund or
Shareholder Fund to the fund with the aim that the amount of assets in the fund
exceeds the liabilities by a small margin.
Except where the management of the fund in accordance with the Capital Support
Arrangements per section 8.3 indicates otherwise, transfers back to the Non-Profit
Fund or the Shareholder Fund will be made whenever emerging surplus in the
fund, after the cost of bonuses (including shareholders’ share), permits.
The exercise of discretion in respect of with-profits policies will be managed with
the aim that the amounts transferred to the fund will be repaid to the extent that is
possible whilst still meeting the aims described in section 5. In determining
benefits under with-profits policies, the Board will disregard any liability to transfer
such amounts back to the Non-Profit Fund or Shareholder Fund to the extent that
this is necessary to treat customers fairly (that is in accordance with these
Principles and Practices).
PLL PPFM Page 127 January 2024
Principle
8.13
New Business
The fund is closed to new business. Some new business remains with policy
options under existing contracts to effect new policies being honoured.
Practices
8.13.1 The minimum amount of new business is transacted consistent with treating
customers fairly. This takes the form of:
• increments to existing policies where there is a contractual obligation;
• new members to certain existing pension scheme arrangements; and
• buyouts and continuation options arising out of group pension scheme
arrangements.
PLL PPFM Page 128 January 2024
Principle
8.14
Equity between the Fund and Shareholders
Services may be provided by the shareholders to the fund but terms for such
services will be on commercial terms which are considered to be consistent with
the risks of providing those services, or be consistent with terms which would be
available for such services on an arm’s length commercial basis.
Shareholder owned funds receive not more than 10% of the fund’s distributable
surplus, as laid down in the 2023 Scheme. Any proposed change to this, although
unlikely, would require the agreement of the Board and would be subject to
approval by our regulator and the High Court.
Practices
8.14.1 For Unitised Capital Guaranteed Fund, deposit administration (former FS / BLL),
former Crusader With-Profits Performance Fund and With-Profits Pension Fund
business and former Crusader Growth Bonus Series H business, no transfer to
shareholders is made from bonuses declared or interest added on this business.
For other classes, one ninth of the cost of bonuses allocated to policyholders is
transferred out of the fund each year.
8.14.2 The cost of bonuses for determining the shareholders’ transfer, subject to
comments below, includes the value of any annual bonuses declared, interim
bonuses paid in anticipation of any annual bonus declaration and final bonuses
paid.
For traditional with-profits business the value of annual bonus is based on the risk
free rate (after tax).
For unitised with-profits business (written prior to 1 January 1994), the value of
annual bonus is the increase in unit value due to the daily application of the annual
bonus rate. Where a market value reduction applies this reduces the value of the
final bonus. Where a market value reduction has the effect of reducing annual
bonuses previously added, then there is a corresponding reduction in the cost of
bonus.
For unitised with-profits business (written on or after 1 January 1994), only the
cost of final bonus (and not the cost of annual bonus) is included in the cost of
bonus.
For fully participating deposit administration) business (specified in 8.2.1), the cost
of bonus is the interest additions, above any guaranteed additions, to the fund
value and final uplift paid, other than for former Crusader business (Emeritus,
Versatile and Nestegg contracts) where the cost of bonus is half of the interest
additions, above any guaranteed additions, to the fund value and half of the final
uplift paid. Where a market value reduction has the effect of reducing annual
bonuses or interest previously added, then there is a corresponding reduction in
the cost of bonus.
For controlled funding arrangements, the cost of bonuses is the discretionary
amount of cash bonus declared once per annum to increase scheme benefits.
There are no final bonuses.
8.14.3 Certain unitised with-profits pension policies written prior to 1 August 1992 contain
a guarantee that the unit price will increase by 4% per annum. Long Term
Accumulation system and Versatile policyholders have certain guaranteed interest
additions. No shareholder transfers are made in respect of these guaranteed
elements.
PLL PPFM Page 129 January 2024
8.14.4 The shareholders pay any extra tax that is generated as a result of any distribution
to a shareholder owned fund.
8.14.5 A change in the underlying basis on which the shareholders’ share is calculated
will not change the division of profit between the with-profits policyholders and the
shareholders. It will however change the amount of profit distributed.
8.14.6 The following factors will have an impact on the balance between the shareholder
share of the distributable surplus and that of the fund:
• tax/other imposts;
• distributions in anticipation of surplus;
• the approach for with-profits policies with both entitlement to final bonus or final
uplift, and which will incur a market value reduction; and
• guaranteed bonuses.
PLL PPFM Page 130 January 2024
9 Principles and Practices – Britannic With-Profits Fund
The Principles and Practices given in sections 9.4 to 9.14 together with the Guiding Principles
and Practices form the Principles and Practices of Financial Management for the Britannic
With-Profits Fund. Sections 9.1 to 9.3 give background information specific to the Britannic
With-Profits Fund. Subsequently in this section the use of the term ‘the fund’ generally means
the Britannic With-Profits Fund.
9.1 Fund History
The Britannic With-Profits Fund comprises the business that was transferred to
Phoenix Life Limited under the 2006 Scheme from the Ordinary Branch With
Profits Fund of Britannic Assurance (BA) and the with-profits policies in the With
Profit Fund of Century Life.
9.1.1 Britannic Assurance
Britannic Assurance’s origins dated back to 1866 when it was founded in
Birmingham as the British Workman’s Mutual Assurance Company Limited. Its
business spread rapidly throughout Lancashire, Yorkshire and the rest of the
United Kingdom. In 1905 it began to trade as Britannic Assurance.
Britannic Assurance wrote both general insurance and long-term insurance
business. The latter included life assurance business, general annuity business,
pensions business and permanent health insurance business. The majority of the
business was transacted in the United Kingdom, however small amounts of
business were transacted in the Channel Islands, Isle of Man and Eire.
In 1997, following detailed investigations into the historical development and
financial strength of Britannic Assurance’s long-term fund, the structure of the
long-term fund was changed to clarify the future interests of policyholders and
shareholders. The restructure was reviewed by an independent actuary and the
Department of Trade and Industry, the then regulator of insurance business in the
United Kingdom.
Before the restructure the long-term fund of Britannic Assurance comprised an
Industrial Branch Fund and an Ordinary Branch Fund, which both contained with-
profits and non-profit business. Under the restructure:
• Two non-profit funds, the Ordinary Branch Life Non Profit Fund and the
Ordinary Branch Pensions Non Profit Fund, were established. Some of the
Ordinary Branch non-profit business was transferred into these new funds.
Shareholders are entitled to all distributable surplus arising in these funds.
• The Ordinary Branch With Profits Fund was established. All of the Ordinary
Branch with-profits business was allocated to this fund, together with the
Ordinary Branch non-profit business that was not transferred to either the
Ordinary Branch Life Non Profit Fund or the Ordinary Branch Pensions Non
Profit Fund. In respect of the Ordinary Branch With Profits Fund, not less than
90% of the surplus distributed each year was allocated to with-profits
policyholders, with the balance available for transfer to the Britannic Assurance
shareholder fund.
• In respect of the Industrial Branch Fund, not less than 90% of the surplus
distributed each year was allocated to with-profits policyholders, with the
balance available for transfer to the Britannic Assurance shareholder fund.
PLL PPFM Page 131 January 2024
In addition:
• Certain assets were transferred to the Ordinary Branch Life Non Profit Fund
and the Ordinary Branch Pensions Non Profit Fund. These assets were
referred to as the Shareholders’ Retained Capital, which was not available for
distribution to policyholders and could, subject to certain restrictions, be
distributed to shareholders. It was available to support the solvency of the
long-term fund of Britannic Assurance.
• A Buffer Reserve was established, being an amount of assets attributable to
the Industrial Branch Fund that could be used to support the liabilities arising in
the Ordinary Branch With Profits Fund as well.
• A special bonus was declared.
In March 2003 Britannic Assurance withdrew from actively writing new business.
All business transferred from Britannic Assurance is administered by PGMS.
Under the 2006 Scheme the Buffer Reserve referred to above became the Buffer
Reserve in Phoenix Life Limited referred to in paragraph 3.3.4 and section 9.12.
9.1.2 Century Life
From its establishment in 1983 until 2005, Century was part of the Century Group,
which acquired 21 companies or blocks of business during this period. The most
significant of these acquisitions were: Sentinel Life (Sentinel) in 1989, National
Employers Life Assurance Company and associated companies (NEL) in 1992,
CCL Assurance also in 1992, Prosperity Life Assurance (Prosperity) in 1994, Old
Mutual Life Assurance Company in 2000 and National Australia Life in 2003.
Century Group consolidated the legal structure of its life funds by transferring
policies to Century following each acquisition.
By 2001 Century had 11 sub-funds which made administration of the acquired
policies time consuming and complex. Therefore, in April 2001 Century undertook
a reconstruction of these funds by way of a Court Order, which reduced the
number of funds in Century to just two, by transferring all existing policies into
either the Non Profit Fund, which included traditional non-profit and unit-linked
policies, or the With Profit Fund, which included traditional with-profits and non-
profit and unit-linked policies.
Apart from a period between September 1992 and April 1994, Century has been
closed to new business since 1989.
Century Group was acquired by the Britannic Group in April 2005.
All business transferred from Century is administered by PGMS.
PLL PPFM Page 132 January 2024
9.2 Types of Business
The with-profits business in the fund is split into different classes for the purposes
of allocating annual bonuses, final bonuses and smoothed returns as appropriate.
The split primarily depends on:
• The type of product and the method by which it participates in profits, that is
traditional with-profits business, unitised with-profits business or smoothed
return business.
• The classification for tax purposes that is life assurance business, general
annuity business, pension business, overseas life assurance business or
Individual Savings Account business.
• Whether the business is regular premium paying or single premium.
• Whether the business formed part of Century With Profit Fund immediately
prior to the effective date of the 2006 Scheme. The former Century business is
all traditional with-profits business.
The diagram below shows the types of business and the some of the different
classes within the Britannic With-Profits Fund.
Within bonus classes there may be additional splits into bonus series, in particular
the former Century business is split into various bonus classes and series. The
bonus classes and series are listed in paragraphs 9.4.10 to 9.4.13.
9.3 Capital Support to the Fund
The capital policy is described in section 3.2.
In certain circumstances, the shareholder will loan money to this fund. The
practices relating to receipt of support are detailed in sections 3.3 and 5.2.
With Profits Business
Former Century
Life business
Former Britannic
Assurance Ordinary
Branch Business
Smoothed Return
Business
Life
Unitised With Profits
Business
Traditional With Profits
Business
Pensions Pensions
(CI & IoM)
Pensions
(CI)
PensionsLife SingleLife Regular
With Profits
Bond
Irish LifeWith Profits
Annuity
With Profits
Annuity
With Profits
ISA
CI = Channel Islands; IoM = Isle of Man; ISA = Individual Savings Account
PLL PPFM Page 133 January 2024
Principle
9.4
Amounts Payable Under a With-Profits Policy
The aim of the methods employed in determining the amounts payable under a
with-profits policy is the fair treatment of all with-profits policyholders consistent
with the guiding principles.
The main guide used for determining the amounts payable under a with-profits
policy is asset share calculations and the amounts payable will allow for a policy’s
fair share of any surplus distributed, which may be in the form of annual or final
bonuses or smoothed returns.
The degree of approximation used in the application of these methods aims to be
consistent with the overall fair treatment of all with-profits policyholders.
Asset share methodology and processes will be regularly reviewed by the Board
and may change. This may include changes to the historical aspects of the
calculations as a result of a variety of factors, including changes in regulations,
improvements in the degree of approximations, maintaining equity between
classes and groups of policyholders and significant changes in the financial
condition of Phoenix Life Limited.
Policyholders have no entitlement to receive the asset shares, if any, used to
determine the bonuses for their policies.
Different bonuses are declared for different classes of with-profits business,
reflecting the original company within which the business was written, tax, type of
with-profits business and product features. New bonus classes would be required
if a new type of product were developed. An existing class would normally only be
split in exceptional circumstances. Within classes, bonuses may be further
differentiated by series.
Bonus policy can be affected by a variety of factors including the financial and
solvency position of Phoenix Life Limited, the financial strength of the fund, the
expected cost of guarantees, actual and expected investment returns and
expenses, the likelihood of changes in the level of provisions and the constraints
which increases in guaranteed benefits may place on the fund, particularly in
relation to investment strategy. These factors, together with the aim to retain
flexibility in the operation of the fund, constrain annual and final bonus
declarations, smoothed return declarations and the smoothing policy. These
constraints also apply in changing economic conditions.
Bonuses can only be declared if there is surplus available for distribution.
Practices
Asset Share Methodology
9.4.1 The basic method for asset share calculations for with-profits business uses actual
investment returns net of tax and for expenses, mortality and morbidity benefits,
uses the actual underlying experience for traditional with-profits business and uses
product charges for unitised with-profits and smoothed return business.
Asset shares are not smoothed. In particular the investment returns and
experience elements contributing to asset shares are not smoothed, other than
that inherent in the processes used in the derivation of the assumptions, or in
respect of initial expenses as described in paragraph 9.4.2(d).
PLL PPFM Page 134 January 2024
Initial asset shares for former Century with-profits business were calculated as
described in paragraph 4.4.7.
9.4.2 The following table describes the elements credited or charged to asset shares for
traditional with-profits (both former Britannic Assurance and former Century),
unitised with-profits and smoothed return business.
Element
Traditional
With-Profits
Business
Unitised With-
Profits
Business
Smoothed
Return
Business
(a)
Premiums
Premiums paid
Note (a)
Premiums paid
Note (a)
Premiums paid
Note (a)
(b)
Investment return
Allocated return
Note (b)
Allocated return
Note (b)
Allocated return
Note (b)
(c)
Investment
expenses
Actual allocated
Note (c)
Implicit in
product charges
Implicit in
product charges
(d)
Initial expenses
Actual allocated
Note (d)
Implicit in
product charges
Implicit in
product charges
(e)
Renewal expenses
Actual allocated
Note (e)
Implicit in
product charges
Implicit in
product charges
(f)
Other expenses
Actual allocated
Note (f)
Not charged
Note (f)
Not charged
(g)
Tax on investment
return
Actual allocated
Note (g)
Actual allocated
Note (g)
Actual allocated
Note (g)
(h)
Tax relief on
expenses
Actual allocated
Note (g)
Implicit in
product charges
Implicit in
product charges
(i)
Mortality &
morbidity costs
Experience
Note (i)
Note (i)
Implicit in
product charges
(j)
Early terminations
Charged
Note (j)
Not charged
Not charged
(k)
Paid-up policies
Charged
Note (k)
Not applicable
Not applicable
(l)
Partial and regular
withdrawals
Not applicable
Note (l)
Note (l)
(m)
Surrenders at
protected dates
Not applicable
Note (m)
Note (m)
(n)
Annuity payments
Not applicable
Not applicable
Sometimes
Note (n)
(o)
Charges for the
cost of guarantees
Note (o)
Note (o)
Implicit in
product charges
(p)
Charges for the
cost of capital
Not charged
Not charged
Implicit in
product charges
(q)
Distributions to
shareholders
Note (q)
Implicit in
product charges
Implicit in
product charges
(r)
Tax on distributions
to shareholders
Not charged
Not charged
Implicit in
product charges
(s)
Profit and losses
from other business
Not charged
Not charged
Not charged
(t)
Estate distribution
or charge
Note (t)
Note (t)
Note (t)
(u)
Exceptional items
Not applicable
Not applicable
Not applicable
The way in which the above items are taken into account is described in the notes
below, together with how they vary by type of business. Where charged is used in
the table above this means both charged and / or credited depending on whether it
is a loss or profit.
PLL PPFM Page 135 January 2024
Notes
(a) Premiums
Premiums are those paid under the policy. For traditional with-profits business,
they exclude any extra premiums for non-standard policies, as the extra charges
are deemed to cover the additional risks, whilst for unitised with-profits business
they are included as the charges for the extra risk are met by cancelling units per
(i) below.
(b) Investment return
For business other than former Century business and Euro-denominated
smoothed return business, the investment return credited to asset shares is based
on the return earned by the Growth Fund. For the former Century business the
investment return credited to asset shares is based partially on the return earned
by the Growth Fund and partially on the return earned by the Matched Fund. For
Euro-denominated smoothed return business, the investment return credited to
asset shares is based on the return earned by the Euro Fund. The Growth Fund,
Matched Fund and Euro Fund are described in section 9.9.
The investment returns are expressed as a percentage return to be applied.
These investment returns are before any deduction for investment expenses which
are allowed for separately.
(c) Investment expenses
Actual investment expenses are charged, based on those allocated in respect of
the Growth Fund, Matched Fund and Euro Fund, where applicable, in accordance
with sections 5.2 and 9.11, subject to a small reduction for former Britannic
traditional with-profits business.
The investment expenses are expressed as a percentage charge to be applied to
the assets.
(d) Initial expenses
No new business is being written in the fund other than to honour policy options.
Where new policies are written for this reason, initial expenses are generally
based on previous initial expenses inflated at RPI+2% per annum and including
allowance for commissions.
In 2007, the Board reviewed the costs allocated to asset shares. The Board
concluded, having received the advice of the With-Profits Committee, that in order
to protect policyholders from the effects of disproportionately high distribution
costs, initial expenses charged to asset shares from 1998 should be restricted to
be less than the costs actually incurred in those years. The restriction was
assessed to reduce the impact of expenses to be more consistent with that
applying for earlier years of entry.
(e) Renewal expenses
Renewal expenses are based on PGMS per policy charges with an uplift to cover
direct costs and including allowance for commissions. These expenses are
allocated in accordance with sections 5.2 and 9.11.
PLL PPFM Page 136 January 2024
(f) Other expenses
For both former Britannic Assurance and Century traditional with-profits business,
significant future project, additional activity and other one-off costs will only be
charged to asset shares following approval by the Board.
For unitised with-profits business, the product charges include some allowance for
project and one-off expenses. However no additional charges are made to asset
shares.
Any other adjustments to the expenses charged to the fund are not charged to
asset shares.
(g) Tax on investment return
The tax on investment income allows for the different treatment of franked and
unfranked income and also unrecoverable foreign tax. The tax on investment
gains, whether realised or unrealised, includes an element of discounting
representing the deferral of the actual payment. The element of discounting is
regularly reviewed and takes into account the expected turnover rate of the
investments and the level of unrealised gains. The rates of tax (before
discounting) are based on those underlying the tax allocated to the fund in
accordance with section 5.2.
(h) Tax relief on expenses
Tax relief due on the actual expenses charged is allowed for. Where the tax relief
in respect of acquisition expenses is spread, this is allowed for. The rates of tax
relief are based on those underlying the tax allocated to the fund in accordance
with section 5.2.
(i) Mortality and morbidity costs
For traditional with-profits business, the charge is based on the underlying
experience and is approximated by applying a percentage of a standard published
mortality table. The percentage applied varies by calendar year and is based on
the results of mortality investigations carried out from time to time. For morbidity
costs (where applicable), the experience is approximated by applying a
percentage of rates charged by the reassurer.
For some unitised with-profits business, these costs are charged explicitly in the
product charges on a monthly basis, based on the sum at risk, by cancelling units.
The sum at risk is the excess of the guaranteed minimum death benefit over the
shadow fund value and value of any unit-linked units (if applicable). Any profits or
losses from the explicit charges not reflecting the actual underlying experience and
costs are not credited to asset shares. For other unitised with-profits business, the
costs are implicit in the product charges and no explicit monthly charge is applied.
(j) Early terminations
For traditional with-profits life business, the profits and losses arising from
surrenders currently accumulate in the estate. The surrender profits/losses on
with-profits business may be applied to asset shares by an addition to or deduction
from the rate of investment return applied in the year in which the profit or loss
arises or may be accumulated in the estate and applied as part of a distribution of
the estate in a later year.
PLL PPFM Page 137 January 2024
(k) Paid-up policies
Any profits or losses arising from policies becoming paid up are treated as in note
(j).
(l) Partial and regular withdrawals
These are reflected in asset share calculations only to the extent that part of the
policy has been cancelled. Specifically no profits or losses resulting from partial or
regular withdrawals are credited. The proportion of the policy withdrawn is
reflected in both the underlying asset share and remaining policy values.
(m) Surrenders at protected dates
These are reflected in asset share calculations only to the extent that part of the
policy has been cancelled. Specifically no profits or losses resulting from
surrenders or withdrawals at protected (guarantee) dates are credited.
(n) Annuity payments
For smoothed return with-profits annuity business, these reflect the pension
annuity payments made under the policy.
(o) Charges for the cost of guarantees
The cost of guarantees is currently not charged to asset shares and the cost is
borne by the estate. Should the cost increase leading to an erosion of the estate,
or should the estate no longer be able to bear the cost, a charge may be
introduced to asset shares in future. See section 9.12.
(q) Distributions to shareholders
For former Britannic Assurance traditional with-profits business, the cost of
distributions to shareholders resulting from the cost of bonus allocated to policies
is charged to asset shares. The cost of bonus is as described subsequently in
section 9.14, using the basis applicable at the time.
For former Century traditional with-profits business, the cost of distributions to
shareholders resulting from the cost of bonus allocated to policies is not charged
to asset shares, as an estimate of the future costs reduced the initial asset shares.
(t) Estate distribution or charge
For traditional with-profits and unitised with-profits business, asset shares may be
increased by distributions from the estate or reduced by charges to the estate.
However, these estate distributions are not guaranteed. In the event of the assets
in the fund being insufficient to cover the liabilities, then any past asset share
enhancements out of the estate will be removed to the extent needed to remove
the deficit. See section 9.12.
Current practice is that smoothed return business does not participate in any
estate distribution or charge.
Former Britannic Assurance asset shares and policy shadow funds (for unitised
with-profits business) were enhanced to reflect the cost of the 1997 special bonus.
For traditional with-profits business, the enhancement is approximate.
9.4.3 Asset shares are calculated for representative specimen policies when setting
bonus rates, smoothed returns and surrender value bases for non-protected exits.
Specimen policies are chosen to represent the business and include a range of
PLL PPFM Page 138 January 2024
policy terms and years of entry. The primary emphasis in selecting specimen
policies is the size of premium or sum assured. There is however a degree of
averaging, particularly for those terms where there are relatively few policies.
For unitised with-profits business, individual policy shadow funds are used as a
proxy for asset shares in determining the amounts payable on non-protected exits
as described in section 9.8.
For smoothed return business, individual unsmoothed policy values are used as a
proxy for asset shares in determining the amounts payable on non-protected exits
as described in section 9.8.
9.4.4 Asset share models contain some approximations, but these approximations do
not prejudice the overall fair treatment of with-profits policyholders. Whilst only
minor approximations are employed in asset share calculations, no investigations
are carried out on the level of approximation built into the resulting asset shares.
For traditional whole life policies, bonuses and surrender value bases may be set
with reference to those applicable for endowments, however we do currently set
these separately.
Policies that have been subject to alterations, including any surrender of bonus or
child endowment option conversions and for former Century business on
becoming paid up, do not yield robust asset share calculations. For these policies
bonuses are based on those for an equivalent unaltered policy with approximate
adjustments to reflect the differing premium and benefit payment histories.
In support of the current practice that bonus rates for Channel Islands and Isle of
Man pension with-profits business are the same as those for the corresponding
pensions business, asset share calculations for this business mirror those for the
corresponding pensions business.
For unitised with-profits business, the shadow funds are priced on a weekly or
daily basis depending on the type of product. These use a daily estimated
investment return. The tracking difference between this estimated return and the
actual investment return over a period is regularly reviewed and adjustments are
made to the current shadow price to reflect any divergence.
For smoothed return business, for Britannic With-Profits Bond business and the
Irish Life business, the unsmoothed policy values are determined on a daily basis
using a daily estimated investment return. The tracking difference between this
estimated return and the actual investment return over a period is regularly
reviewed and adjustments are made to the current unsmoothed policy values to
reflect any divergence.
9.4.5 Items not charged to asset shares, the effects of the approximations in the
experience assumptions and the effects of other approximations in the methods
employed and the treatment of Channel Islands and Isle of Man pensions
business feed through to the estate as described in section 9.12.
9.4.6 Asset share practices are documented.
Asset share and bonus policies are documented at a high level in various Board
(and previously Britannic Assurance Board) reports and reports on asset share
investigations that have been undertaken from time to time.
Detailed specifications relating to the asset share calculations and the bonus
calculations only exist to a varying degree, but the coding within the models used
in the processes are viewable and thus document the calculations.
PLL PPFM Page 139 January 2024
Asset share assumptions are documented and this tends to include references to
their source of derivation.
For each bonus review appropriate documentation is produced and provides an
audit trail of the process, including sources of data, source and derivation of
assumptions, backing calculations, notes and correspondence. This audit trail
normally includes retaining electronic copies of the systems and calculations used
for the review.
9.4.7 Asset share models, processes and documentation are subject to a continual
process of development, improvement and refinement. Significant effects are
reported to and considered by the Board.
9.4.8 Asset share practices are not guaranteed and may be changed in future.
Asset share methodology and processes will be regularly reviewed by the Board
and may change. This may include changes to the historical aspects of the
calculations as a result of a variety of factors, including changes in regulations,
improvements in the degree of approximations, maintaining equity between
classes and groups of policyholders and significant changes in the financial
condition of Phoenix Life Limited.
Bonus Declarations
9.4.9 Bonus declarations are approved by the Board or committee of the Board or
delegated to senior management and then retrospectively approved by the Board.
9.4.10 For former Britannic Assurance traditional with-profits business:
Separate annual bonus scales are declared for the following classes:
• Life traditional with-profits business
• Pensions traditional with-profits business
• Pensions traditional with-profits business (Channel Islands and Isle of Man).
Separate final bonus scales are declared for the following classes:
• Life traditional with-profits endowment business
• Life traditional with-profits whole of life business
• Life traditional with-profits whole of life fully paid business
• Pensions traditional with-profits business
• Pensions traditional with-profits business (Channel Islands and Isle of Man).
These scales have separate rates for single premium business.
The current practice is for the bonus rates for pension traditional with-profits
business (Channel Islands and Isle of Man) to be the same as those for the
corresponding pension traditional with-profits business.
9.4.11 For former Century traditional with-profits business:
Separate annual bonus scales are declared for the following classes:
• Former NEL Simple bonus business
• Former NEL Compound bonus business
• Former Sentinel Simple bonus business
• Former Sentinel Compound bonus business
• Former Prosperity life business.
Separate final bonus scales are declared for the following classes:
• Former NEL Simple bonus business
• Former NEL Compound bonus business
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• Former Sentinel Simple bonus business
• Former Sentinel Compound bonus life business
• Former Sentinel Compound bonus deferred annuity business.
For former Prosperity life business, there is no final bonus and none is expected in
the future.
9.4.12 For unitised with-profits business:
Separate annual bonus scales are declared for the following classes of business:
• Life regular premium unitised with-profits business
• Life single premium unitised with-profits business
• Pensions unitised with-profits business
• Pensions unitised with-profits business (Channel Islands)
• Individual Savings Account unitised with-profits business.
Separate final bonus scales are declared for:
• Life regular premium unitised with-profits business
• Life single premium unitised with-profits business
• Pensions unitised with-profits business
• Pensions unitised with-profits business (Channel Islands)
• Individual Savings Account unitised with-profits business.
The current practice is for the bonus rates for pensions unitised with-profits
business (Channel Islands) to be the same as those for the corresponding
pensions unitised with-profits business, though this is not guaranteed.
9.4.13 For smoothed return business, separate smoothed returns, declared returns and
annual and final bonuses, where applicable, are declared for each class of
business:
• Britannic With-Profits Bond business and within this class, separate smoothed
returns are declared for each policy series
• With-profits annuity business and within this class, separate declared returns
are declared for each policy month and year of entry
• Irish Life with-profits bond business and within this class, separate smoothed
returns, annual and final bonuses are declared for each policy series.
9.4.14 Bonuses and smoothed returns are reviewed regularly at least once a year.
For other than smoothed return business, annual bonuses and are reviewed
annually and are declared in arrears in March / April of the following year to which
the bonus relates, other than Individual Savings Account unitised with-profits
business, where annual bonuses are declared in advance and are reviewed at
least once a year. Final bonuses are declared in advance and are reviewed at
least twice a year, normally from 1 January (towards the end of December for
most unitised with-profits business) and 1 July (towards the end of June for most
unitised with-profits business).
For smoothed return business, other than with-profits annuity business, smoothed
returns and any annual and final bonuses, are declared in advance, and are
reviewed at least twice a year, normally on a quarterly basis.
For with-profits annuity business, declared investment returns are set at policy
anniversaries for the following year.
9.4.15 The timing of final bonus declarations may be varied.
9.4.16 Final bonuses and annual bonuses declared in advance are expected to, but are
not guaranteed to, apply until the next planned review date. These bonuses may
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be reviewed at any time between normal planned review dates. Additional reviews
would normally only be in response to exceptional investment market movements.
9.4.17 Final bonus reviews also consider the amount of final bonus paid on non-protected
exits (surrenders).
9.4.18 Bonuses and smoothed returns are declared out of surplus arising in the year or in
anticipation of surplus arising. If there is no surplus or no expectation of surplus
arising, no bonuses can be declared.
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Principle
9.5
Annual Bonus Rates
The aim is to set annual bonuses at a prudent level, balancing the benefit to
policyholders of increased guarantees, the aim for an element of final bonus, the
flexibility of the operation of the fund and its ability to ensure the guarantees can
be met in future. Annual bonuses may increase or decrease from declaration to
declaration and may also be nil. Annual bonuses can only be declared if there is
sufficient surplus available.
Practices
9.5.1 For smoothed return business where there are annual bonuses, these are related
to the smoothed returns and are covered in section 9.7 which covers smoothing.
The rest of this section does not apply to this business.
9.5.2 The Board makes decisions on annual bonus declarations taking into account a
number of factors. These factors are set out in the following paragraphs.
9.5.3 For each class of business, the level of annual bonus is set so as to maintain a
buffer for final bonus. The future claim payouts are estimated using realistic
assumptions and the annual bonuses are set at such a level that if experience
turns out to be in line with those assumptions, the overall amount of the payout
paid in the form of final bonus will be in line with a target proportion. Under current
investment conditions, the overall target is that 25% of the overall value of
payouts, calculated before any future augmentation provided by a release of the
estate, will be in the form of final bonus. Given the aggregate nature of this target,
for an individual policy, this final bonus buffer may be more or less than 25%. This
overall target is itself subject to review and may be changed. If experience does
not turn out to be in line with the assumptions then the 25% target might not be
met.
Annual bonus rates will be adjusted to keep the overall level of projected final
bonus broadly in line with the target. If necessary to remain on target, annual
bonus rates will be reduced to nil, or close to nil. However, some small annual
bonuses may be declared even if the final bonus buffer is below target.
There is no maximum change in the annual bonus rate; however, in the normal
course of events the declared annual bonus rates would not be expected to
change by more than 2% from one declaration to the next.
9.5.4 Where the financial position of the fund is weak, the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus buffer being above the 25% target.
9.5.5 For former Century policies (excluding Prosperity policies), the aim is to maintain
current levels of annual bonus unless so doing would lead to a material risk that
significant groups of policyholders would receive payments in excess of asset
shares on account of guaranteed benefits. Prosperity policies have no final
bonuses, so we set annual bonuses to target projected final bonus headroom of
0%.
9.5.6 Annual bonuses can only be declared if there is sufficient surplus available.
9.5.7 The asset share comparisons are performed for representative specimen policies
grouped according to the level at which different bonus rates are declared.
9.5.8 Where annual bonuses are declared in arrears, interim bonus rates are set with
reference to the most recent annual bonuses declared and any future anticipated
PLL PPFM Page 143 January 2024
direction of these rates and may be higher or lower than the latest annual bonus
rates declared. The annual bonus rate may, however, eventually be set at a level
that differs from the interim rate.
9.5.9 For former Britannic Assurance traditional with-profits business, annual bonus
rates are rounded and expressed as a percentage of the sum assured or the basic
annuity and the rates depend on year of entry.
For former Century traditional with-profits business, annual bonus rates are
expressed as a percentage of the sum assured or the basic annuity for simple
bonus policies, as a percentage of the sum assured or the basic annuity plus
attaching bonuses for compound bonus policies, or as a percentage of the sum
assured and a percentage of the attaching bonuses for former Prosperity life
business.
For unitised with-profits business, annual bonuses rates are rounded and
expressed as a percentage rate per annum of the with-profits and bonus units,
allowing for the period the units have been in force during the year.
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Principle
9.6
Final Bonus Rates
The aim is to set final bonus rates so that specimen policy payouts achieve a
target payout ratio. These final bonus rates are then adjusted for smoothing as
described in section 9.7. Final bonuses for a policy may increase or decrease
from declaration to declaration and may also be nil. Final bonuses will be
reviewed regularly, but can be reviewed at any time.
Practices
9.6.1 For smoothed return business where there are final bonuses, these are related to
the smoothed returns and are covered in section 9.7 which covers smoothing.
The rest of this section does not apply to this business.
9.6.2 The current long-term target payout ratio for maturing policies is 100% of asset
share.
In this context maturity includes retirement at selected retirement age for pensions
business and surrender or withdrawal at a guarantee date for unitised with-profits
business. The guaranteed benefit of traditional deferred annuity business used in
the comparisons is the capital value of the basic annuity and annual bonuses
payable from the retirement age.
9.6.3 The actual payout ratio for maturing policies at any one time will not necessarily be
equal to the target portion due to:
• the level of accumulated guarantees; or
• the effects of smoothing.
9.6.4 Final bonuses are determined by comparing projected asset shares with the
corresponding guaranteed benefits, together with any interim bonus, for maturities
in the period under consideration. These projected asset shares allow for the
actual experience to date and expected future experience, including expected
future investment return and where relevant, shareholder transfers in respect of
the final bonus being determined. The final bonuses actually declared are based
on these figures after adjusting for smoothing as described in section 9.7.
9.6.5 The projections supporting final bonus investigations are based on actual
experience up to five months in advance of the start date of the declaration. The
projections generally consider policies maturing during the calendar year in which
the final bonus rates apply.
9.6.6 Final bonus declarations are also informed by comparisons of projected asset
shares and corresponding projected benefits for maturities in subsequent final
bonus periods and over the next couple of years.
9.6.7 The asset share comparisons are performed for representative specimen policies,
grouped according to the level at which different bonus rates are declared. The
primary focus is on performing the calculations for specimen policies at the terms
which contain a significant volume of policies. For other terms approximations
may be used.
For former Century business, the final bonus is based on a rate multiplied by a
duration factor and the grouping combines all policies and terms within the
relevant bonus class.
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9.6.8 For former Britannic Assurance traditional with-profits life assurance business,
final bonus rates are rounded and expressed as a percentage of the sum assured
and the rates depend on duration and for whole of life policies on premium paying
term. Rounding may mean that resulting payout ratios deviate slightly from the
target.
For former Britannic Assurance traditional with-profits pensions business, final
bonus rates are rounded and expressed as a percentage of the basic annuity and
annual bonus and the rates depend on duration. For 1981 and 1970 years of
entry, there are additional rates to reflect significant pricing and product design
changes that occurred in these years.
Rounding may mean that resulting payout ratios deviate slightly from the target.
9.6.9 For former Century former NEL with-profits business, final bonus rates are
expressed as a percentage of the sum assured or basic annuity. The final bonus
is this rate multiplied by the duration the policy has been in force. There is also a
second tier / additional final bonus rate, which is expressed as a percentage of the
sum assured. The second tier / additional final bonus is this rate multiplied by the
duration the policy has been in force since 1 April 1996.
For former Century former Sentinel with-profits business, final bonus rates are
expressed as a percentage of the sum assured or basic annuity and annual and
interim bonuses. The final bonus is this rate multiplied by the duration to the first
policy anniversary after 31 March 1998.
For former Century former Prosperity with-profits business, no final bonus is
payable and none is expected in the future.
Rounding may mean that resulting payout ratios deviate slightly from the target.
9.6.10 For unitised with-profits business, final bonus rates are rounded and expressed as
a percentage of the with-profits units and may vary by month and year of
purchase. The rates may be negative, but overall the final bonus on a policy is
subject to a minimum of nil.
Rounding may mean that resulting payout ratios deviate slightly from the target.
9.6.11 Final bonus scales are determined by reference to maturing representative
specimen policies.
For former Britannic Assurance traditional with-profits life assurance business, the
final bonus payable on a death claim (or terminal or critical illness claim, if
applicable) is calculated as follows:
• For an endowment assurance, it is the final bonus rate for a policy maturing at
the same duration completed, multiplied by the proportion of the original term
completed, applied to the sum assured.
• For a whole life assurance, it is the final bonus rate based on policy
commencement year and total number of premiums contracted to be paid, but
applied to the smaller of the office premium multiplied by the completed
duration and the sum assured.
For former Century with-profits life assurance business, the final bonus payable on
a death claim is calculated based on the duration the policy has been in force at
the time of death.
For unitised with-profits business, the final bonus scale applies on a death claim
(or terminal or critical illness claim, if applicable) as well.
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Some endowment assurances have an additional sum assured payable on death
but this is not eligible for bonuses. Also any guaranteed minimum death benefit is
not eligible for bonuses. Similarly for traditional with-profits pensions business,
where the death benefit is a return of premiums this is not eligible for bonuses.
9.6.12 Final bonuses are declared in advance and are made in anticipation of a surplus
arising. Final bonuses can only be declared if there is an expectation of such
surplus arising.
9.6.13 Final bonus reviews also consider the amount of final bonus payable on
surrenders of traditional business, based on section 9.8.
9.6.14 For all classes of policy final bonus rates may be changed at any time. At times
when the value of the excess assets in the fund is not changing rapidly, this is
likely to mean that changes, if any, are made one or two times per year, normally
from 1 January and 1 July. However, a sudden change in the value of those
excess assets (such as because of a significant change in the value of equity
share markets) may cause final bonus rates to be changed on other occasions.
Changes to surrender and transfer values may be less frequent than changes to
final bonus rates for maturities.
9.6.15 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on maturities may deviate from the target payout ratios during the
period between reviews. Normally an investment return variation of up to 10%
compared to that assumed when the final bonuses were last reviewed, would be
allowed before there would be an additional final bonus review. However, where
the maturity payout ratios at the latest final bonus review were near the top or
bottom of the range described in paragraph 9.7.2, a lower level of investment
return variance may lead to an additional final bonus review.
PLL PPFM Page 147 January 2024
Principle
9.7
Smoothing
The aim is to smooth with-profits policy payouts at protected dates to manage the
volatility of with-profits policy payouts. The effect of smoothing may have a
positive or negative effect on with-profits policy payouts.
Smoothing leads to profits and losses which are anticipated to offset each other
over time. In the short-term, if these profits or losses were to become excessive,
then the smoothing policy would be reviewed.
For all business except traditional with-profits business, the non-protected exit
values will take account of day to day investment market movements and as a
result may have a market value reduction applied. For traditional with-profits
business, non-protected exit values will have a degree of smoothing.
Practices
Traditional and Unitised With-Profits Business
9.7.1 Final and interim bonuses are declared in advance and are expected to, but are
not guaranteed to, apply until the next planned review date. Additional reviews
would normally only occur in response to exceptional investment market
movements. Thus with-profits policyholders leaving at protected dates are not
impacted by day to day investment fluctuations. This forms part of the smoothing
process.
9.7.2 Final bonus reviews take into account the current maturity payout ratios and the
long-term target payout ratio per paragraph 9.6.2. The aim is to ultimately bring
maturity payout ratios for representative specimen policies in line with the long-
term target payout ratio in a smoothed manner based on the guidelines as
described in paragraph 9.7.3. The target range for payout ratios is to be between
80% and 120% of asset share before the effects of smoothing.
In this context maturity includes retirement at selected retirement age for pensions
business and surrender or withdrawal at a guarantee date for unitised with-profits
business.
9.7.3 For traditional and unitised with-profits policies where final bonus changes are
normally made twice a year, smoothing is applied to maturity and retirement
values by limiting the change in final bonus rates. Normally the change in final
bonus rates for a specimen policy will be limited so that the increase or reduction
in total maturity or retirement payout compared to a position where bonus rates
are not changed is not more than 7.5% at each six monthly review.
For traditional policies and unitised with-profits policies, surrender value bases are
normally reviewed twice a year, smoothing is applied by limiting the change in
immediate surrender value for specimen policies. Normally the surrender value for
specimen model policies will not change by more than 10% at each six monthly
review. Surrender values may change in between reviews because in many cases
the surrender values are calculated using formulae that depend upon factors such
as term remaining which change over time.
However, if it is necessary to enable the fund to continue to meet the objectives
set out in the guiding principles in section 5 sometimes larger changes are made
in final bonus rates and surrender values.
If there has been a significant change in premium rates then larger changes than
those described above may be made so that final bonus rates and surrender
PLL PPFM Page 148 January 2024
bases remain consistent with the premium rates on which the business was
generally written. Where premium rates were revised with the intention of
changing payouts, then smoothing will not be applied, so that the change in
payouts intended by the premium rate change does occur.
Calculations may also be carried out for specimen policies which are due to reach
their maturity date in the following few years. If these calculations show a trend in
payouts which could not be accommodated by following the normal limits on
change described above, the final bonus rate or surrender value being determined
may be adjusted so that the trend may more easily be accommodated.
For both maturity and retirement values and surrender values, any change to
payouts that results from changes in the distributable estate, if any, will be
additional to the limits described and will not be subject to smoothing. Also where
there have been significant changes in methodologies and practices, the impact
may not be managed within the normal smoothing rules.
9.7.4 The smoothing of maturity values from declaration to declaration primarily focuses
on specimen maturities at terms which contain a significant volume of policies.
The effect on the aggregate position for maturities, incorporating all relevant
business for the class of with-profits business and grouped according to the level
at which different bonus rates are declared, is also considered. As final bonus
rates are rounded, this may result in slight deviations from the target position.
9.7.5 In adverse conditions, where the level of guaranteed benefits exceeds the target
proportion of the relevant asset shares, no final bonuses may be warranted. In
this situation, the guaranteed benefits provide a floor for maturity payouts. This
provides further protection against day to day investment fluctuations and may
further limit movements in maturity payouts for similar policies, as a result of bonus
declarations.
9.7.6 Smoothing leads to profits and losses which are anticipated to offset each other
over time. Costs may arise under paragraph 9.7.5, but such costs are the cost of
guarantees and not the cost of smoothing. The smoothing policy is not specifically
constrained by a limit on the short-term profits and losses of smoothing, but should
these become excessive, the smoothing policy may be revised. The profits and
losses from smoothing and costs from guarantees feed through to the estate and
are effectively dealt with by principle 9.12 and its associated practices.
9.7.7 As the final bonus payable on life assurance business death claims (or terminal or
critical illness claims, if applicable) is based on the final bonus scale for maturities,
there is a similar element of smoothing operating on payouts for death claims.
Some endowment assurances have an additional sum assured payable on death
but this not eligible for bonuses. Also any guaranteed minimum death benefit is
not eligible for bonuses. Similarly for traditional with-profits pensions business,
where the death benefit is a return of premiums this is not eligible for bonuses.
These are not smoothed.
9.7.8 For unitised with-profits business, surrender values will target a proportion of asset
share, as described in section 9.8. Surrender values may be subject to the
application of a market value reduction and where this is the case, they will reflect
day to day market movements.
Smoothed Return Business
9.7.9 The smoothed and declared investment returns are derived from the actual
investment returns netted down for tax adjusted only for smoothing. Smoothed
and declared investment returns may be positive, negative or nil. There is no
maximum amount by which smoothed and declared investment returns may alter
PLL PPFM Page 149 January 2024
at any declaration. They do not explicitly take into account payout ratios or
movements in equivalent term payouts or annuity incomes.
9.7.10 The smoothed and declared investment returns are based on a historic geometric
average of monthly investment returns, net of tax.
The calculations supporting smoothed and declared investment return
investigations are based on actual investment returns up to five months in
advance of the start date of the declaration.
To avoid smoothed and declared investment returns being affected by the actual
investment returns before a policy series started and to ensure that each policy
series started from a neutral smoothing position, a long-term rate of return was
assumed for the period before the policy series started. The use of the long-term
rate of return extended to the date the policy series closed, other than for Irish Life
business which originally only had a single series and used an average approach.
The long-term rate is reviewed at least once a year.
The smoothed return declarations also consider the relationships between the
guaranteed benefits, the smoothed benefits and the underlying unsmoothed
values and asset shares.
The smoothing mechanism is not guaranteed and may be revised, especially if
payouts fall outside the target ranges as described in paragraphs 9.7.11 and
9.7.12.
The resulting rates of smoothed and declared returns and any associated annual
bonus are rounded.
The period over which returns are averaged, the periods for which the long-term
rate of return is used and the detailed application varies by class of smoothed
return business as follows:
(a) Britannic With-Profits Bond
The smoothing period is five years. New policy series were started each
calendar quarter.
(b) With-Profits Annuity
The smoothing period is five years. New policy series were started each
month.
(c) Irish Life With-Profits Bond
The smoothing period is three years. The business is split into two series,
one for policies issued before September 2002 and one for policies issued
from September 2002. For the post September 2002 series, the smoothed
return may be increased above that calculated as described above and
applied to the pre September 2002 series. This addition is reviewed by
considering projections to the next guarantee date. The addition to the
smoothed return is not guaranteed and may change at any review of
smoothed returns and may be nil or negative.
9.7.11 The current long-term target payout ratio is 100% of asset share. The target range
for payout ratios is to be between 80% and 120% of asset share.
9.7.12 Payout ratios for smoothed policy values and annuity incomes within 10% of the
target payout ratio could be described as the normal situation. That is for the
target payout ratio of 100%, a payout ratio between 90% and 110%.
PLL PPFM Page 150 January 2024
Where smoothed policy values and annuity incomes are between 10% and 20%
above or below the target payout ratio, the smoothing mechanism will be reviewed
and may be revised.
Where smoothed policy values and annuity incomes are not within 25% of the
target payout ratio, then the smoothed return may be adjusted with the aim of
keeping within the target range. In addition the smoothing mechanism will be
reviewed and would normally be revised.
Due to the exceptional investment returns in 2008 which caused the payout ratios
for the Euro-denominated Irish Life With-Profits Bond business to become
excessive, the smoothing mechanism for this business was adjusted from 1 April
2009. The adjustment meant that half of the negative investment return for 2008
was applied as a one off reduction to the smoothed value and the remaining half of
the investment return for 2008 flowed through the smoothing mechanism as
normal.
9.7.13 There are underlying guaranteed policy values and these depend on the type of
business as follows:
(a) Britannic With-Profits Bond
The guaranteed policy value is currently set at 75% of the previous highest
smoothed policy value, after adjusting for any withdrawals. For the non-IFA
variant the guaranteed value is subject to a minimum of the contribution.
(b) With-Profits Annuity
The underlying guaranteed annuity income level is increased such that it is
not less than 75% of the total annuity income following the yearly review.
(c) Irish Life With-Profits Bond
As part of the smoothed investment return declaration, an annual bonus is
declared. The annual bonus rate (before annual management charge)
would normally be based on two thirds of the smoothed investment return
(before annual management charge) and is subject to a minimum of the
annual management charge, that is the annual bonus rate net of the annual
management charge is subject to a minimum of nil. This annual bonus
increases the underlying guaranteed policy value. The relationship between
the smoothed investment return and the annual bonus is not guaranteed.
There is no maximum amount by which annual bonus rates may alter at any
declaration. The annual bonus rate is normally only revised on an annual
basis, but this is not guaranteed. At each smoothed investment return
declaration the annual bonus is reviewed and may be revised.
Annual bonus declarations also consider the relationship between the
smoothed and guaranteed policy values. The aim is that the smoothed
value should provide a significant element of final bonus. If the final bonus
element is considered to be too high or too low, then the annual bonus
calculation may be adjusted.
The final bonus represents the difference between the smoothed value and
the guaranteed value.
9.7.14 In exceptional circumstances the actual smoothed or declared return declared may
be less than that derived from the net actual investment returns adjusted only for
smoothing. This may only occur on the advice of the With-Profits Committee,
PLL PPFM Page 151 January 2024
where profits available from the fund are insufficient to cover the smoothed or
declared investment returns due to be applied.
9.7.15 In adverse conditions, the level of guaranteed policy values or guaranteed annuity
income levels may exceed smoothed values or annuity income levels based solely
on the declared investment returns. Thus the guaranteed policy values and
guaranteed annuity income levels provide a floor for payouts at protected dates
and provide further protection against investment fluctuations.
9.7.16 Smoothing leads to profits and losses which are anticipated to offset each other
over time. Costs may arise under paragraph 9.7.15, but such costs are the cost of
guarantees and not the cost of smoothing. The smoothing policy is not specifically
constrained by a limit on the short-term profits and losses of smoothing, but should
these become excessive, the smoothing policy may be revised. The profits and
losses from smoothing and costs from guarantees feed through to the estate and
are effectively dealt with by section 9.12.
9.7.17 Non-protected exit values will target a proportion of asset share, as described in
section 9.8. For Britannic With-Profits Bonds and Irish Life With-Profits Bonds,
surrender values may be subject to the application of a market value reduction and
where this is the case, they will reflect day to day market movements. However
before a market value reduction is applied, a small margin is allowed and this
provides a small element of protection from day to day market movements. For
the with-profits annuity, the terms for converting into a fixed annuity will reflect
market conditions at the time of conversion.
9.7.18 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on maturities may deviate from the target payout ratios during the
period between reviews. Normally an investment return variation of up to 10%
compared to that assumed when the smoothed returns were last reviewed, would
be allowed before there would be an additional review of smoothed returns.
However, where the payout ratios at the latest review of smoothed returns were
near the top or bottom of the range described in paragraph 9.7.11, a lower level of
investment return variance may lead to an additional review of smoothed returns.
PLL PPFM Page 152 January 2024
Principle
9.8
Surrender Values
The aim in setting non-protected exit values will be to minimise any adverse effect
on the interests of continuing policyholders and subject to this, the aim is to set
non-protected exit values so that payouts for specimen policies achieve a target
payout ratio.
Practices
Traditional With-Profits Business
9.8.1 For life business non-protected exits refer to surrenders and policies becoming
paid-up. For pensions business non-protected exits refer to transfers, early and
late retirements and policies becoming paid up.
Surrender values are targeted in the long term at 100% of asset share. The target
range for surrenders is 80% of asset share to 120% of asset share, before the
effects of smoothing.
9.8.2 The basis for the surrender value formulae is determined by targeting the target
proportion of asset share for representative specimen policies.
9.8.3 Surrender values are calculated by formulae based on discounting the policy
benefits. The formulae include an allowance for final bonus.
9.8.4 The approach of discounting policy benefits ensures that surrender values take
some account of the value of the policy guarantees and produce a reasonable
progression of surrender values into the prospective maturity value.
9.8 5 In determining the basis used to discount the policy benefits, the Board will ensure
that in aggregate payments to surrendering policyholders do not materially
adversely affect the interests of continuing policyholders.
9.8.6 For whole life policies, the basis for surrender values is based on a similar
approach to that used for endowments. For altered policies the surrender values
include approximate adjustments to reflect the alterations made to the policy.
For former Britannic Assurance traditional with-profits retirement annuity business,
the high level of the policy guarantees compared to asset shares is such that the
surrender values may exceed the upper limit of the target range.
9.8.7 For life assurance business, but not for pensions business, surrender profits or
losses may be recycled into the asset shares of continuing policies, although this
would be done in an approximate way, as described in section 9.4.
9.8.8 Paid-up policy benefits are determined such that value of the paid-up policy
benefits target similar payout ratios to surrenders. Paid-up policies cease to
participate in profits, other than for former Century former NEL and some former
Sentinel business.
9.8.9 Some policies have surrender and paid-up policy calculations specified in the
policy conditions. These represent a minimum basis that is applied.
9.8.10 Surrender value and paid-up policy value bases will normally be reviewed once a
year. However more frequent reviews might take place, in particular in response
to significant investment market movements. Surrender values and paid-up policy
values may also change more regularly following a review of final bonus rates.
PLL PPFM Page 153 January 2024
9.8.11 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on surrender values may deviate from the target payout ratios during
the period between reviews.
Unitised With-Profits Business
9.8.12 Non-protected exits refer to surrenders and withdrawals, other than those at a
guarantee date, transfers, early or late retirements and any excess regular
withdrawals. For unitised with-profits business, surrender values (that is non-
protected exit values), other than those at a guarantee date, are determined with
reference to the full value of units and the target payout ratio. The full value of
units comprise the with-profits units, bonus units, interim bonus and any final
bonus that would be payable assuming it was a surrender at a protected date.
9.8.13 The target payout ratio is 100% using the underlying shadow fund as a proxy for
the asset share excluding any element relating to the distribution of the estate.
The target range is for surrender payout ratios to be between 80% and 120% of
asset share.
9.8.14 Surrender values are the lower of the full value of the units and the shadow fund,
as determined on an individual policy basis. If the resulting surrender value is less
than the full value of the units, a market value reduction has been applied. The
market value reduction acts by firstly reducing any final bonus and then once any
final bonus has been eliminated, reduces the value of the with-profits and bonus
units, so that the surrender value is equal to the shadow fund.
The resulting surrender value may be subject to withdrawal charges to cover
unrecovered initial costs or the administration costs of processing the surrender.
9.8.15 Unitised with-profits business paid-up policy values are the with-profits units and
bonus units added to date and they continue to participate in profits.
9.8.16 Surrender value bases will normally be reviewed once a year, although surrender
values for a policy may change on a weekly or daily basis due to movements in
the value of the shadow fund and reviews of final bonus rates. However more
frequent reviews might take place, in particular in response to significant adverse
market movements.
9.8.17 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on surrender values may deviate from the target payout ratios during
the period between reviews.
Smoothed Return Business
9.8.18 For smoothed return with-profits bond business, the target payout ratio is 100% of
the asset share as represented by the unsmoothed policy value. The target range
is for surrender payout ratios to be between 80% of asset share and 120% of
asset share.
The surrender value is the lower of the smoothed policy value and the
unsmoothed policy value increased by a small margin, on an individual policy
basis. If the resulting surrender value is less than the smoothed value, a market
value reduction has been applied. For Irish Life business, if the surrender value is
less than the guaranteed policy value, a market value reduction is also considered
to have been applied, even if the surrender value is not less than the smoothed
policy value. The resulting surrender value may be subject to withdrawal charges
to cover unrecovered initial costs. Non-protected exits refer to surrenders and
withdrawals, other than those at a guarantee date, and any excess regular
withdrawals. For Irish Life business, all regular withdrawals are considered as
non-protected exits.
PLL PPFM Page 154 January 2024
9.8.19 The terms for converting the with-profits annuity into a fixed annuity are based on
the target payout ratio of the underlying policy asset share and the annuity basis
for new business at the time. The target payout ratio is currently 100%. The
target range is for payout ratios to be between 80% and 120% of asset share.
9.8.20 Surrender value bases will normally be reviewed once a year, although surrender
values for a policy may change on a daily basis due to movements in the value of
the unsmoothed policy value. However more frequent reviews might take place, in
particular in response to significant adverse market movements.
9.8.21 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on surrender values may deviate from the target payout ratios during
the period between reviews.
PLL PPFM Page 155 January 2024
Principle
9.9
Investment Strategy
The fund will take investment risk only to the extent that there is a high degree of
certainty that the fund is sufficiently strong to absorb adverse experience. Within
this constraint the primary objective of the strategy will be to achieve the best
long-term investment return. The size and timing of guaranteed benefits and other
liabilities determine the investment freedom and risk tolerance.
Investments will be spread over a number of asset classes and within these asset
classes the actual holdings will normally be diversified and of an appropriate
quality. Derivatives are normally only used for efficient portfolio management or to
reduce investment risk.
The fund may hold assets which are not normally traded, but will not normally
seek to increase its exposure to such type of assets.
The investment strategy will be reviewed regularly to ensure it remains
appropriate.
Practices
9.9.1 The fund maintains three pools of investment assets. These are called the Growth
Fund, the Matched Fund and the Euro Fund.
These investments are managed by the investment managers in accordance with
an investment mandate specified by the Board.
The Growth Fund backs the former Britannic with-profits business asset shares
and a proportion of the former Century with-profits business asset shares. The
Matched Fund backs the remaining proportion of the former Century with-profits
business asset shares and the non asset share liabilities of the fund. The Euro
Fund backs the Euro-denominated with-profits business asset shares. This is
described in more detail subsequently.
9.9.2 Currently the same mix of assets is held for all former Britannic with-profits policies
in the fund, other than for Euro-denominated business, and the same investment
performance is used when working out asset shares. This may change in the
future if it would be fairer to hold different mixes of assets for different groups of
with-profits policyholders.
Currently the same mix of assets is held for all Euro-denominated business and
the same investment performance is used when working out asset shares. This
may change in the future if it would be fairer to hold different mixes of assets for
different groups of with-profits policyholders.
Former Century asset shares are invested 30% in the Growth Fund and 70% in
the Matched Fund fixed interest assets. The allocation to the Growth Fund may
reduce over time as the outstanding term of the former Century policies reduces
relative to the other business of the fund or if maintaining the exposure would,
when combined with paragraph 9.5.5, lead to a material increase in the cost of
guarantees for the former Century business. The exposure of the former Century
asset shares to the Growth Fund is reviewed at least one a year.
PLL PPFM Page 156 January 2024
9.9.3 The investment assets are spread over a number of different asset classes, which
may include:
• Property
• Approved fixed interest securities, such as British Government gilts and other
government and supranational bonds
• Other fixed interest securities, such as corporate bonds, debentures, loan
notes and emerging market debt
• Approved variable interest securities, such as British Government index-linked
gilts
• Other variable interest securities, such as variable rate corporate bonds
• United Kingdom equity shares
• Overseas equity shares, such as European, United States of America,
Japanese, Asia Pacific and emerging markets
• Loans secured by mortgage
• Cash, such as short term deposits and money market funds
• Derivatives
• Private equity
• Alternative assets such as hedge funds.
The investments may be direct or via collective investment schemes such as unit
trusts.
With the exception of property, loans secured by mortgages, private equity and
some alternative assets, investments are predominately listed and traded on a
recognised stock exchange.
The actual investments held are widely diversified within these asset classes.
The investment guidelines cover:
• Asset class allocation ranges
• Benchmarks
• Credit ratings and durations of fixed interest securities. Specifically other fixed
interest securities should be at least investment grade and an overall average
credit rating is specified. Unrated or non-investment grade other fixed interest
securities can only be held with the approval of the Board.
• Exposures, such as minimum and maximum number of holdings and maximum
exposure to any one counterparty
• Currency matching and localisation
• Stock lending
• The liquidity position
• Exposure to sectors or companies that do not align with our approach to
responsible investment, for example Tobacco.
The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
A consideration when setting the investment guidelines is to minimise any
reduction in the value of the investment assets for solvency purposes.
The investment strategy and guidelines differ between the three pools of
investment assets and reflect the different liabilities they are backing.
9.9.4 The investment strategy is regularly reviewed taking account of a variety of
considerations, including our approach to responsible investment. In particular,
reports from the investment managers, the Chief Actuary, the With-Profits Actuary
PLL PPFM Page 157 January 2024
and the With-Profits Committee, and recommendations for change are considered
and, if appropriate, implemented.
9.9.5 The investment strategy is influenced by the level of solvency of Phoenix Life
Limited and the need to be able to ensure and demonstrate adequate solvency at
all times.
9.9.6 The introduction of any new asset or liability instruments into the investment
strategy will only occur following approval by the Board. Such instruments are
only likely to be permitted for efficient portfolio management or to reduce
investment risk.
9.9.7 The fund may include assets that are not normally traded, although currently there
are none.
Any future assets which would not normally be traded will only be acquired
following a review by the With-Profits Committee and approval by the Board. Any
acquisition of such assets would be made after considering the run-off position of
the fund, the management of the estate and the ultimate need at some future time
to realise such assets.
9.9.8 The Board reviews the investment strategy at least once a year. However more
frequent reviews might take place, in particular in response to adverse market
movements or significant changes in the operating environment. The Board
documents the investment strategy, provides investment ranges to the investment
managers and monitors the position.
9.9.9 The three pools of investment assets, the Growth Fund, the Matched Fund and the
Euro Fund are reviewed at least once a year and monies are transferred between
them in order to rebalance them to their respective liabilities.
9.9.10 Growth Fund
(a) The Growth Fund supports the asset shares of the fund (excluding the Euro-
denominated business). The primary objective for the Growth Fund is to achieve
the highest possible long-term rate of return, subject to the constraints described.
(b) The investment strategy of the Growth Fund is to have an equity-backing ratio
which balances the expected higher returns with the risks of adverse market
movements, the risk-based capital requirements and the management and
potential distribution of the estate. The fund also holds a small proportion of
alternative assets, such as hedge funds. The fixed interest assets held will be
chosen having regard to the expected liability cashflows.
(c) The risk appetite for the investment strategy is considered by examining the ability
of the fund to withstand severe adverse market movements and still meet
guaranteed commitments to policyholders.
(d) The proportion of the assets backing asset shares invested in equities, including
private equity, property and alternative assets may change in the future as a
consequence of practices 9.9.4, 9.9.5 and 9.9.10(c) . It would also change if the
Board’s long-term view of the merits of equity and property investments relative to
other asset classes was to change.
9.9.11 Matched Fund
(a) The Matched Fund supports the liabilities of the fund (other than the asset shares)
and part of the asset shares of the former Century business. The Matched Fund
also includes the estate. The primary objective of the Matched Fund is to invest in
PLL PPFM Page 158 January 2024
assets which as closely as possible meet the expected liability cashflow
requirements.
(b) The investment strategy for the Matched Fund is set by examining the profile of
liabilities to be matched. These liabilities include the provision for policy
guarantees to the extent that these might not be supported by asset shares. The
provision for guarantees may be matched by short positions in growth assets such
as equities and property. These positions would be effective matches for relatively
small movements in equity and property markets but would need adjustment in the
event of significant market movements. These positions are reviewed at least
once a year.
(c) Assets representing the estate of the Britannic With-Profits Fund are mostly
invested in fixed interest securities. However, if the estate is large in relation to
the potential risks facing the fund, then part of the estate may be invested in
growth investments in line with the asset mix for the asset shares.
9.9.12 Euro Fund
(a) The Euro Fund supports the Euro-denominated business in the fund. The primary
objective of the Euro Fund is to achieve the highest possible long-term Euro-
denominated rate of return, subject to the constraints described.
(b) The investment strategy for the Euro Fund is set with reference to the asset
strategy for the Growth Fund, adjusted to give a higher equity exposure and a
Euro bias, that is exposure is based more on European equities and bonds rather
than on United Kingdom equities and bonds. The higher equity exposure
recognises that there are additional charges levied on this business to allow a
higher exposure whilst maintaining policy guarantees.
Asset Shares
9.9.13 The guideline asset mix ranges for asset shares are:
Former
Britannic
Assurance
Sterling
business
Former
Britannic
Assurance
Euro
business
Former
Century
business
Fixed interest
and cash
45% to 60%
35% to 55%
80% to 90%
Equities
including
private equity
and alternative
assets
35% to 45%
45% to 65%
10% to 15%
Property
5% to 10%
0%
0% to 5%
From time to time the actual asset mix will be different from the guideline mix due
to market movements and active management decisions taken by the investment
managers or the Investment Committee. Fixed interest will be a mixture of
approved fixed interest securities, such as British Government gilts and other
government and supranational bonds, and other fixed interest securities, such as
corporate bonds, debentures, loan notes and emerging markets debt.
Possible Future Changes
9.9.14 If it is considered by the Board to be in the best interests of the policyholders,
further hypothecation of the assets in the fund may be introduced. For example
this may involve the hypothecation of different equity-backing ratios to different
PLL PPFM Page 159 January 2024
classes or groups of policies or the hypothecation of fixed interest assets by term
remaining within asset shares to reduce the volatility of policyholder returns near
maturity. Currently no such changes are planned.
PLL PPFM Page 160 January 2024
Principle
9.10
Business Risks
The Board aims to manage its business in a prudent manner, having regard to
both the risks and rewards of which it is aware. The Board will also have regard to
the availability of suitable capital and the amount required in light of the risks being
undertaken. Some business risks are outside the control of Phoenix Life Limited.
Risks determined by the Board to arise in connection with the insurance business
of the fund are attributed to the fund. Costs and benefits are attributed in the
same manner.
Unless specifically passed through to asset share calculations, the impact of
business risks is borne by the estate. Thus with-profits policyholders are exposed
through bonuses, following from sections 9.4 and 9.12, to the profits and losses of
the fund.
Practices
9.10.1 Infrastructure risks
(a) As the unit charges under the management services agreement are subject to
annual increases linked to movements in the Retail Prices Index (RPI), the fund is
exposed to the risk of higher than expected inflation.
Costs associated with day to day administrative problems are borne by PGMS.
(b) Pensions review and mortgage endowment review compensation costs are
allocated to the fund.
Ongoing pensions review administration costs are included in the PGMS unit
charges, while the mortgage endowment review administration costs are treated
as additional activity costs.
Explicit reserves have been established to cover the expected costs.
(c) Compensation and mis-selling costs have been and will continue to be allocated to
the fund. Any costs associated with large scale reviews triggered by regulator
guidance or directives would also be allocated to the fund.
(d) The PGMS charges are currently VAT exempt. Phoenix Life Limited retains the
risk of increase in charges due to changes in VAT rules, including any
retrospective changes.
9.10.2 As the fund is running off, there is a risk that the fixed costs will not be reduced in
line with the reducing policy volumes. This is partially mitigated by agreements for
the provision of administration services, but this risk has not been entirely
eliminated.
9.10.3 Management services are provided to the fund by PGMS. In the event of the
failure of PGMS, substantial costs would be incurred in securing an alternative
supplier, especially as PGMS and / or its sub-contractors own the infrastructure
assets. The financial viability of PGMS is regularly monitored. Should PGMS be
unable to meet any of its obligations to provide services then Phoenix Life Limited
would request that Phoenix Group, as owners of PGMS step in to restore the
position. Should Phoenix Group not do this, then Phoenix Life Limited would
attribute any losses to the shareholder fund or Non-Profit Fund, and the fund
would only be affected if the shareholder fund or Non-Profit Fund had insufficient
excess assets to bear the losses.
PLL PPFM Page 161 January 2024
9.10.4 The fund contains non-profit business and the profits or losses arising in respect of
this business fall to the fund.
9.10.5 There are no material reassurance treaties applicable to the fund which would
have a material impact in the event of the reassurer failing. There is a material
internal arrangement whereby the fund’s property linked liabilities in respect of
unitised business are transferred to the Non-Profit Fund. Consequently the fund is
materially at risk from any failure of the Non-Profit Fund. Future new reassurance
or similar arrangements (where the fund would be exposed to the failure of the
reassurer) will only be entered into to reduce the risk within the business and
where they are cost / benefit justified.
9.10.6 Mortality, morbidity and persistency experience may impact asset shares or
charges directly, but can also have an indirect effect, such as causing the level of
expense charges to vary, other than the service level charges from PGMS.
However, the structure of the PGMS service level charges in respect of unitised
with-profits business means that there is some lapse risk associated with the
overall level of these charges. Experience is regularly investigated. The potential
impact of variations in experience is also considered.
9.10.7 Although the fund is no longer actively seeking new business, there remains some
risk in respect of any new business arising and from the exercising of policy
options.
9.10.8 Investment management services are provided to the fund by the investment
managers. Failures at the investment managers might result in losses or costs to
the fund, either through losses in the investments being managed or in securing
an alternative supplier.
9.10.9 Other business risks which potentially impact the fund and the amounts payable
under with-profits policies are explicitly or implicitly covered under the other
principles and their associated practices, but are summarised here as follows:
• Solvency risks
• Investment risks
• Expense and charges risks
• Mortality and morbidity risks
• Persistency risks
• Taxation risks
• Guarantee risks
• Regulatory risks
• Bonus declaration risks
• Estate management and distribution risks.
9.10.10 Phoenix Group’s current strategy involves acquiring closed books of insurance
business. Any arrangements impacting on Phoenix Life Limited will be discussed
with our regulator and will be approved by the Board.
9.10.11 Risks undertaken by the fund are approved by the Board. They consider the scale
of such risks and the cost / benefit justification, having regard to the availability of
suitable capital and the amount required in light of the risks being undertaken.
They also aim to ensure that risks are undertaken which are, in their opinion, to
the advantage of with-profits policyholders.
The Board approves to what extent these risks pass to asset shares. The balance
of these risks feed through to the estate. The profits and losses from risks which
pass to asset shares affect the amounts payable under with-profits policies. The
profits and losses from risks that feed through to the estate only indirectly affect
the amounts payable under with-profits policies, as part of any distribution of or
charge to the estate as described in section 9.12.
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9.10.12 Business risks are regularly monitored and they form part of the key insurance risk
and operational risk management processes. The risk based capital requirements
are assessed with regard to the business risks being undertaken.
Business risks attributed to the fund are reviewed at least once a year by the With-
Profits Committee.
PLL PPFM Page 163 January 2024
Principle
9.11
Expenses and Charges
Policies will either be charged product charges or be charged amounts which
represent a fair share of the actual costs or a sub-set of the actual costs.
This approach will be adjusted where necessary in order to continue to treat
customers fairly.
Product charges may be either explicit or implicit.
Where actual costs are used and where costs are specific to a policy or policy
class, then taking into account the approximations referred to in section 9.4, such
costs will be taken into account in assessing the bonuses added to that policy or
class and in assessing the early termination value payable. Where costs are not
specific to a policy or class, they will be apportioned across the policies or classes
to which they are relevant in a reasonable manner.
Practices
9.11.1 Expenses and charges applied to asset shares are product charges for unitised
with-profits business and smoothed return business and actual costs for traditional
with-profits business as described in section 9.4.
9.11.2 An agreement exists with PGMS to supply administration services to the fund.
This is a perpetual agreement and is not expected to be renegotiated, but charges
may be amended in respect of major regulatory change. The agreement can
however be terminated early for material failure to meet service standards or other
non compliance with the agreement. We regularly monitor service standards.
Value added fees for work outside the service level agreements are changed
separately.
9.11.3 The costs apportioned to any particular group of policies will only change:
• if the formulaic bases of cost charging are altered to reflect a change in the
underlying cost of the activities supporting that group of policies; or
• if the apportioned costs are allocated on a basis which more fairly reflects the
costs of the group.
PLL PPFM Page 164 January 2024
Principle
9.12
Estate Management
The combined estate of the Britannic Industrial Branch Fund and the Britannic
With-Profits Fund (including the Buffer Reserve) should lie in a target range. If the
estate falls outside the target range then either the target payout ratio (in section
9.6) will be changed or asset shares (in section 9.4) will be adjusted, to maintain
the estate within the target range where possible.
In addition, subject to the above, the estate (excluding any element relating to the
Buffer Reserve) of the fund should be less than an upper target amount.
Practices
9.12.1 The former Britannic Assurance smoothed return business, that is, Irish Life, with-
profits annuity and Britannic With-Profits bond business, does not have any
interest in the estate arising in the fund and references in this section to potential
benefit enhancements from estate distribution do not apply to this business.
9.12.2 The estate is the estimated realistic value of the assets less the estimated realistic
value of the liabilities. It is calculated using realistic assumptions and generally
accepted methodologies on a basis determined by the Board.
9.12.3 To the extent that any profits or losses arising in the fund are not allocated to asset
shares in accordance with section 9.4, they will act to increase or reduce the
estate. To the extent that the amounts charged to asset shares are based on
estimates or assumptions, then any difference between these and the actual
amounts will act to increase or reduce the estate.
9.12.4 The estate in the fund will be used to:
(a) assist the fund in demonstrating it has access to sufficient capital resources
to meet its liabilities and treat customers fairly;
(b) provide a buffer in the fund should adverse experience mean that the
reserves held to cover the liabilities prove insufficient;
(c) meet any costs which are charged directly to the estate rather than to asset
shares;
(d) meet the costs of any changes which the Board believe are necessary to
improve fairness between policyholders and / or enhance the run-off of the
fund; and
(e) enhance the benefits payable to those with-profits policies which have an
interest in the estate but always aiming to retain sufficient estate to meet the
expected amounts required for (a), (b), (c) and (d). The amount considered
by the Board to be available from time to time for such enhancements will be
referred to as the distributable estate.
9.12.5 Any enhancements in benefits on account of the distributable estate referred to in
9.12.4(e) will generally be achieved by including a temporary uplift to the asset
share for the purpose of setting final bonus rates and surrender values. However
if the distributable estate is large then consideration would be given to making
additions to the asset shares from the estate.
9.12.6 The amount of the estate, the distributable estate, and the potential for any
enhancements to policyholder benefits will be subject to review at least once a
year.
9.12.7 In the event of a risk of the assets in the fund being insufficient to cover the
liabilities, charges may be made to asset shares to restore the estate to a target
minimum level. However such charges could not be applied to any part of the
PLL PPFM Page 165 January 2024
deficit caused by regulatory penalties (fines) or compensation payments relating to
events which occurred before 31 July 2009, see paragraph 5.2.18, except to the
extent that such charges are effectively reversing any estate previously added into
asset shares.
9.12.8 Providing that it is possible to do so whilst still treating policyholders fairly, it is
intended to manage the excess assets using solely the resources of the fund and
avoiding the need to draw on any external sources of capital.
In the event of the assets in the fund being insufficient to cover the liabilities, then
any past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit.
Arrangements exist for monies to be transferred from the Non-Profit Fund or
Shareholder Fund to the fund with the aim that the amount of assets in the fund
exceeds the liabilities by a small margin, should the charges described in 9.12.7
above be insufficient to restore the estate. For this purpose, the possibility of
distributing any surplus assets to policyholders will not be regarded as a liability.
Transfer of such amounts back to the Non-Profit Fund or the Shareholder Fund
will be made whenever emerging surplus in the fund permits.
The exercise of discretion in respect of with-profits policies will be managed with
the aim that the amounts transferred to the fund will be repaid to the extent that is
possible whilst still meeting the aims described in section 5. In determining
benefits under with-profits policies, the Board will disregard any liability to transfer
such amounts back to the Non-Profit Fund or Shareholder Fund to the extent that
this is necessary to treat customers fairly (that is in accordance with these
Principles and Practices).
9.12.9 The assets comprising the Buffer Reserve are currently split between the Britannic
With-Profits Fund and the Britannic Industrial Branch Fund, and the amount of the
Buffer Reserve is tracked by means of a notional segregation of the assets of that
fund.
9.12.10 The Buffer Reserve is available to support both the Britannic Industrial Branch
Fund and the Britannic With-Profits Fund in meeting their liabilities and covering
their capital requirements.
9.12.11 We will consider enhancements to benefits on account of any distributable estate
in the Britannic Industrial Branch Fund and the Britannic With-Profits Fund if the
combined assets of the funds, including the Buffer Reserve, exceed the combined
capital requirements of the funds. The amount of enhancement will be determined
separately for each fund. A further assessment will then be carried out using the
combined assets, liabilities and capital requirements of both funds, including the
Buffer Reserve, to establish if any amount from the Buffer Reserve can be
regarded as distributable estate.
9.12.12 If this calculation shows that part or all of the Buffer Reserve can be regarded as
distributable estate, then an appropriate share will be apportioned to each fund,
such apportionment currently being by reference to asset shares of policies which
have an interest in the estate. To the extent that the distributable estate arising
from the Buffer Reserve is used to enhance claim payments or asset shares then
assets will be transferred from the Buffer Reserve to each of these funds to meet
the costs of these enhancements.
PLL PPFM Page 166 January 2024
Principle
9.13
New Business
The fund is no longer actively seeking new business. Policy options under
existing contracts to effect new policies are honoured.
Practices
9.13.1 The fund is no longer actively seeking new business, but continues to write a small
amount of new business relating to policy options under existing contracts. This
includes recurring single premium payments for personal pension policies used to
contract out of the state second pension.
Currently there are no plans to reopen the fund to new business.
PLL PPFM Page 167 January 2024
Principle
9.14
Equity Between the Fund and Shareholders
Services may be provided by the shareholders to the fund but terms for such
services will be on commercial terms which are considered to be consistent with
the risks of providing those services, or considered to be consistent with terms
which would be available for such services on an arm’s length commercial basis.
Shareholders receive no more than one ninth of the cost of bonuses distributed to
policyholders, as laid down in the 2023 Scheme. Any change to the one ninth limit
would require the agreement of the Board and would be subject to approval by our
regulator and the High Court.
Practices
9.14.1 The following services are provided to the fund:
• product provision (annuity products by the Non-Profit Fund);
• reassurance of property linked benefits by the Non-Profit Fund; and
• administration services by PGMS.
9.14.2 Shareholders will only provide services to the fund on commercial terms, that is if
there is an adequate return for the risks involved in providing the services. The
profit margin for shareholders is acceptable to the fund if:
• the cost for the fund is consistent with the terms available from other providers;
or
• the profit margin is consistent with the risks borne and there are reasonably
foreseeable circumstances in which the shareholder could make a loss.
9.14.3 The allocation of profits between policyholders and shareholders is laid down in
the 2023 Scheme which states that not less than 90% of the surplus being
distributed from the fund is allocated to policyholders. Current practice is to
distribute exactly 90% of such surplus to policyholders, leaving the remaining 10%,
being one ninth of the cost of bonus, to be transferred to shareholders.
The division of profits between with-profits policyholders and shareholders does
not change as a result of changes in the underlying basis used to determine the
cost of bonus as described in paragraph 9.14.5 to 9.14.7. The transfer to
shareholders remains one ninth of the cost of bonus as determined in accordance
with the underlying basis.
In respect of the smoothed return with-profits bond business and the with-profits
annuity business, the shareholder one ninth share of the cost of bonus is restricted
if the accumulated cost of capital element contained within the annual
management charge less past transfers (including associated tax) is not sufficient
to fully fund the one ninth cost.
9.14.4 The shareholder transfer associated with the distribution of profits from the fund
can only take place following the published annual actuarial investigation of the
long-term business of Phoenix Life Limited carried out in accordance with the
requirements of the Financial Services and Markets Act 2000 (or equivalent
subsequent legislation). The Board is responsible for the distribution of profits and
no transfer to shareholders can take place without its authority.
PLL PPFM Page 168 January 2024
9.14.5 For all traditional with-profits business, the cost of bonus is the increase in the
liabilities using a risk free discount rate (net of tax as appropriate), as a result of
the bonus declaration together with cost of bonus paid on claims since the
previous actuarial investigation as follows:
(a) Life assurance traditional with-profits business
• The cost of annual bonus is the value of any annual bonus added, discounted
using the above basis.
• The cost of final bonus is the value of any final bonus paid on death or maturity
or where applicable terminal or serious illness. The cost of any interim bonus
paid on such claims is the value of the interim bonus added, discounted using
the above basis.
• The cost of interim bonus or final bonus on a policy becoming paid up for a
reduced sum assured is the value of any bonus added, discounted using the
above basis.
• The cost of interim bonus on surrender is the value of that bonus discounted
using the above basis and the cost of final bonus is the value of the final bonus
element of the surrender value.
• If the policy has not paid premiums up to the policy anniversary following the
previous valuation date, then where applicable, the cost of annual bonus is
reduced to reflect that only a proportion of that year’s annual bonus is included
in the claim value.
(b) Pensions traditional with-profits business (including Channel Islands and Isle of
Man business)
• The cost of annual bonus is the capital value, at the selected retirement age
using the above basis, of the annual bonus added discounted using the above
basis.
• The cost of any interim bonus paid on retirements is the capital value, at the
retirement date using the above basis.
• On retirement, the cost of final bonus is the excess of the capital value of the
annuity, annual bonus, interim bonus and final bonus on the commencement
basis, less the capital value of the annuity, annual bonus and interim bonus on
the above basis, subject to a minimum of nil.
• The cost of any interim bonus or final bonus on a policy becoming paid up for a
reduced annuity is the capital value, at the selected retirement age using the
above basis, of the interim bonus or final bonus added, discounted using the
above basis.
• The cost of any interim bonus on transfer is the capital value, at the selected
retirement age using the above basis, of any interim bonus added, discounted
using the above basis and the cost of any final bonus is the capital value, at the
selected retirement age using the transfer basis, of the final bonus added.
• If the policy has not paid premiums up to the policy anniversary following the
valuation date, then where applicable, the cost of annual bonus is reduced to
reflect that only a proportion of that year’s annual bonus is included in the claim
value.
PLL PPFM Page 169 January 2024
9.14.6 For unitised with-profits business, the cost of bonus is the increase in the liabilities
as a result of the bonus declaration together with cost of bonus paid on claims
since the previous actuarial investigation as follows:
• The cost of annual bonus is the value of the bonus units added.
• The cost of interim bonus paid on claims is the value of the bonus units added.
• The cost of final bonus paid on claims is the value of the final bonus paid. The
final bonus is the amount after the application of any market value reduction,
subject to a minimum of nil.
• The cost of bonus is reduced if the application of a market value reduction
reduces the claim value of the bonus and interim bonus units.
9.14.7 For smoothed return business, the cost of bonus is the increase in the liabilities as
a result of the bonus declaration together with cost of bonus paid on claims since
the previous actuarial investigation as follows:
(a) Smoothed return with-profits bonds (this includes Britannic With-Profits Bond and
Irish Life business).
• The cost of annual bonus (where applicable) is the value of the annual bonus
added to increase the guaranteed fund.
• Where there is no annual bonus, the cost of bonus arising from an increase in
the value of the guaranteed benefits, is any increase in the guaranteed fund,
relative to the higher of the guaranteed fund at the previous valuation date and
the original smoothed value.
• For claims, the cost of bonus is the excess of the amount paid less the higher
of the original smoothed value and the guaranteed fund at the time of claim,
subject to a minimum of nil.
• The cost of bonus is reduced if the application of a market value reduction
reduces the claim value below the guaranteed fund, but only to the extent that
previous increases in the value of guaranteed benefits have generated a cost
of bonus in the past.
(b) With-profits annuity
• The cost of bonus in respect of the declared investment return depends on
whether it is added in the form which is only paid for the next policy year or in a
form which increases the guaranteed benefits. In the former case it is the
value of the additional payment for the next policy year on the published
valuation basis, but using a risk free discount rate, whilst in the latter case it is
the capital value of the increase in the additional guaranteed benefits on the
published valuation basis, but using a risk free discount rate.
9.14.8 Where distributions to policyholders are made in anticipation of a surplus arising,
these only contribute to the cost of bonus at the next actuarial investigation and
only generate an allocation to shareholders at that time.
9.14.9 Any taxation arising from the distribution of profits from the fund to the
shareholders is borne by the fund, except in relation to former Century former
Prosperity business.
PLL PPFM Page 170 January 2024
10 Principles and Practices – Britannic Industrial Branch Fund
The Principles and Practices given in sections 10.4 to 10.14 together with the Guiding
Principles and Practices form the Principles and Practices of Financial Management for the
Britannic Industrial Branch Fund. Sections 10.1 to 10.3 give background information specific
to the Britannic Industrial Branch Fund. Subsequently in this section the use of the term ‘the
fund’ generally means the Britannic Industrial Branch Fund.
10.1 Fund History
The Britannic Industrial Branch Fund comprises the business that was transferred
to Phoenix Life Limited under the 2006 Scheme from the Industrial Branch Fund of
Britannic Assurance (BA).
Britannic Assurance’s origins dated back to 1866 when it was founded in
Birmingham as the British Workman’s Mutual Assurance Company Limited. Its
business spread rapidly throughout Lancashire, Yorkshire and the rest of the
United Kingdom. In 1905 it began to trade as Britannic Assurance.
Britannic Assurance wrote both general insurance and long-term insurance
business. The latter included life assurance business, general annuity business,
pensions business and permanent health insurance business. The majority of the
business was transacted in the United Kingdom, however small amounts of
business were transacted in the Channel Islands, Isle of Man and Eire.
In 1997, following detailed investigations into the historical development and
financial strength of Britannic Assurance’s long-term fund, the structure of the
long-term fund was changed to clarify the future interests of policyholders and
shareholders. The restructure was reviewed by an independent actuary and the
Department of Trade and Industry, the then regulator of insurance business in the
United Kingdom.
Before the restructure the long-term fund of Britannic Assurance comprised an
Industrial Branch Fund and an Ordinary Branch Fund, which both contained with-
profits and non-profit business. Under the restructure:
• Two non-profit funds, the Ordinary Branch Life Non Profit Fund and the
Ordinary Branch Pensions Non Profit Fund, were established. Some of the
Ordinary Branch non-profit business was transferred into these new funds.
Shareholders are entitled to all distributable surplus arising in these funds.
• The Ordinary Branch With Profits Fund was established. All of the Ordinary
Branch with-profits business was allocated to this fund, together with the
Ordinary Branch non-profit business that was not transferred to either the
Ordinary Branch Life Non Profit Fund or the Ordinary Branch Pensions Non
Profit Fund. In respect of the Ordinary Branch With Profits Fund, not less than
90% of the surplus distributed each year was allocated to with-profits
policyholders, with the balance available for transfer to the Britannic Assurance
Shareholder Fund.
• In respect of the Industrial Branch Fund, not less than 90% of the surplus
distributed each year was allocated to with-profits policyholders, with the
balance available for transfer to the Britannic Assurance Shareholder Fund.
PLL PPFM Page 171 January 2024
In addition:
• Certain assets were transferred to the Ordinary Branch Life Non Profit Fund
and the Ordinary Branch Pensions Non Profit Fund. These assets were
referred to as the Shareholders’ Retained Capital, which was not available for
distribution to policyholders and could, subject to certain restrictions, be
distributed to shareholders. It was available to support the solvency of the
long-term fund of Britannic Assurance.
• A Buffer Reserve was established, being an amount of assets attributable to
the Industrial Branch Fund that could be used to support the liabilities arising in
the Ordinary Branch With Profits Fund as well.
• A special bonus was declared.
In March 2003 Britannic Assurance withdrew from actively writing new business.
All business transferred from Britannic Assurance is administered by PGMS.
Under the 2006 Scheme the Buffer Reserve referred above became the Buffer
Reserve in Phoenix Life Limited referred to in paragraph 3.1.5 and section 10.12.
10.2 Types of Business
The Britannic Industrial Branch Fund comprises:
• Industrial Assurance Business – Business sold under the Industrial Assurances
Act 1923 before 1 December 2001.
• Home Service Business – Business sold since 1 December 2001 where
premiums were initially received in cash by collectors at intervals more frequent
than once every two months. This business would have previously been sold
under the Industrial Assurances Act 1923.
All of this business is now currently paid by means other than the home collection
of cash.
This is traditional life assurance business.
The rights of former British Legal Closed Fund policyholders are the same as
those for former Britannic Assurance policyholders and the bonus rates applying
are the same as those for former Britannic Assurance policies which entered in
1926.
For policies issued from April 1979 to March 1984 that are eligible for Life
Assurance Premium Relief, the sum assured reflected the rate of relief applicable
during that time. Where the premium paid by the policyholder has not been
increased to reflect the reductions in the rate of relief since the policy started, a
shortfall deduction is made at the time of claim to reflect this.
For policies issued before April 1979 that are eligible for Life Assurance Premium
Relief, the increased sum assured benefit is increased each year to reflect the
relief received for that year. This increased sum assured benefit is not eligible for
bonuses, but the rate of annual bonus added to the basic sum assured includes an
allowance to reflect this.
For policies issued before decimalisation in 1971 where the premium did not
convert exactly, a decimalisation adjustment is made at the time of claim to reflect
this.
PLL PPFM Page 172 January 2024
10.3 Capital Support to the Fund
The capital policy is described in section 3.2.
In certain circumstances the shareholder will loan money to this fund. The
practices relating to receipt of support are detailed in sections 3.3 and 5.2.
PLL PPFM Page 173 January 2024
Principle
10.4
Amounts Payable Under a With-Profits Policy
The aim of the methods employed in determining the amounts payable under a with-
profits policy is the fair treatment of all with-profits policyholders consistent with
guiding principles.
The main guide used for determining the amounts payable under a with-profits
policy is asset share calculations and the amounts payable will allow for a policy’s
fair share of any surplus distributed, which may be in the form of annual or final
bonuses.
The degree of approximation used in the application of these methods aims to be
consistent with the overall fair treatment of all with-profits policyholders.
Asset share methodology and processes will be regularly reviewed by the Board
and may change. This may include changes to the historical aspects of the
calculations as a result of a variety of factors, including changes in regulations,
improvements in the degree of approximations, maintaining equity between classes
and groups of policyholders and significant changes in the financial condition of
Phoenix Life Limited.
Policyholders have no entitlement to receive the asset shares, if any, used to
determine the bonuses for their policies.
Different bonuses are declared for different classes of with-profits business,
reflecting tax, type of with-profits business and product features. New bonus
classes would be required if a new type of product were developed. An existing
class would normally only be split in exceptional circumstances. Within classes,
bonuses may be further differentiated by series.
Bonus policy can be affected by a variety of factors including the financial and
solvency position of Phoenix Life Limited, the financial strength of the fund, the
expected cost of guarantees, actual and expected investment returns and expenses,
the likelihood of changes in the level of provisions and the constraints which
increases in guaranteed benefits may place on the fund, particularly in relation to
investment strategy. These factors, together with the aim to retain flexibility in the
operation of the fund, constrain annual and final bonus declarations and the
smoothing policy. These constraints also apply in changing economic conditions.
Bonuses can only be declared if there is surplus available for distribution.
Practices
Asset Share Methodology
10.4.1 The basic method for asset shares calculations for traditional with-profits business
uses actual investment returns net of tax and the actual underlying experience.
Asset shares are not smoothed. In particular the investment returns and
experience elements contributing to asset shares are not smoothed, other than
that inherent in the processes used in the derivation of the assumptions, or in
respect of initial expenses as described in paragraph 10.4.2(d).
PLL PPFM Page 174 January 2024
10.4.2 The following table describes the elements credited or charged to asset shares for
traditional with-profits business.
Element
Description of Allowance
(a)
Premiums
Premiums paid under the policy – note (a)
(b)
Investment return
Growth Fund return – note (b)
(c)
Investment
expenses
Actual allocated – note (c)
(d)
Initial expenses
Actual allocated – note (d)
(e)
Renewal expenses
Actual allocated – note (e)
(f)
Other expenses
Not charged – note (f)
(g)
Tax on investment
return
Actual allocated – note (g)
(h)
Tax relief on expenses
Actual allocated – note (h)
(i)
Mortality & morbidity
costs
Based on underlying experience – note (i)
(j)
Early terminations
Profits and losses based on underlying surrender and
lapse experience are credited – note (j)
(k)
Paid-up policies
Approximate effect allowed for by increasing the rate of
early terminations in (j) above
(l)
Partial and regular
withdrawals
Not applicable
(m)
Surrenders at
protected dates
Not applicable
(n)
Annuity payments
Not applicable
(o)
Charges for the cost of
guarantees
Not charged – note (o)
(p)
Charges for the cost of
capital
Not charged
(q)
Distributions to
shareholders
Actual incurred – note (q)
(r)
Tax on distributions to
shareholders
Not charged
(s)
Profit and losses from
other business
No profits or losses are credited
(t)
Estate distribution or
charge
Distributions from or charges to the estate as
determined – note (t)
(u)
Exceptional items
Not applicable
Notes
(a) Premiums
The premiums allow for the effect of Life Assurance Premium Relief and the
benefits correspondingly so, including any increased sum assured and shortfall
deductions.
The premiums allow for the effects of decimalisation and the benefits
correspondingly allow for decimalisation adjustments.
PLL PPFM Page 175 January 2024
(b) Investment return
The investment return element allocated to asset shares is based on the Growth
Fund as described in section 10.9.
The investment returns are expressed as a percentage return to be applied.
These investment returns are before any deduction for investment expenses which
are allowed for separately.
(c) Investment expenses
Actual investment expenses are charged, based on those allocated in respect of
the Growth Fund in accordance with sections 5.2 and 10.11, subject to a small
reduction.
The investment expenses are expressed as a percentage charge to be applied to
the assets.
(d) Initial expenses
No new business is being written in the fund other than to honour policy options.
Where new policies are written for this reason, initial expenses are generally
based on previous initial expenses inflated at RPI+2% per annum and including
allowance for commissions.
In 2007, the Board reviewed the costs allocated to asset shares. The Board
concluded, having received the advice of the With-Profits Committee, that in order
to protect policyholders from the effects of disproportionately high distribution
costs, initial expenses charged to asset shares from 1997 should be restricted to
be less than the costs actually incurred in those years. The restriction was
assessed to reduce the impact of expenses to be more consistent with that
applying for earlier years of entry.
(e) Renewal expenses
Renewal expenses are based on PGMS charges and an uplift to cover direct
costs. These are all per policy expenses, allocated in accordance with sections
5.2 and 10.11.
(f) Other expenses
Significant future project, additional added activity and other one-off costs will only
be charged to asset shares following approval by the Board.
Any other adjustments to the expenses charged to the fund are not charged to
asset shares.
(g) Tax on investment return
The tax on investment income allows for the different treatment of franked and
unfranked income and also unrecoverable foreign tax. The tax on investment
gains, whether realised or unrealised, includes an element of discounting
representing the deferral of the actual payment. The element of discounting is
regularly reviewed and takes into account the expected turnover rate of the
investments and the level of unrealised gains. The rates of tax (before
discounting) are based on those underlying the tax allocated to the fund in
accordance with section 5.2.
PLL PPFM Page 176 January 2024
(h) Tax relief on expenses
Tax relief due on the actual expenses charged is allowed for. Where the tax relief
in respect of acquisition expenses is spread, this is allowed for. The rates of tax
relief are based on those underlying the tax allocated to the fund in accordance
with section 5.2.
(i) Mortality and morbidity costs
The charge based on the underlying experience is approximated by applying a
percentage of a standard published mortality table. The percentage applied varies
by calendar year and is based on the results of mortality investigations for the fund
as carried out from time to time. There are no morbidity costs associated with this
business.
(j) Early terminations
The profits and losses arising from surrenders currently accumulate in the estate.
This may be allowed for via adjustments to the investment returns.
(o) Charges for the cost of guarantees
The cost of guarantees is currently not charged to asset shares and the cost has
been borne by the estate. Should the cost increase leading to an erosion of the
estate, or should the estate no longer be able to bear the cost, a charge may be
introduced to asset shares in future. See section 10.12.
(q) Distributions to shareholders
The cost of distributions to shareholders resulting from the cost of bonus allocated
to policies is charged to asset shares. The cost of bonus is as described
subsequently in section 10.14, using the basis applicable at the time.
(t) Estate distribution or charge
Asset shares may be increased by distributions from the estate or reduced by
charges to the estate. However, these estate distributions are not guaranteed. In
the event of the assets in the fund being insufficient to cover the liabilities, then
any past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit. See section 10.12.
Asset shares are enhanced to reflect the cost of the 1997 special bonus.
However, the enhancement is approximate.
10.4.3 Asset shares are calculated for representative specimen policies when setting
bonus rates and setting surrender value bases for non-protected exits. Specimen
policies are chosen to represent the business and include a range of policy terms
and years of entry. The primary emphasis in selecting specimen policies is the
size of premium or sum assured. There is however a degree of averaging,
particularly for those terms where there are relatively few policies.
10.4.4 Asset share models contain some approximations, but these approximations do
not prejudice the overall fair treatment of with-profits policyholders. In particular
the complications due to Life Assurance Premium Relief and decimalisation are
subject to approximate methods. Whilst only minor approximations are employed
in asset share calculations, no investigations are carried out on the level of
approximation built into the resulting asset shares.
PLL PPFM Page 177 January 2024
For whole life policies, bonuses and surrender value bases may be set with
reference to those applicable for endowments, however we do currently set these
separately.
10.4.5 Items not charged to asset shares, the effects of the approximations in the
experience assumptions and the effects of other approximations in the methods
employed feed through to the estate as described in section 10.12.
10.4.6 Asset share practices are documented.
Asset share and bonus policies are documented at a high level in various Board
(and previously Britannic Assurance Board) reports and reports on asset share
investigations that have been undertaken from time to time.
Detailed specifications relating to the asset share calculations and the bonus
calculations only exist to a varying degree, but the coding within the models used
in the processes are viewable and thus document the calculations.
Asset share assumptions are documented and this tends to include references to
their source of derivation.
For each bonus review appropriate documentation is produced and provides an
audit trail of the process, including sources of data, source and derivation of
assumptions, backing calculations, notes and correspondence. This audit trail
normally includes retaining electronic copies of the systems and calculations used
for the review.
10.4.7 Asset share models, processes and documentation are subject to a continual
process of development, improvement and refinement. Significant effects are
reported to and considered by the Board.
10.4.8 Asset share practices are not guaranteed and may be changed in future.
Asset share methodology and processes will be regularly reviewed by the Board
and may change. This may include changes to the historical aspects of the
calculations as a result of a variety of factors, including changes in regulations,
improvements in the degree of approximations, maintaining equity between
classes and groups of policyholders and significant changes in the financial
condition of Phoenix Life Limited.
Bonus Declarations
10.4.9 Bonus declarations are approved by the Board or committee of the Board or
delegated to senior management and then retrospectively approved by the Board.
10.4.10 A single annual bonus scale covers all the with-profits business.
Separate final bonus scales are declared for endowment policies, whole of life
premium paying policies and whole of life fully paid policies.
10.4.11 Bonuses are reviewed regularly at least once a year.
Annual bonuses are reviewed annually and are declared in arrears in March / April
of the following year to which the bonus relates.
Final bonuses, which are declared in advance, are reviewed at least twice a year,
normally from 1 January and 1 July.
10.4.12 The timing of final bonus declarations may be varied.
PLL PPFM Page 178 January 2024
10.4.13 Final bonuses are expected to, but are not guaranteed to, apply until the next
planned review date. These bonuses may be reviewed at any time between
normal planned review dates. Additional reviews would normally only be in
response to exceptional investment market movements.
10.4.14 Final bonus reviews also consider the amount of final bonus paid on non-protected
exits (surrenders).
10.4.15 Bonuses are declared out of surplus arising in the year or in anticipation of surplus
arising. If there is no surplus or no expectation of surplus arising, no bonuses can
be declared.
PLL PPFM Page 179 January 2024
Principle
10.5
Annual Bonus Rates
The aim is to set annual bonuses at a prudent level, balancing the benefit to
policyholders of increased guarantees, the aim for an element of final bonus, the
flexibility of the operation of the fund and its ability to ensure the guarantees can
be met in future. Annual bonuses may increase or decrease from declaration to
declaration and may also be nil. Annual bonuses can only be declared if there is
sufficient surplus available.
Practices
10.5.1 The Board makes decisions on annual bonus declarations taking into account a
number of factors. These factors are set out in the following paragraphs.
10.5.2 For each class of business, the level of annual bonus is set so as to maintain a
buffer for final bonus. The future claim payouts are estimated using realistic
assumptions and the annual bonuses are set at such a level that if experience
turns out to be in line with those assumptions, the overall amount of the payout
paid in the form of final bonus will be in line with a target proportion. Under current
investment conditions, the overall target is that 25% of the overall value of
payouts, calculated before any future augmentation provided by a release of the
estate, will be in the form of final bonus. Given the aggregate nature of this target,
for an individual policy, this final bonus buffer may be more or less than 25%. This
overall target is itself subject to review and may be changed. If experience does
not turn out to be in line with the assumptions then the 25% target might not be
met.
Annual bonus rates will be adjusted to keep the overall level of projected final
bonus broadly in line with the target. If necessary to remain on target, annual
bonus rates will be reduced to nil, or close to nil. However, some small annual
bonuses may be declared even if the final bonus buffer is below target.
There is no maximum change in the annual bonus rate; however, in the normal
course of events the declared annual bonus rates would not be expected to
change by more than 2% from one declaration to the next.
10.5.3 Where the financial position of the fund is weak, the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus buffer being above the 25% target.
10.5.4 The asset share comparisons are performed for representative specimen policies
grouped according to the level at which different bonus rates are declared.
10.5.5 Where annual bonuses are declared in arrears, interim bonus rates are set with
reference to the most recent annual bonuses declared and any future anticipated
direction of these rates and may be higher or lower than the latest annual bonus
rates declared. The annual bonus rate may, however, eventually be set at a level
that differs from the interim rate.
10.5.6 Annual bonus rates are rounded and expressed as a percentage of the sum
assured and the rates depend on year of entry.
PLL PPFM Page 180 January 2024
Principle
10.6
Final Bonus Rates
The aim is to set final bonus rates so that specimen policy payouts achieve a
target payout ratio. These final bonus rates are then adjusted for smoothing as
described in section 10.7. Final bonuses for a policy may increase or decrease
from declaration to declaration and may also be nil. Final bonuses will be
reviewed regularly, but can be reviewed at any time.
Practices
10.6.1 The current long-term target payout ratio for maturing policies is 100% of asset
share.
10.6.2 The actual payout ratio for maturing policies at any one time will not necessarily be
equal to the target payout ratio due to:
• the level of accumulated guarantees; or
• the effects of smoothing.
10.6.3 Final bonuses are determined by comparing projected asset shares with the
corresponding guaranteed benefits together with any interim bonus, for maturities
in the period under consideration. The projected asset shares allow for the actual
experience to date and expected future experience, including expected future
investment return and shareholder transfer in respect of the final bonus being
determined. The final bonuses actually declared are based on these figures after
adjusting for smoothing as described in section 10.7.
10.6.4 The projections supporting final bonus investigations are based on actuarial
experience up to five months in advance of the start date of the declaration. The
projections generally consider policies maturing during the calendar year in which
the final bonus rates apply.
10.6.5 Final bonus declarations are also informed by comparisons of projected asset
shares and corresponding projected benefits for maturities in subsequent final
bonus periods and over the next couple of years.
10.6.6 The asset share comparisons are performed for representative specimen policies,
grouped according to the level at which different bonus rates are declared. The
primary focus is on performing the calculations for specimen policies at the terms
which contain a significant volume of policies. For other terms approximations
may be used.
10.6.7 Final bonus rates are rounded and expressed as a percentage of the sum assured
and the rates depend on duration, and for whole of life policies on premium paying
term. Rounding may mean that resulting payout ratios deviate slightly from the
target.
10.6.8 Final bonus scales are determined by reference to maturing representative
specimen policies. The final bonus payable on a death claim is calculated as
follows:
• For an endowment assurance, it is the final bonus rate for a policy maturing at
the same duration completed, multiplied by the proportion of the original term
completed, applied to the sum assured.
• For a whole life assurance, it is the final bonus rate based on policy
commencement year and total number of premium contracted to be paid, but
applied to the lower of the office premium multiplied by the completed duration
and the sum assured.
PLL PPFM Page 181 January 2024
Some endowment assurances have an additional sum assured payable on death
but this not eligible for bonuses.
10.6.9 Final bonuses are declared in advance and are made in anticipation of a surplus
arising. Final bonuses can only be declared if there is an expectation of such
surplus arising.
10.6.10 Final bonus reviews also consider the amount of final bonus payable on
surrenders, based on section 10.8.
10.6.11 For all classes of policy final bonus rates may be changed at any time. At times
when the value of the excess assets in the fund is not changing rapidly, this is
likely to mean that changes, if any, are made one or two times per year, normally
from 1 January and 1 July. However, a sudden change in the value of those
excess assets (such as because of a significant change in the value of equity
share markets) may cause final bonus rates to be changed on other occasions.
Changes to surrender and transfer values may be less frequent than changes to
final bonus rates for maturities.
10.6.12 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on maturities may deviate from the target payout ratios during the
period between reviews. Normally an investment return variation of up to 10%
compared to that assumed when the final bonuses were last reviewed, would be
allowed before there would be an additional final bonus review. However, where
the maturity payout ratios at the latest final bonus review were near the top or
bottom of the range described in paragraph 10.7.2, a lower level of investment
return variance may lead to an additional final bonus review.
PLL PPFM Page 182 January 2024
Principle
10.7
Smoothing
The aim is to smooth with-profits policy payouts at protected dates to manage the
volatility of with-profits policy payouts. The effect of smoothing may have a
positive or negative effect on with-profits policy payouts.
Smoothing leads to profits and losses which are anticipated to offset each other
over time. In the short term, if these profits or losses were to become excessive,
then the smoothing policy would be reviewed.
Non-protected exit values will have a degree of smoothing.
Practices
10.7.1 Final and interim bonuses are declared in advance and are expected to, but are
not guaranteed to, apply until the next planned review date. Additional reviews
would normally only occur in response to exceptional adverse investment market
movements. Thus with-profits policyholders leaving at protected dates are not
impacted by day to day investment fluctuations. This forms part of the smoothing
process.
10.7.2 Final bonus reviews take into account the current maturity payout ratios and the
long-term target payout ratio per paragraph 10.6.1. The aim is to ultimately bring
maturity payout ratios for representative specimen policies in line with the long-
term target payout ratio in a smoothed manner based on the guidelines as
described in paragraphs 10.7.3. The target range for payout ratios is to be
between 80% and 120% of asset share before the effect of smoothing.
10.7.3 For traditional policies where final bonus changes are normally made twice a year,
smoothing is applied to maturity and retirement values by limiting the change in
final bonus rates. Normally the change in final bonus rates for a specimen policy
will be limited so that the increase or reduction in total maturity or retirement
payout compared to a position where bonus rates are not changed is not more
than 7.5% at each six monthly review.
For traditional policies surrender value bases are normally reviewed twice a year,
smoothing is applied by limiting the change in immediate surrender value for
specimen policies. Normally the surrender value for specimen model policies will
not change by more than 10% at each six monthly review. Surrender values may
change in between reviews because in many cases the surrender values are
calculated using formulae that depend upon factors such as term remaining which
change over time.
However, if it is necessary to enable the fund to continue to meet the objectives
set out in the guiding principles in section 5 sometimes larger changes are made
in final bonus rates and surrender values.
If there has been a significant change in premium rates then larger changes than
those described above may be made so that final bonus rates and surrender
bases remain consistent with the premium rates on which the business was
generally written. Where premium rates were revised with the intention of
changing payouts, then smoothing will not be applied, so that the change in
payouts intended by the premium rate change does occur.
Calculations may also be carried out for specimen policies which are due to reach
their maturity date in the following few years. If these calculations show a trend in
payouts which could not be accommodated by following the normal limits on
PLL PPFM Page 183 January 2024
change described above, the final bonus rate or surrender value being determined
may be adjusted so that the trend may more easily be accommodated.
For both maturity and retirement values, and surrender values, any change to
payouts that results from changes in the distributable estate, if any, will be
additional to the limits described and will not be subject to smoothing. Also where
there have been significant changes in methodologies and practices, the impact
may not be managed within the normal smoothing rules.
10.7.4 The smoothing of maturity values from declaration to declaration primarily focuses
on specimen maturities at terms which contain a significant volume of policies.
The effect on the aggregate position for maturities, incorporating all relevant
business for the class of with-profits business and grouped according to the level
at which different bonus rates are declared is also considered. As final bonus
rates are rounded, this may result in slight deviations from the target position.
10.7.5 In adverse conditions, where the level of guaranteed benefits exceeds the target
proportion of the relevant asset shares, no final bonuses may be warranted. In
this situation, the guaranteed benefits provide a floor for maturity payouts. This
provides further protection against day to day investment fluctuations and may
further limit movements in maturity payouts for similar policies, as a result of bonus
declarations.
10.7.6 Smoothing leads to profits and losses which are anticipated to offset each other
over time. Costs may arise under paragraph 10.7.5, but such costs are the cost of
guarantees and not the cost of smoothing. The smoothing policy is not specifically
constrained by a limit on the short-term profits and losses of smoothing, but should
these become excessive, the smoothing policy may be revised. The profits and
losses from smoothing and costs from guarantees feed through to the estate and
are effectively dealt with by section 10.12.
10.7.7 As the final bonus payable on death claims is based on the final bonus scale for
maturities, there is a similar element of smoothing operating on payouts for death
claims.
Some endowment assurances have an additional sum assured payable on death
but this not eligible for bonuses and is not smoothed.
PLL PPFM Page 184 January 2024
Principle
10.8
Surrender Values
The aim in setting non-protected exit values will be to minimise any adverse effect
on the interests of continuing policyholders and subject to this, the aim is to set
non-protected exit values so that payouts for specimen policies achieve a target
payout ratio.
Practices
10.8.1 Non-protected exits refer to surrenders and policies becoming paid-up.
Surrender values are targeted in the long-term at 100% of asset share (as
described below). The target range for surrenders is 80% of asset share to 120%
of asset share before the effect of smoothing.
10.8.2 The basis for the surrender value formulae is determined by targeting the target
proportion of asset share for representative specimen policies.
10.8.3 Surrender values are calculated by formulae based on discounting the policy
benefits. The formulae include an allowance for final bonus.
10.8.4 The approach of discounting policy benefits ensures that surrender values take
some account of the value of the policy guarantees and produce a reasonable
progression of surrender values into the prospective maturity value.
10.8.5 In determining the basis used to discount the policy benefits, the Board will ensure
that in aggregate payments to surrendering policyholders do not materially
adversely affect the interests of continuing policyholders.
10.8.6 For whole life policies, the basis for surrender values is based on a similar
approach to that used for endowments.
10.8.7 Surrender profits or losses may be recycled into the asset shares of continuing
policies although this would be done in an approximate way, as described in
section 10.4.
10.8.8 Paid-up policy benefits are determined such that the value of the paid-up policy
benefits target similar payout ratios to surrenders. Paid-up policies cease to
participate in profits.
10.8.9 Some policies have surrender and paid-up policy calculations specified in the
policy conditions. Additionally the regulations specify certain surrender value and
paid-up policy value calculations. These represent a minimum basis that is
applied.
10.8.10 Surrender value and paid-up policy value bases will normally be reviewed once a
year. However more frequent reviews might take place, in particular in response
to significant investment market movements. Surrender values and paid-up policy
values may also change more regularly following a review of final bonus rates.
10.8.11 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on surrender values may deviate from the target payout ratios during
the period between reviews.
PLL PPFM Page 185 January 2024
Principle
10.9
Investment Strategy
The fund will take investment risk only to the extent that there is a high degree of
certainty that the fund is sufficiently strong to absorb adverse experience. Within
this constraint the primary objective of the strategy will be to achieve the best
long-term investment return. The size and timing of guaranteed benefits and other
liabilities determine the investment freedom and risk tolerance.
Investments will be spread over a number of asset classes and within these asset
classes the actual holdings will normally be diversified and of an appropriate
quality. Derivatives are normally only used for efficient portfolio management or to
reduce investment risk.
The fund may hold assets which are not normally traded, but will not normally
seek to increase its exposure to such type of assets.
The investment strategy will be reviewed regularly to ensure it remains
appropriate.
Practices
10.9.1 The fund maintains two pools of investment assets. These are called the Growth
Fund and the Matched Fund.
These investments are managed by the investment managers in accordance with
an investment mandate specified by the Board.
The Growth Fund backs the with-profits business asset shares. The Matched
Fund backs the non asset share liabilities of the fund. This is described in more
detail subsequently.
10.9.2 Currently the same mix of assets is held for all with-profits policies in the fund and
the same investment performance is used when working out asset shares. This
may change in the future if it would be fairer to hold different mixes of assets for
different groups of with-profits policyholders.
10.9.3 The investment assets are spread over a number of different asset classes, which
may include:
• Property
• Approved fixed interest securities, such as British Government gilts and other
government and supranational bonds
• Other fixed interest securities, such as corporate bonds, debentures, loan
notes and emerging market debt
• Approved variable interest securities, such as British Government index-linked
gilts
• Other variable interest securities, such as variable rate corporate bonds
• United Kingdom equity shares
• Overseas equity shares, such as European, United States of America,
Japanese and Asia Pacific
• Loans secured by mortgage
• Cash, such as short term deposits and money market funds
• Derivatives
• Private equity
• Alternative assets such as hedge funds.
The investments may be direct or via collective investment schemes such as unit
trusts.
PLL PPFM Page 186 January 2024
With the exception of property, private equity, loans secured by mortgages and
some alternative assets, investments are predominately listed and traded on a
recognised stock exchange.
The actual investments held are widely diversified within these asset classes.
The investment guidelines cover:
• Asset class allocation ranges
• Benchmarks
• Credit ratings and durations of fixed interest securities. Specifically other fixed
interest securities should be at least investment grade and an overall average
credit rating is specified. Unrated or non-investment grade other fixed interest
securities can only be held with the approval of the Board.
• Exposures, such as minimum and maximum number of holdings and maximum
exposure to any one counterparty
• Currency matching and localisation
• Stock lending
• The liquidity position.
• Exposure to sectors or companies that do not align with our approach to
responsible investment, for example Tobacco.
The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
A consideration when setting the investment guidelines is to minimise any
reduction in the value of the investment assets for solvency purposes.
The investment strategy and guidelines differ between the two pools of investment
assets and reflect the different liabilities they are backing.
10.9.4 The investment strategy is regularly reviewed taking account of a variety of
considerations, including our approach to responsible investment. In particular,
reports from the investment managers, the Chief Actuary, the With-Profits Actuary
and the With-Profits Committee, and recommendations for change are considered
and, if appropriate, implemented.
10.9.5 The investment strategy is influenced by the level of solvency of Phoenix Life
Limited and the need to be able to ensure and demonstrate adequate solvency at
all times.
10.9.6 The introduction of any new asset or liability instruments into the investment
strategy will only occur following approval by the Board. Such instruments are
only likely to be permitted for efficient portfolio management or to reduce
investment risk.
10.9.7 The fund may include assets that are not normally traded, although currently there
are none.
Any future assets which would not normally be traded will only be acquired
following a review by the With-Profits Committee and approval by the Board. Any
acquisition of such assets would be made after considering the run-off position of
the fund, the management of the estate and the ultimate need at some future time
to realise such assets.
PLL PPFM Page 187 January 2024
10.9.8 The Board reviews the investment strategy at least once a year. However more
frequent reviews might take place, in particular in response to adverse market
movements or significant changes in the operating environment. The Board
documents the investment strategy, provides investment ranges to the investment
managers and monitors the position.
10.9.9 The two pools of investment assets, the Industrial Branch Growth Fund and the
Industrial Branch Matched Fund are reviewed at least once a year and monies are
transferred between them in order to rebalance them to their respective liabilities.
10.9.10 Growth Fund
(a) The Growth Fund supports the asset shares of the fund. The primary objective for
the Growth Fund is to achieve the highest possible long-term rate of return,
subject to the constraints described.
(b) The risk appetite for the investment strategy is considered by examining the ability
of the fund to withstand severe adverse market movements and still meet
guaranteed commitments to policyholders.
(c) The investment strategy of the Growth Fund is to have an equity-backing ratio
which balances the expected higher returns with the risks of adverse market
movements, the risk-based capital requirements and the management and
potential distribution of the estate. The fund also holds a small proportion of
alternative assets, such as hedge funds. The fixed interest assets held will have
regard to the expected liability cashflows.
(d) The proportion of the assets backing asset shares invested in equities, including
private equity, property and alternative assets may change in the future as a
consequence of practices 10.9.4, 10.9.5 and 10.9.10(b) and (c). It would also
change if the Board’s long-term view of the merits of equity and property
investments relative to other asset classes was to change.
10.9.11 Matched Fund
(a) The Matched Fund supports the liabilities of the fund other than the asset shares.
The Matched Fund also includes the estate. The primary objective of the
Industrial Branch Matched Fund is to invest in assets which as closely as possible
meet the expected liability cashflow requirements.
(b) The investment strategy for the Matched Fund is set by examining the profile of
liabilities to be matched. These liabilities include the provision for policy
guarantees to the extent that these might not be supported by asset shares. The
provision for guarantees may be matched by short positions in growth assets such
as equities and property. These would be effective matches for relatively small
movements in equity and property markets but would need adjustment in the event
of significant market movements. These positions are reviewed at least once a
year.
(c) Assets representing the estate of the Britannic Industrial Branch Fund are mostly
invested in fixed interest securities. However, if the estate is large in relation to
the potential risks facing the fund, then part of the estate may be invested in
growth investments in line with the asset mix for the asset shares.
PLL PPFM Page 188 January 2024
Asset Shares
10.9.12 The guideline asset mix range for asset shares is:
All business
Fixed interest and cash
45% to 60%
Equities including
private equity and
alternative assets
25% to 45%
Property
5% to 10%
From time to time the actual asset mix will be different from the guideline mix due
to market movements and active management decisions taken by the investment
managers or the Investment Committee. Fixed interest will be a mixture of
approved fixed interest securities, such as British Government gilts and other
government and supranational bonds, and other fixed interest securities, such as
corporate bonds, debentures, loan notes and emerging market debt.
Possible Future Changes
10.9.13 If it is considered by the Board to be in the best interests of the policyholders,
further hypothecation of the assets in the fund may be introduced. For example
this may involve the hypothecation of different equity-backing ratios to different
classes or groups of policies or the hypothecation of fixed interest assets by term
remaining within asset shares to reduce the volatility of policyholder returns near
maturity. Currently no such changes are planned.
PLL PPFM Page 189 January 2024
Principle
10.10
Business Risks
The Board aims to manage its business in a prudent manner, having regard to
both the risks and rewards of which it is aware. The Board will also have regard to
the availability of suitable capital and the amount required in light of the risks being
undertaken. Some business risks are outside the control of Phoenix Life Limited.
Risks determined by the Board to arise in connection with the insurance business
of the fund are attributed to the fund. Costs and benefits are attributed in the
same manner.
Unless specifically passed through to asset share calculations, the impact of
business risks is borne by the estate. Thus with-profits policyholders are exposed
through bonuses, following from sections 10.4 and 10.12, to the profits and losses
of the fund.
Practices
10.10.1 Infrastructure risks
(a) As the unit charges under the management services agreement are subject to
annual increases linked to movements in the Retail Prices Index, the fund is
exposed to the risk of higher than expected inflation.
Costs associated with day to day administrative problems are borne by PGMS.
(b) Compensation and mis-selling costs have been and will continue to be allocated to
the fund. Any costs associated with large scale reviews triggered by regulator
guidance or directives would also be allocated to the fund.
(c) The PGMS charges are currently VAT exempt. Phoenix Life Limited retains the
risk of increase in charges due to changes in VAT rules, including any
retrospective changes.
10.10.2 As the fund is running off, there is a risk that the fixed costs will not be reduced in
line with the reducing policy volumes. This is partially mitigated by agreements for
the provision of administration services, but this risk has not been entirely
eliminated.
10.10.3 Management services are provided to the fund by PGMS. In the event of the
failure of PGMS, substantial costs would be incurred in securing an alternative
supplier, especially as PGMS and / or its sub-contractors own the infrastructure
assets. The financial viability of PGMS is regularly monitored. Should PGMS be
unable to meet any of its obligations to provide services then Phoenix Life Limited
would request that Phoenix Group, as owners of PGMS step in to restore the
position. Should Phoenix Group not do this, then Phoenix Life Limited would
attribute any losses to the shareholder fund or Non-Profit Fund, and the fund
would only be affected if the shareholder fund or Non-Profit Fund had insufficient
excess assets to bear the losses.
10.10.4 The fund contains non-profit business and the profits or losses arising in respect of
this business fall to the fund.
10.10.5 There are no material reassurance treaties applicable to the fund which would
have a material impact in the event of the reassurer failing. Future new
reassurance arrangements (where the fund would be exposed to the failure of the
reassurer) will only be entered into to reduce the risk within the business and
where they are cost / benefit justified.
PLL PPFM Page 190 January 2024
10.10.6 Mortality and persistency experience may impact asset shares or charges directly,
but can also have an indirect effect, such as causing the level of expense charges
to vary, other than the service level charges from PGMS. Experience is regularly
investigated. The potential impact of variations in experience is also considered.
10.10.7 Although the fund is no longer actively seeking new business, there remains some
risk in respect of any new business arising and from the exercising of policy
options.
10.10.8 Investment management services are provided to the fund by the investment
managers. Failures at the investment managers might result in losses or costs to
the fund, either through losses in the investments being managed or in securing
an alternative supplier.
10.10.9 Other business risks which potentially impact the fund and the amounts payable
under with-profits policies are explicitly or implicitly covered under the other
principles and their associated practices, but are summarised here as follows:
• Solvency risks
• Investment risks
• Expense and charges risks
• Mortality risks
• Persistency risks
• Taxation risks
• Guarantee risks
• Regulatory risks
• Bonus declaration risks
• Estate management and distribution risks.
10.10.10 Phoenix Group’s current strategy involves acquiring closed books of insurance
business. Any arrangements impacting on Phoenix Life Limited will be discussed
with our regulator and will be approved by the Board.
10.10.11 Risks undertaken by the fund are approved by the Board. They consider the scale
of such risks and the cost / benefit justification, having regard to the availability of
suitable capital and the amount required in light of the risks being undertaken.
They also aim to ensure that risks are undertaken which are, in their opinion, to
the advantage of with-profits policyholders.
The Board approves to what extent these risks pass to asset shares. The balance
of these risks feed through to the estate. The profits and losses from risks which
pass to asset shares affect the amounts payable under with-profits policies. The
profits and losses from risks that feed through to the estate only indirectly affect
the amounts payable under with-profits policies, as part of any distribution of or
charge to the estate as described in section 10.12.
10.10.12 Business risks are regularly monitored and they form part of the key insurance risk
and operational risk management processes. The risk based capital requirements
are assessed with regard to the business risks being undertaken.
Business risks attributed to the fund are reviewed at least once a year by the With-
Profits Committee.
PLL PPFM Page 191 January 2024
Principle
10.11
Expenses and Charges
Policies will be charged amounts which represent a fair share of the actual costs
or a sub-set of the actual costs.
This approach will be adjusted where necessary in order to continue to treat
customers fairly.
Where actual costs are used and where costs are specific to a policy or policy
class, then taking into account the approximations referred to in section 10.4, such
costs will be taken into account in assessing the bonuses added to that policy or
class and in assessing the early termination value payable. Where costs are not
specific to a policy or class, they will be apportioned across the policies or classes
to which they are relevant in a reasonable manner.
Practices
10.11.1 Expenses and charges applied to asset shares are actual costs as described in
section 10.4.
10.11.2 An agreement exists with PGMS to supply administration services to the fund.
This is a perpetual agreement and is not expected to be renegotiated, but charges
may be amended in respect of major regulatory change. The agreement can
however be terminated early for material failure to meet service standards or other
non compliance with the agreement. We regularly monitor service standards.
Value added fees for work outside the service level agreements are changed
separately.
10.11.3 The costs apportioned to any particular group of policies will only change:
• if the formulaic bases of cost charging are altered to reflect a change in the
underlying cost of the activities supporting that group of policies; or
• if the apportioned costs are allocated on a basis which more fairly reflects the
costs of the group.
PLL PPFM Page 192 January 2024
Principle
10.12
Estate Management
The combined estate of the Britannic Industrial Branch Fund and the Britannic
With-Profits Fund (including the Buffer Reserve) should lie in a target range. If
this estate falls outside the target range then either the target payout ratio (in
section 10.6) will be changed or asset shares (in section 10.4) will be adjusted, to
maintain the estate within the target range where possible.
In addition, subject to the above, the estate (excluding any element relating to the
Buffer Reserve) of the Britannic Industrial Branch Fund should be less than an
upper target amount.
Practices
10.12.1 The estate is the estimated realistic value of the assets less the estimated realistic
value of the liabilities. It is calculated using realistic assumptions and generally
accepted methodologies on a basis determined by the Board.
10.12.2 To the extent that any profits or losses arising in the fund are not allocated to asset
shares in accordance with section 10.4, they will act to increase or reduce the
estate. To the extent that the amounts charged to asset shares are based on
estimates or assumptions, then any difference between these and the actual
amounts will act to increase or reduce the estate.
10.12.3 The estate in the fund will be used to:
(a) assist the fund in demonstrating it has access to sufficient capital resources
to meet its liabilities and treat customers fairly;
(b) provide a buffer in the fund should adverse experience mean that the
reserves held to cover the liabilities prove insufficient;
(c) meet any costs which are charged directly to the estate rather than to asset
shares;
(d) meet the costs of any changes which the Board believe are necessary to
improve fairness between policyholders and / or enhance the run-off of the
fund; and
(e) enhance the benefits payable to those with-profits policies which have an
interest in the estate but always aiming to retain sufficient estate to meet the
expected amounts required for (a), (b), (c) and (d). The amount considered
by the Board to be available from time to time for such enhancements will be
referred to as the distributable estate.
10.12.4 Any enhancements in benefits on account of the distributable estate referred to in
10.12.3(e) will generally be achieved by including a temporary uplift to the asset
share for the purpose of setting final bonus rates and surrender values. However
if the distributable estate is large then consideration would be given to making
additions to the asset shares from the estate.
10.12.5 The amount of the estate, the distributable estate, and the potential for any
enhancements to policyholder benefits will be subject to review at least once a
year.
10.12.6 In the event of a risk of the assets in the fund being insufficient to cover the
liabilities, charges may be made to asset shares to restore the estate to a target
minimum level. However such charges could not be applied to any part of the
deficit caused by regulatory penalties (fines) or compensation payments relating to
events which occurred before 31 July 2009, see paragraph 5.2.18, except to the
extent that such charges are effectively reversing any estate previously added into
asset shares.
PLL PPFM Page 193 January 2024
10.12.7 Providing that it is possible to do so whilst still treating policyholders fairly, it is
intended to manage the excess assets using solely the resources of the fund and
avoiding the need to draw on any external sources of capital.
In the event of the assets in the fund being insufficient to cover the liabilities, then
any past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit.
Arrangements exist for monies to be transferred from the Non-Profit Fund or
Shareholder Fund to the fund with the aim that the amount of assets in the fund
exceeds the liabilities by a small margin, should the charges described in 10.12.6
above be insufficient to restore the estate. For this purpose, the possibility of
distributing any surplus assets to policyholders will not be regarded as a liability.
Transfer of such amounts back to the Non-Profit Fund or the Shareholder Fund
will be made whenever emerging surplus in the fund permits.
The exercise of discretion in respect of with-profits policies will be managed with
the aim that the amounts transferred to the fund will be repaid to the extent that is
possible whilst still meeting the aims described in section 5. In determining
benefits under with-profits policies, the Board will disregard any liability to transfer
such amounts back to the Non-Profit Fund or Shareholder Fund to the extent that
this is necessary to treat customers fairly (that is in accordance with these
Principles and Practices).
10.12.8 The assets comprising the Buffer Reserve are currently split between the Britannic
With-Profits Fund and the Britannic Industrial Branch Fund, and the amount of the
Buffer Reserve is tracked by means of a notional segregation of the assets of that
fund.
10.12.9 The Buffer Reserve is available to support both the Britannic Industrial Branch
Fund and the Britannic With-Profits Fund in meeting their liabilities and covering
their capital requirements.
10.12.10 We will consider enhancements to benefits on account of any distributable estate
in the Britannic Industrial Branch Fund and the Britannic With-Profits Fund if the
combined assets of the funds, including the Buffer Reserve, exceed the combined
capital requirements of the funds. The amount of enhancement will be determined
separately for each fund. A further assessment will then be carried out using the
combined assets, liabilities and capital requirements of both funds, including the
Buffer Reserve, to establish if any amount from the Buffer Reserve can be
regarded as distributable estate.
10.12.11 If this calculation shows that part or all of the Buffer Reserve can be regarded as
distributable estate, then an appropriate share will be apportioned to each fund,
such apportionment currently being by reference to asset shares of policies which
have an interest in the estate. To the extent that distributable estate arising from
the Buffer Reserve is used to enhance claim payments or asset shares then
assets will be transferred from the Buffer Reserve to each of these funds to meet
the cost of these enhancements.
PLL PPFM Page 194 January 2024
Principle
10.13
New Business
The fund is no longer actively seeking new business. Policy options under
existing contracts to effect new policies are honoured.
Practices
10.13.1 The fund is no longer actively seeking new business, but continues to write a small
amount of new business relating to policy options under existing contracts.
Currently there are no plans to reopen the fund to new business.
PLL PPFM Page 195 January 2024
Principle
10.14
Equity Between the Fund and Shareholders
Services may be provided by the shareholders to the fund but terms for such
services will be on commercial terms which are considered to be consistent with
the risks of providing those services, or considered to be consistent with terms
which would be available for such services on an arm’s length commercial basis.
Shareholders receive no more than one ninth of the cost of bonuses distributed
to policyholders, as laid down in the 2023 Scheme. Any change to the one ninth
limit would require the agreement of the Board and would be subject to approval
by our regulator and the High Court.
Practices
10.14.1 Administration services are provided to the fund by PGMS.
10.14.2 Shareholders will only provide services to the fund on commercial terms, that is, if
there is an adequate return for the risks involved in providing the services. The
profit margin for shareholders is acceptable to the fund if:
• the cost for the fund is consistent with the terms available from other providers;
or
• the profit margin is consistent with the risks borne and there are reasonably
foreseeable circumstances in which the shareholder could make a loss.
10.14.3 The allocation of profits between policyholders and shareholders is laid down in
the 2023 Scheme which states that not less than 90% of the surplus being
distributed from the fund is allocated to policyholders. Current practice is to
distribute exactly 90% of such surplus to policyholders, leaving the remaining 10%,
being one ninth of the cost of bonus, to be transferred to shareholders.
The division of profits between with-profits policyholders and shareholders does
not change as a result of changes in the underlying basis used to determine the
cost of bonus as described in paragraph 10.14.5. The transfer to shareholders
remains one ninth of the cost of bonus as determined in accordance with the
underlying basis.
10.14.4 The shareholder transfer associated with the distribution of profits from the fund
can only take place following the published annual actuarial investigation of the
long-term business of Phoenix Life Limited carried out in accordance with the
requirements of the Financial Services and Markets Act 2000 (or equivalent
subsequent legislation). The Board is responsible for the distribution of profits and
no transfer to shareholders can take place without its authority.
PLL PPFM Page 196 January 2024
10.14.5 The cost of bonus is the increase in the liabilities using a risk free discount rate
(net of tax as appropriate), as a result of the bonus declaration together with cost
of bonus paid on claims since the previous actuarial investigation as follows:
• The cost of annual bonus is the value of any annual bonus added, discounted
using the above basis.
• The cost of final bonus is the value of any final bonus paid on death or maturity.
The cost of any interim bonus paid on such claims is the value of the interim
bonus added, discounted using the above basis.
• The cost of interim bonus or final bonus on a policy becoming paid up for a
reduced sum assured is the value of any bonus added, discounted using the
above basis.
• The cost of interim bonus on surrender is the value of that bonus discounted
using the above basis and the cost of final bonus is the value of the final bonus
element of the surrender value.
• If the policy has not paid premiums up to the policy anniversary following the
previous valuation date, then the cost of annual bonus is reduced to reflect that
only a proportion of that year’s annual bonus is included in the claim value.
10.14.6 Where distributions to policyholders are made in anticipation of a surplus arising,
these only contribute to the cost of bonus at the next actuarial investigation and
only generate an allocation to shareholders at that time.
10.14.7 Any taxation arising from the distribution of profits from the fund to the
shareholders is borne by the fund.
PLL PPFM Page 197 January 2024
11 Principles and Practices – Phoenix With-Profits Fund
The Principles and Practices given in sections 11.4 to 11.14 together with the Guiding
Principles and Practices form the Principles and Practices of Financial Management for the
Phoenix With-Profits Fund. Sections 11.1 to 11.3 give background information specific to the
Phoenix With-Profits Fund. Subsequently in this section the use of the term ‘the fund’
generally means the Phoenix With-Profits Fund.
11.1 Fund History
The Phoenix With-Profits Fund comprises the business that was transferred into
Phoenix Life Limited from the long-term business fund of Phoenix Life & Pensions
Limited (PLP) under the 2006 Scheme.
PLP traces its history back to Royal Life Insurance Limited (RLI), which was
created in 1981 to receive, by transfer under the Insurance Companies Act 1974,
the UK life insurance businesses of Royal Insurance Company Limited. This
included business from Law Union and Rock Insurance Company Limited and
Liverpool and London and Globe Insurance Company Limited which was
transferred into Royal Insurance Company Limited in 1964.
RLI was a company within the Royal Insurance Group, which merged with the Sun
Alliance and London Insurance Group in 1996. In 1998, RLI was renamed Royal
& Sun Alliance Life and Pensions (RSALP). RSALP was bought by RLG With
Profit Holdings Limited, a company in the Resolution Life Group in 2004. RSALP
changed its name to PLP in 2005.
PLP closed to new business in 2002, although it continues to issue policies under
options on existing policies, including the acceptance of new members to existing
pension arrangements and the issue of immediate annuities in respect of vesting
pensions.
In 2022 policies sold in Ireland were transferred to PLAE, an Irish company within
the Group, and immediately reinsured back into the Phoenix With-Profits Fund.
PLAE is responsible for paying claims under these policies. For as long as the
reinsurance remains in force, amounts payable to PLAE on these policies under
the reinsurance will continue to reflect participation in the Phoenix With-Profits
Fund at the same level as before.
11.2 Types of Policy
The with-profits contracts in the fund mainly fall into the following categories:
• traditional endowments and whole life policies
• traditional pension policies funding for cash, most of which have guaranteed
annuity options
• single premium unitised with-profits whole life bonds
• unitised with-profits pension policies
11.3 Capital Support to the Fund
The capital policy is described in section 3.2.
In certain circumstances, the shareholders will loan money to this fund. The
practices relating to receipt of support are detailed in sections 3.3 and 5.2.
PLL PPFM Page 198 January 2024
Principle
11.4
Amounts Payable Under a With-Profits Policy
The aim of the methods employed in determining the amounts payable under a
with-profits policy is the fair treatment of all with-profits policyholders consistent
with the guiding principles.
The main guide used for determining the amounts payable under with-profits
policies is asset share calculations which are carried out for certain specimen
policies. The amounts payable will allow for a fair share of any surplus distributed,
which may be in the form of annual or final bonuses.
In putting into practice the aims set out in the guiding principles and in the
application of the with-profits principles generally, various degrees of
approximation are applied in a number of different areas, the major ones being
described in paragraph 11.4.4. The Board endeavours to ensure that these
approximations:
• are applied consistently;
• have a broadly neutral effect between policyholder and shareholder interests
and between the different with-profits funds;
• where appropriate, have a broadly neutral effect over time (that is between
one generation of policyholders and another); and
• for the larger classes of business, are of broadly neutral effect within that
class.
This may mean that for some smaller classes of business, a different result would
result if less approximate methods were used.
Any of the assumptions used in previous years (such as investment returns,
charges and allocations of miscellaneous profits and losses) can be changed at
any time:
• should they be shown to have been incorrect; or
• should legal or regulatory change render it necessary to do so; or
• if their continued application unchanged could put at risk the achievement of
the aims as set out in the guiding principles in section 5.
Changes to the methods used to determine the amounts payable under a with-
profits policy are controlled by:
• requesting and considering the advice of the Chief Actuary and the With-
Profits Actuary and the opinion of the With-Profits Committee before making
any changes;
• assigning to the Chief Actuary the executive responsibility to continue to apply
the currently agreed methods until advised differently; and
• following legal or regulatory requirements to obtain independent expert input
where necessary.
Policyholders have no entitlement to receive the asset shares, if any, used to
determine the bonuses for their policies.
Bonuses can only be declared if there is surplus available for distribution.
Asset shares are only calculated for certain specimen policies for the purpose of
determining the amounts payable under with-profits policies.
Charges for guarantees or smoothing may be made annually or by a retention
from maturity or early termination values (or by a combination of both methods).
The basis on which the charges will be determined are described in paragraph
11.4.2(o) below.
PLL PPFM Page 199 January 2024
Practices
Asset Share Methodology
11.4.1 The basic method for asset share calculations for with-profits business uses an
apportionment of actual investment returns net of tax and the actual underlying
experience.
Asset shares are generally not smoothed. In particular the investment returns and
experience elements contributing to asset shares are generally not smoothed,
other than that inherent in the processes used in the derivation of the assumptions
or in respect of large profits and losses from other business per paragraph
11.4.2(s).
PLL PPFM Page 200 January 2024
11.4.2 The following table describes the elements currently credited or charged to asset
shares for specimen policies.
Element
Description of Allowance
(a)
Premiums
Premiums paid under the policy
(b)
Investment return
Allocated return – note (b)
(c)
Investment
expenses
Actual allocated – note (c)
(d)
Initial expenses
Actual allocated – note (d)
(e)
Renewal expenses
Actual allocated – note (e)
(f)
Other expenses
Actual allocated – note (f)
(g)
Tax on investment
return
Actual allocated – note (g)
(h)
Tax relief on expenses
Actual allocated – note (h)
(i)
Mortality & morbidity
costs
Based on underlying experience – note (i)
(j)
Early terminations
No profits or losses are credited – note (j)
(k)
Paid-up policies
No profits or losses are credited
(l)
Partial and regular
withdrawals
No profits or losses are credited other than as
described in note (o) below
(m)
Surrenders at
protected dates
No profits or losses are credited
(n)
Annuity payments
Not applicable
(o)
Charges for the cost of
guarantees
Charged – note (o)
(p)
Charges for the cost of
capital
See note (p)
(q)
Distributions to
shareholders
Actual incurred – note (q)
(r)
Tax on distributions to
shareholders
Not charged
(s)
Profit and losses from
other business
Profits or losses are credited – note (s)
(t)
Estate distribution or
charge
Distributions from or charges to the estate as
determined - note (t)
(u)
Exceptional items
Not applicable
The way in which the above items are taken into account is described in the notes
below.
(b) Investment return
Each year the total return, income and capital gains / losses, made on the assets
of the fund is determined. For growth investments as described in section 11.9,
this is done in aggregate. For fixed interest securities, the returns are sub-divided
according to the time to redemption of the security.
PLL PPFM Page 201 January 2024
The investment strategy is described in section 11.9. In accordance with this,
different proportions of each type of asset are notionally attributed to the specimen
with-profits policies depending upon a number of factors, in particular:
• the term remaining, and
• the anticipated relative size of the guaranteed benefits and the asset share at
such a date.
The return attributed to each specimen policy is then the weighted average return
from each asset type using those proportions. Other than for traditional with-
profits Buy As You Earn (BAYE) pension policies and unitised with-profits pension
solutions policies, the return on fixed interest securities that do not form part of the
growth investments described in section 11.9 will be that of the subclass of such
securities issued by the UK government with a duration which matches most
closely the term remaining of the specimen policy. For with-profits bonds and
unitised with-profits pension policies without guaranteed annuity rates, the term
remaining is adjusted as described in paragraph 11.9.9. Any difference in return
between UK government fixed interest securities and the other fixed interest
securities within the asset share is applied as a uniform percentage adjustment
across the fixed interest part of the asset shares of all policies, irrespective of the
term remaining.
The return on some types of asset, particularly derivative securities, may be
attributed to the class of policy, if any, in respect of which they are deemed to have
been purchased.
The ratio of overseas equities to UK equities is the same for all specimen policies.
The ratio of UK government to other fixed interest securities is the same for all
specimen policies.
(c) Investment expenses
Actual investment expenses are charged based on those allocated to the fund in
accordance with sections 5.2 and 11.11.
The investment expenses are expressed as a percentage charge to be applied to
the assets.
(d) Initial expenses
Initial expenses are based on PGMS charges and an uplift to cover direct costs.
These are all per policy expenses, allocated in accordance with sections 5.2 and
11.11.
(e) Renewal expenses
Renewal expenses are based on PGMS charges and an uplift to cover direct
costs. These are all per policy expenses, allocated in accordance with sections
5.2 and 11.11.
A small number of policies (Pensions Solutions and Lifestyle Bond series) are
subject to an explicit regular charge for expenses and shareholder’s profits and the
impact of expenses on the asset shares of specimen policies of this type is limited
to those charges.
For those policy classes where there is an explicit policy fee or other charge
collected by cancellation of units or other reduction in benefits, only the expenses
not covered by these fees or charges, if any, are apportioned to the asset shares
of the specimen policies for these classes.
PLL PPFM Page 202 January 2024
(f) Other expenses
Project and other one-off expenses incurred are included in the actual renewal
expenses charged to asset shares.
The historic costs of establishing policy administration outsource arrangements
over the period 2003 to 2005 were spread over a five year period.
Significant future project, additional activity and other one-off costs will only be
charged to asset shares following approval by the Board.
(g) Tax on investment return
The tax charged to classes of policy subject to tax is calculated by applying the
current rates applicable to life insurance companies in respect of income
attributable to policyholders to the different elements of the investment return.
Approximate allowance is made for any deferment in tax payment, particularly in
respect of tax on unrealised capital gains (which is charged at a discounted rate to
reflect the average expected period until it is payable).
(h) Tax relief on expenses
Tax relief due on the actual expenses charged is allowed for in those classes of
business that are subject to tax. Where the tax relief in respect of expenses is
deferred this is allowed for. The rates of tax relief are the average rates
applicable.
(i) Mortality and morbidity costs
Amounts to cover the cost of payments in excess of asset share on death or
illness are deducted.
Where a policy class is designed to pay a benefit on death or illness which
exceeds asset share at that time, and where no explicit charge for benefit is
applicable, an annual charge is made to cover the cost of making those enhanced
payments.
The estimated annual cost of providing such benefits is determined periodically
from an analysis of recent actual mortality and illness rates experienced by
policyholders and / or from insurance industry and national statistics. These costs
are expressed as rates dependent upon various factors including age.
The charge on each specimen policy in each year is then determined by applying
the appropriate rate to the current difference between the benefit payable on death
or illness and the asset share.
Some pension policies provide either no benefit at all on death or only a return of
premiums paid, with or without interest. For the specimen policies representing
such classes, a credit to asset share is calculated using similar principles.
(j) Early terminations
It is not the current practice to attribute to the asset share of specimen policies any
differences between the amount paid on the early termination of with-profits
policies and their estimated asset share.
(o) Charges for the cost of guarantees
The costs of meeting guarantees in the fund are periodically assessed.
PLL PPFM Page 203 January 2024
Charges for guarantee costs have been deducted from asset shares in past years.
However no such charges have been made since 2013. No charges for
guarantees are currently being made. In the event of the assets in the fund being
insufficient to cover its liabilities, then any past guarantee charges will be restored.
Further charges for guarantee costs will not be reintroduced unless the assets of
the fund are insufficient to cover its liabilities. Such a charge would not exceed 1%
of the asset share per annum (or an equivalent amount expressed in different
terms, for example as a percentage of premium).
The charge for guarantees cannot be negative.
(p) Charges for the cost of capital
From time to time, one or more loan agreements may be in place in accordance
with section 5.2. Further details may be found in section 11.3. Interest at a
commercial rate will be payable on such loans. Where part of such a loan is
required to eliminate a deficit in the fund, then the interest payable on that part of
the loan is not currently charged to asset shares. Where part of such a loan is not
required to cover a deficit, then a deduction is currently made from asset shares to
reflect the excess of the interest payable on that part of the loan above the return
achieved by the fund from investing that part of the loan.
No charge is currently made to the fund for the capital that it is necessary to retain
in the Non-Profit Fund and Shareholder Fund in order that Phoenix Life Limited
continues to have adequate capital.
The asset shares of specimen policies do not receive any credit for the return
earned on excess assets held within the fund.
(q) Distributions to shareholders
The cost of distributions to shareholders resulting from the cost of bonus allocated
to policies is charged to asset shares.
(s) Other business profit or losses
It is the current practice to attribute to the asset share of most specimen policies in
most classes any other business profits or losses arising in a year, other than the
costs of any compensation payable as a result of policies mis-sold, expressed
each year as an addition or reduction to the investment return.
Some larger business profits or losses may be spread over a number of future
years.
These practices may be changed if the Board consider it necessary to do so to
enable the fund to meet the objectives set out in the guiding principles in section 5.
(t) Estate distribution or charge
Asset shares may be increased by distributions from the estate or reduced by
charges to the estate. However, these estate distributions are not guaranteed. In
the event of the assets in the fund being insufficient to cover the liabilities, then
any past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit. See section 11.12.
11.4.3 For traditional with-profits business, the primary focus is on performing the
calculations for specimen policies at the terms which contain a significant volume
of policies. For other terms approximations may be used.
PLL PPFM Page 204 January 2024
For unitised with-profits business, the specimen policies are for every past year
(month, in the case of with-profits bonds) of commencement.
Separate single premium and regular premium specimen policies are used.
Policies generally reflect the average size and policyholder age for the year of
issue and term. Where final bonus rates or market value reductions are shared by
policies of different years of issue or different premium types, the specimen
policies may be grouped or otherwise averaged.
For unitised with-profits pensions business other than Profit Plus Fund (PPF)
policies, regular premium final bonus rates and market value reductions are set by
averaging single premium final bonus rates and market value reductions. The
retirement year of the specimen policies used to set final bonus rates and market
value reductions is chosen to be representative of the underlying business.
Asset shares are not calculated for specimen whole life, paid-up and altered
policies. As a result the target ranges described in sections 11.6 and 11.8 do not
apply to policies of these types.
11.4.4 Various approximations are inherent in the asset share method described above
and in the general applications of the Principles in practice. These include:
• Investment returns are calculated monthly but may be applied uniformly over
the period within the model which is usually quarterly or six-monthly.
• The investment return itself is only calculated approximately during the course
of a year (by the use of appropriate indices) and is updated after the end of
each year to reflect the actual performance earned.
• The asset mixes used to determine investment returns may not be exactly in
line with the actual assets held.
• Carrying out the calculations (and hence changing final bonus rates) only
infrequently (such as monthly, half yearly or annually),
• An inevitable time delay before actual experience is reflected in bonus rates
and their application to policies.
• The application of bonus rates determined using a specimen policy of one type
to policies of another type (such as the use of final bonus rates determined for
standard endowment policies for low start endowments and for whole life
policies).
• Where the premium rate for a specimen policy changed in the middle of a year
of issue, the final bonus may be based on either the pre or the post change
rate.
• The use of specimen policies will usually mean that small premium policies
receive more than asset share (as many administration costs are independent
of premium size) and large premium policies less.
• The use of specimen policies only for selected terms of policy and the
interpolation of final bonus rates for intermediate terms will mean that the
amounts paid on policies of those intermediate terms will not necessarily equal
asset share.
• The calculations of final bonuses are based on specimen policies with a typical
and straightforward premium history and so the bonuses will only be
approximate for policies with complex premium histories. Similarly bonuses will
only be approximate for policies that have been altered in other ways.
• For policies which been made paid up, the use of final bonus rates applicable
to policies which have been premium paying throughout. Or, alternatively, the
application to both types of policy of final bonus rates calculated using both
specimen paid-up policies and specimen premium paying throughout policies.
• Specimen policy calculations generally assume that all policies were subject to
standard terms, including sales commission.
Some of these approximations, as well as others not listed, will also be present in
the calculations of the excess assets of the fund from time to time.
PLL PPFM Page 205 January 2024
11.4.5 Items not charged to asset shares, the effects of the approximations in the
experience assumptions and the effects of other approximations in the methods
employed feed through to the estate as described in section 11.12.
11.4.6 The procedures have been documented that set out how the asset share
calculations described above are to be carried out and how the parameters to be
used in the calculation are to be derived each year. A permanent record is kept of
the historic parameters used. Some of the instructions for the detailed
computations are embedded within a number of computer programs.
11.4.7 Any change to the practices used, including those used to determine the excess
assets in the fund, would be subject to the procedure described in principle 11.4.
Any material changes to the historical parameters used would, if a result of the
identification of a past inaccuracy, be notified to the Board and the With-Profits
Committee at the time of the next recommended change in bonus rates. If
considered appropriate, any changes may be phased in over a period rather than
implemented at once.
Any proposed changes to the historical parameters for other reasons would be
subject to the same processes as a change in practice.
11.4.8 Asset share practices are not guaranteed and may be changed in future.
Asset share methodology and processes will be regularly reviewed by the Board
and may change. This may include changes to the historical aspects of the
calculations as a result of a variety of factors, including changes in regulations,
improvements in the degree of approximations, maintaining equity between
classes and groups of policyholders and significant changes in the financial
condition of Phoenix Life Limited.
Bonus Declarations
11.4.9 Bonus declarations are approved by the Board or committee of the Board or
delegated to senior management and then retrospectively approved by the Board.
11.4.10 The amount payable (or available to convert to a pension) on most traditional with-
profits policies on maturity is the total of:
• the sum assured;
• the annual bonuses added whilst the policy has been in force; and
• final bonus, if any.
Exceptions are some pension policies, where the sum assured and bonuses are
expressed as annual amounts of pension rather than as cash amounts.
The amount payable (or available to convert to a pension) on most unitised with-
profits policies on maturity is the total of:
• the value of the units; and
• final bonus, if any.
Exceptions are some pension policies which may be subject to a full or limited
market value reduction at maturity, where either is allowed under the policy
conditions; and some with-profits bonds, which may be subject to a limited market
value reduction at maturity.
Amounts payable on the encashment of policies at times other than maturity are
determined in different ways.
PLL PPFM Page 206 January 2024
The rate, if any, of final bonus which applies to a particular policy class, date of
issue and date of maturity is currently determined in most cases with reference to
the asset share of a representative range of specimen policies.
11.4.11 Bonuses are reviewed regularly at least once a year.
The timing of annual bonus reviews is described in paragraph 11.5.5.
The timing of final bonus reviews is described in paragraph 11.6.4.
11.4.12 The timing of final bonus declarations may be varied.
11.4.13 Final bonuses are expected to, but are not guaranteed to, apply until the next
planned review date. These bonuses may be reviewed at any time between
normal planned review dates. Additional reviews would normally only be in
response to exceptional investment market movements.
11.4.14 Final bonus reviews also consider the amount of final bonus paid on non-protected
exits (surrenders) for policies where the surrender value calculation makes explicit
use of the current final bonus scale.
11.4.15 Bonuses are declared out of surplus arising in the year or in anticipation of surplus
arising. If there is no surplus or no expectation of surplus arising, no bonuses can
be declared.
PLL PPFM Page 207 January 2024
Principle
11.5
Annual Bonus Rates
In circumstances where the value of assets is fairly close to the minimum amount
required to enable the fund to meet the aims described in the guiding principles,
low or nil rates of annual bonus are likely to be added for most classes of with-
profits policy. Conversely, if the value of assets is more than reasonably
sufficient, higher rates of annual bonus are likely to be added for many classes.
Separate annual bonus rates are applied to different policy classes to reflect the
different aspects of the products, including tax treatment, country of issue, form of
benefit and extent of guaranteed benefit (although no differentiation between
policies of the same class with and without guaranteed annuity options). Apart
from with-profits bonds, currently no differentiation is made between different
dates of issue, although the Board may do so in the future if it helped to better
satisfy the aims described in the guiding principles in section 5.
Although most classes of new business, other than under options on existing
policies, are no longer accepted, alternative products might at some time be
introduced into which existing customers could switch their benefits at their
discretion, which might receive different bonus rates.
Practices
11.5.1 The Board makes decisions on annual bonus declarations taking into account a
number of factors. These factors are set out in paragraphs 11.5.2 to 11.5.6.
11.5.2 Annual bonuses currently take the form of:
• additions to the sum assured (or equivalent amount) and / or to existing
bonuses (traditional policies and bonds not eligible for final bonus);
• increases in the price of units (unitised policies except PPF policies); or
• additional (‘bonus’) units (PPF policies).
11.5.3 For each class of business, other than bonds not eligible for final bonus (see
11.5.5), the level of annual bonus is set so as to maintain a buffer for final bonus.
The future claim payouts are estimated using realistic assumptions and the annual
bonuses are set at such a level that if experience turns out to be in line with those
assumptions, the overall amount of the payout paid in the form of final bonus will
be in line with a target proportion. Under current investment conditions, the overall
target is that 25% of the overall value of payouts, calculated before any future
augmentation provided by a release of the estate, will be in the form of final bonus.
Given the aggregate nature of this target, for an individual policy, this final bonus
buffer may be more or less than 25%. This overall target is itself subject to review
and may be changed. If experience does not turn out to be in line with the
assumptions then the 25% target might not be met.
Annual bonus rates will be adjusted to keep the overall level of projected final
bonus broadly in line with the target. If necessary to remain on target, annual
bonus rates will be reduced to nil, or close to nil. However, some small annual
bonuses may be declared even if the final bonus buffer is below target.
There is no maximum change in the annual bonus rate; however, in the normal
course of events the declared annual bonus rates would not be expected to
change by more than 2% from one declaration to the next.
11.5.4 Where the financial position of the fund is weak, the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus buffer being above the 25% target.
PLL PPFM Page 208 January 2024
11.5.5 For bonds not eligible for final bonus, annual bonus will be set at a level which,
using realistic assumptions, will bring the projected asset share and the value of
projected policy benefits broadly in line over a five year period. If at any time the
fund is targeting payouts at a higher proportion of asset share than 100% on
account of distributable estate, then this will be allowed for in the projected asset
share used for this purpose of calculating annual bonus rates, and such
distributable estate will therefore be gradually reflected in payouts over a five year
period.
For bonds not eligible for final bonus, a minimum rate is set each year and the
actual bonus rate set at the policy anniversary in 12 months’ time cannot be less
than this. Other than at times when the value of the allocated assets are changing
rapidly, bonus rates for this class do not change by more than 2% (such as from
3% to less than 1% or more than 5%) in any 12 month period.
11.5.6 Currently annual bonus rates are reviewed as follows:
• for traditional policies and PPF policies, towards the end of each year, with
changes taking
effect from 1 January;
• for unitised policies, except PPF policies and bonds not eligible for final bonus,
in time for the new rates to take effect from the 1 March; and
• for bonds not eligible for final bonus, in time for the new rates to take effect
from the anniversary of issue.
However, rates may be reviewed at other times should it be considered to be
necessary to continue to adhere to the Principles.
11.5.7 Where annual bonuses are declared in arrears, interim bonus rates are set with
reference to the most recent annual bonuses declared and any future anticipated
direction of these rates and may be higher or lower than the latest annual bonus
rates declared. The annual bonus rate may, however, eventually be set at a level
that differs from the interim rate.
PLL PPFM Page 209 January 2024
Principle
11.6
Final Bonus Rates
Subject to the guiding principles set out in section 5, final bonus may be added to
policies when they terminate or when benefits are encashed for other purposes,
with the aim of ensuring, if they do not already do so, that benefits reflect fairly a
share in the profits (and losses) which have been generated within the fund whilst
the policy has been in force. Some series of bonds not eligible for final bonus
have been issued and for these policies, annual bonus rates alone will be used to
achieve the aim described earlier in this paragraph.
Separate final bonus rates are applied to different policy classes to reflect the
different aspects of the products, including tax treatment, country of issue, form of
benefit and extent of guaranteed benefit (although not the presence or absence of
guaranteed annuity options). For most policy classes, differentiation is made
between different dates of issue and different periods in force. On death and on
early termination, the final bonus added may be higher or lower than indicated
above, for reasons explained in the Practices.
Practices
11.6.1 For each specimen policy, we determine a proportion of asset share that it is
appropriate to use to best meet the guiding principles. This proportion will vary
from time to time, may be greater or lesser than 100% and may vary by class of
policy, date of issue, term remaining to a date at which a guarantee or option
applies or other relevant factor.
For each specimen policy the following are compared:
(i) the appropriate proportion of each specimen policy’s asset share (the asset
share for this purpose being inclusive of any enhancement as described in
paragraph 11.4.2); and
(ii) the total of the sum assured and the annual bonuses already added to that
specimen policy (or the value of units for a unitised policy).
If (i) is the larger, a final bonus for the specimen policy is normally set using the
methods described below. If (ii) is the larger, no final bonus will normally be set for
that specimen policy.
The target for the proportion in (i) is 100%. The proportion used for particular
specimen policies may be affected by smoothing (see section 11.7). The aim is to
maintain the proportions in (i) within the range 80% and 120% for most specimen
policies before the effects of smoothing.
For each specimen policy where a final bonus is to be set, the excess of (i) over
(ii), after any smoothing, is expressed as a percentage of:
• the sum assured plus annual bonuses for traditional policies;
• the value of units for unitised policies, including PPF policies.
This is then the new final bonus rate for all policies of the same type and duration
in force as the specimen policy.
Where a rate is not derived for every duration, the rates applicable for other
durations are determined by interpolation or extrapolation between the rates
derived as above. For all policy classes except those in (a) to (c) below, the rates
vary by duration in years.
PLL PPFM Page 210 January 2024
Exceptions:
(a) For ‘Pensions Solutions’ classes, final bonus is calculated on a policy-by-
policy basis by reference to ‘shadow’ units which change in value monthly in
line with the asset share and / or the smoothed asset share.
(b) For PPF policies, one final bonus rate applies irrespective of original term.
This is calculated taking into account an appropriate mix of specimen
policies of different original terms.
(c) For with-profits bonds entitled to final bonus, the original term is currently
differentiated by month.
11.6.2 Final bonus and market value reductions do not apply at the same time to any of
the policies.
11.6.3 Final bonus is paid on death claims on traditional whole life and endowment
policies at the rate that applied to endowment policies which commenced at the
same time and reached maturity at the date of death.
11.6.4 For all classes of policy the final bonus rates may be changed at any time. At
times when the value of the excess assets in the fund is not changing rapidly, this
is likely to mean that changes, if any, are normally made monthly for with-profits
bonds (including Lifestyle Bond) and one to two times per year (effective from
1 January and 1 July) for most other classes. However, a sudden change in the
value of those excess assets (such as because of a significant change in the value
of equity share markets) may cause changes to the final bonus rates on other
occasions.
11.6.5 As the value of assets are changing every day but final bonus rates are only
recalculated infrequently, there will inevitably often be times when, if the asset
shares for specimen policies were recalculated, final bonus would, in effect, be
based on slightly larger or smaller percentages of those asset shares than the
practices would in theory dictate. Normally an investment return variation of up to
10% compared to that assumed when the final bonuses were last reviewed, would
be allowed before there would be an additional final bonus review. However,
where the proportion of asset shares at the latest final bonus review was near the
top or bottom of the range described in paragraph 11.6.1, a lower level of
investment return variance may lead to an additional final bonus review.
PLL PPFM Page 211 January 2024
Principle
11.7
Smoothing
Smoothing refers to the practice of limiting the change in final bonus rates on any
one occasion so that the benefits paid to policyholders differ from those which
would otherwise apply and also to the practice of limiting the frequency of such
changes. Smoothing means that the value on similar policies maturing at different
times either vary little (between changes in final bonus rates) or change by no
more than a specified amount over a given period. Smoothing is applied to all
classes of policy which are eligible for final bonus and to all types of claim.
However, more frequent and generally smaller changes are made to some
classes of unitised with-profits policies.
Smoothing is intended to have a neutral effect over time. In other words, if
applying the limitation on changes in the rate of final bonus results, for a period, in
different amounts of discretionary benefits than would otherwise have been paid,
then in a subsequent period discretionary benefits would be adjusted by a broadly
equal and opposite amount when circumstances and the practices allow.
Other than on death or early termination, the aim at all times is to pay policy
benefits that are close to those described under section 11.6. Accordingly,
smoothing is limited and final bonus rates and total policy benefits may change by
relatively large amounts both on any one occasion and over a 12 month or longer
period. The cost of smoothing is not expected to be material at any time and so
no specific upper limit is imposed on it.
The smoothing principles also generally underlie the market value reductions
which may apply to most unitised policies. However, these principles are not
necessarily applied when determining the amount payable on traditional policies
which are terminated significantly early.
Practices
11.7.1 For with-profits bonds and Pensions Solutions classes, smoothing is applied to
policy benefits by means of an adjustment to the credited investment return.
However, smoothing is only applied when asset shares are more than 95% for
with-profits bonds or 90% for Pensions Solutions classes of the asset share with
the smoothing adjustment applied to the investment return. When smoothing does
apply, final bonus rates or market value reductions are set in relation to an
investment return, including business profits and losses smoothed over three
years. The smoothed investment return over the first three years of a specimen
policy (or the first three years of the Pensions Solutions series) is calculated in part
by reference to a deemed return in respect of the period prior to the
commencement of the policy or series. This rate is determined by the Board from
time to time.
11.7.2 For traditional policies and other unitised with-profits policies, including PPF
policies where final bonus changes are normally made twice a year, smoothing is
applied to maturity and retirement values by limiting the change in final bonus
rates. Normally the change in final bonus rates for a specimen policy will be
limited so that the increase or reduction in total maturity or retirement payout
compared to a position where bonus rates are not changed is not more than 7.5%
at each six monthly review.
For traditional policies and other unitised with-profits policies, surrender value
bases are normally reviewed twice a year, smoothing is applied by limiting the
change in immediate surrender value for specimen policies. Normally the
surrender value for specimen model policies will not change by more than 10% at
each six monthly review. Surrender values may change in between reviews
PLL PPFM Page 212 January 2024
because in many cases the surrender values are calculated using formulae that
depend upon factors such as term remaining which change over time.
However, if it is necessary to enable the fund to continue to meet the objectives
set out in the guiding principles in section 5 sometimes larger changes are made
in final bonus rates and surrender values.
If there has been a significant change in premium rates then larger changes than
those described above may be made so that final bonus rates and surrender
bases remain consistent with the premium rates on which the business was
generally written. Where premium rates were revised with the intention of
changing payouts, then smoothing will not be applied, so that the change in
payouts intended by the premium rate change does occur.
Calculations may also be carried out for specimen policies which are due to reach
their maturity date in the following few years. If these calculations show a trend in
payouts which could not be accommodated by following the normal limits on
change described above, the final bonus rate or surrender value being determined
may be adjusted so that the trend may more easily be accommodated.
For both maturity and retirement values, and surrender values, any change to
payouts that results from changes in the distributable estate, if any, will be
additional to the limits described and will not be subject to smoothing. Also where
there have been significant changes in methodologies and practices, the impact
may not be managed within the normal smoothing rules.
11.7.3 The period over which smoothing will be of neutral effect on a class of policies is
indirectly determined by the application of the above practices.
11.7.4 Applying smoothing does mean that on occasions, particularly for traditional
policies, payments are more or less than the proportion of asset share which it is
considered appropriate to pay. This difference will reduce or increase the excess
assets of the fund. There is no particular maximum accumulated cost of or benefit
to the fund which is allowed, although no smoothing accumulation would be
allowed to build up which was inconsistent with the achievements of the objectives
set out in the guiding principles in section 5.
11.7.5 Any cost to the fund of partial payments under unitised policies to which a market
value reduction does not apply does not affect the remaining value of the policies
concerned. Rather, it reduces the value of the excess assets in the fund (although
the excess assets will be increased for charges levied in respect of such
guarantees).
PLL PPFM Page 213 January 2024
Principle
11.8
Surrender Values
The aim in setting non-protected exit values will be to minimise any adverse effect
on the interests of continuing policyholders and subject to this, the aim is to set
non-protected exit values so that payouts for specimen policies or groups of
specimen policies in aggregate achieve a target payout ratio.
Practices
11.8.1 Non-protected exits refer to surrenders and transfers for pensions business.
11.8.2 For traditional policies that surrender early the aim is to make payments that are,
in aggregate and over time, across all specimen policies that are used for
determining surrender bases, a targeted proportion of asset share. This
proportion is currently 100%.
11.8.3 Actual surrender payments on individual policies will not generally be in line with
the target proportion because:
• Individual asset shares are not calculated or held on the administration
systems for use in surrender value calculations. Rather surrender values are
calculated in a variety of ways for different types of policy. Typically surrender
values are based on a discounted value of the guaranteed sum at maturity or
retirement (reduced to allow for non-payment of future premiums in the case of
regular premium policies) together with an allowance, where appropriate for
final bonus.
• Specimen policies are used to determine the parameters in the surrender value
calculations. The outcome for a particular individual policy may be different
from that of the specimen policy.
• There are a limited number of parameters that may be altered in the surrender
formulae for certain products which means that the parameters are set in
aggregate across a range of specimen policies.
• As the value of assets are changing every day but the parameters in the
surrender value formulae are only reviewed infrequently, there will inevitably
often be times when, if the asset share for the specimen policies were
recalculated, surrender values would, in effect, be based on slightly larger or
smaller percentages of those asset shares than the practices would in theory
dictate.
11.8.4 For the reasons given above, surrender values, when expressed as a proportion of
asset share, are expected to fall in a range around the target proportion. The
parameters in the surrender value bases are reviewed periodically with the aim
that the majority of surrender values for the range of specimen policies that are
analysed, will fall within the range of 80% to 120% of asset share before the
effects of smoothing.
11.8.5 In some cases, values in excess of 120% of asset share may be payable when
policies are surrendered close to maturity and the asset share of the relevant
specimen policy is less than the guaranteed benefits at maturity, or the maturity
payout is in excess of the asset share due to smoothing. This may also occur if
the value of the guaranteed benefits is high relative to asset share, due to the
effective maximum discount rate used in the surrender bases.
11.8.6 For traditional policies, the method used to derive the surrender or transfer value
may not involve the explicit application of final bonus. Where the value paid is
larger than the discounted value of the guaranteed sum assured and annual
bonuses already added, an element equivalent to final bonus will be implicit in the
value. For the purposes of determining the shareholder’s entitlement to profit in
PLL PPFM Page 214 January 2024
respect of any surrender or transfer, an appropriate proportion of the value paid is
deemed as representing final bonus.
11.8.7 For unitised policies, a market value reduction will be applied in most
circumstances where the calculation described in paragraph 11.6.1 results in a
shortfall of the determined proportion of asset share relative to the value of units.
The amount of the market value reduction will not exceed the amount of the
shortfall. Most policies contained a date or range of dates on which no market
value reduction or a limited market value reduction will apply. Some policies also
allow small regular encashments to be made without a market value reduction
applying (but otherwise the same market value reductions apply to partial as to full
encashments). As the value of assets change every day but market value
reductions are only reviewed periodically, there will inevitably often be times when,
if the asset share for the specimen policies were recalculated, surrender values
would, in effect, be based on slightly larger or smaller percentages of those asset
shares than the practices would in theory dictate. Normally an investment return
variation of up to 10% compared to that assumed when market value reductions
were last reviewed, would be allowed before there would be an additional market
value reduction review.
11.8.8 For bonds not eligible for final bonus, the dates, if any, at which no market value
reduction or a limited market value reduction applies vary for different tranches.
Most such dates have now passed.
11.8.9 For other with-profits bonds, the date at which no market value reduction or a
limited market value reduction applies on encashment is the 10th anniversary of
commencement. A period of three months following the 10th anniversary is
allowed during which any encashment request received will also benefit from no
market value reduction or a limited market value reduction. The market value
reduction may also be limited prior to the 10th anniversary so that the encashment
value represents the discounted value of the amount which would be available at
the 10th anniversary. Most such dates have now passed.
11.8.10 For PPF policies, the surrender value is based on the current value of the units
using the same price table as is used to allocate new units in respect of premiums
paid. The price table is constructed so as to reproduce, at present, 100% of asset
share at most longer outstanding terms whilst ensuring, whenever necessary, that
the price increases smoothly to the guaranteed £1 at maturity.
11.8.11 The percentages described above may be changed at any time, as may the
methods of calculation. However, before any changes are made, the Board will
formally consult with and take into account the opinions of the With-Profits Actuary
and the With-Profits Committee.
PLL PPFM Page 215 January 2024
Principle
11.9
Investment Strategy
Overall, the strategy will be to invest in fixed interest securities and growth
investments (see below), either directly or through vehicles such as unit trusts,
OEICS or derivatives. Growth investments will only be held to the extent to which
this is possible without unduly putting at risk the fund’s ability to meet guaranteed
benefits as they arise. Some cash or equivalent assets may be held for liquidity
purposes. Growth investments will normally consist of equity shares and
commercial property. However, the investment manager may also choose to hold
other types of investment within the growth investment category including corporate
bonds, cash, total return funds, derivatives, currencies and commodities.
For certain purposes, including determining the bonus rates applicable to policies,
account may be taken of assets such as future profits. A separate investment
strategy is adopted in respect of the reserves held to meet guarantees.
From time to time assets outside the fund may be relied upon to provide some or all
of a margin against future adverse change in investment markets. The investment
strategy is, however, based upon the intention that the fund will meet its aims using
only the assets of the fund after repayment of any loans or other financial support
received.
Derivatives may be used from time to time to make changes in the investment
dispositions more rapidly or cheaply than could be done directly through the
markets. They may also be used from time to time to reduce the risk of loss, for
example from share price falls, interest rate changes or exchange rate fluctuations.
There is no direct link between individual policies and specific assets. The
proportion of shares and property used indirectly to determine the bonuses
applicable to different policies may differ between different products, dates of issue
or terms remaining to reflect the different risks to both the specific policyholders and
to policyholders and the shareholder more generally. For some with-profits policies
with relatively high guaranteed benefits, this may mean that few or no growth
investments will be deemed to be held. Fixed interest securities that do not form
part of the growth investments are deemed to be broadly matched to the term
remaining.
Non-profit, non-linked policies are backed by fixed interest securities of appropriate
duration.
Index-linked and unit-linked liabilities are either backed to the extent possible with
close-matching assets or, in the case of unit-linked policies, are reinsured to the
Non-Profit Fund, which does so.
The aim is to restrict the maximum loss which could be suffered from the complete
default of any one external counterparty, whether through reinsurance, direct
investment or derivatives by dealing with a wide range of counterparties. In some
cases, additional precautions such as daily marking to market or deposit back are
used.
Larger, unprotected exposures are permitted to sister companies (regulated UK life
insurers) through internal reinsurance arrangements.
From time to time the growth investments may include a small number of properties
which are occupied by Phoenix Life Limited or by a related company and which
would not be expected to be traded.
Practices
PLL PPFM Page 216 January 2024
11.9.1 There are no formal procedures in place for assets to be transferred permanently
from the Shareholder Fund to the long-term business fund. Similarly within the
long-term business fund there are no formal procedures in place for assets to be
transferred permanently between the Non-Profit Fund and any of the with-profits
funds. Formal loan arrangements as described in section 11.14 may be in place
from time to time but would not normally be considered as permanently
irrecoverable at any time.
11.9.2 The investment strategy is regularly reviewed taking account of a variety of
considerations, including our approach to responsible investment. In particular,
reports from the investment managers, the Chief Actuary, the With-Profits Actuary
and the With-Profits Committee, and recommendations for change are considered
and, if appropriate, implemented.
11.9.3 All the guarantees to policyholders and liabilities to other creditors are not
completely matched with assets which provide a similar guarantee or payment. In
particular, often a proportion of the assets is invested in growth investments
because it is considered that, over most longer periods of time, a better return will
result. Separate investment strategies are followed for assets equal in amount to
the estimated aggregate asset shares of policies and for assets representing
additional provisions for liabilities under non-profit policies, for guarantees on with-
profits policies, for other liabilities and for the capital margins and excess capital.
Each of these strategies is described in more detail below.
11.9.4 It is not possible to implement the strategies described below with absolute
precision and any difference between the actual outcome and the theoretical
outcome will be treated as described in paragraph 11.4.2(s).
11.9.5 Investment returns allocated to the asset shares of specimen policies will reflect
the actual mix of assets held, should this be different from the theoretical mix
calculated according to paragraphs 11.9.6 to 11.9.9.
Asset Shares
11.9.6 Firstly, the appropriate asset mix for a large number of specimen policies of
different types, term remaining and commencement dates is determined. This mix
is determined by the successive application of a number of rules:
(i) The proportion invested in growth investments is regularly reviewed. The
asset mix is currently approximately 70% in growth investments and
approximately 30% in fixed interest securities with a small balance invested
in cash and / or assets such as future profits.
Unless
(ii) There are less than nine years of term remaining, when the mixes are
changed proportionately as the term remaining reduces until they are 35%
in growth investments and 65% in fixed interest securities with one year or
less of term remaining.
Unless
(iii) The rate of return required from growth investments for the asset share of
that specimen policy to grow over the term remaining, after the deduction of
retentions and charges, to equal the projected guaranteed benefits at the
maturity date is more than 5% per annum gross, when the proportion of
growth investments above is reduced according to the table below (and the
proportion in fixed interest securities increased to balance).
PLL PPFM Page 217 January 2024
Rate of return required*
Reduction applied
5% - 7.5%
33%
7.5% - 10%
67%
10% or more
100%
(* For terms remaining of seven years or less, the dividing points of 7.5%
and 10% are higher, rising to 11% and 17% respectively for terms
remaining of one year or less).
For the purpose of determining the exposure to growth investments, the term
remaining for a with-profits bond will be taken as:
• for bonds with a future guarantee date upon which no market value reduction
will apply on surrender, the time to that guarantee date; or
• for bonds with no such guarantee, or which have passed the date upon which
such a guarantee applied, 10 years.
For Buy As You Earn (BAYE) pension policies, the asset mix is 50% fixed interest
securities, 25% equities and 25% property.
11.9.7 The parameters defining the asset mix may be changed from time to time. When
doing so, account will be taken of the results of stochastic modelling calculations
which demonstrate the range of reasonable parameter sets that satisfy the aims
described in principle 11.9. From within this range, one is selected which is
considered to best balance the interests of all policyholders. However, this is
dependent on the fund having sufficient excess assets at the time. In anticipation
that such increases will be made, the proportionate reduction for policies with less
than nine years term remaining will be adjusted.
11.9.8 The actual proportions of different assets held will vary slightly from the specified
parameters as asset values change, although the actual mixes will be reviewed at
least annually and adjusted if necessary to bring the proportions more closely in
line with the target.
11.9.9 All policies are grouped according to the specimen policy which most closely
represents them and the asset mix for each specimen policy is obtained by
applying the rules in paragraph 11.9.6 to the policies in the group. The term of the
fixed interest securities that do not form part of the growth investments reflect the
term remaining.
For the purpose of determining the duration of the fixed interest investments, the
term remaining for a with-profits bond will be taken as:
• for bonds with a future guarantee date upon which no market value reduction
will apply on surrender, the time to that guarantee date; or
• for bonds with no such guarantee, or which have passed the date upon which
such a guarantee applied, five years.
For unitised with-profits pension business without guaranteed annuity rates, the
fixed interest duration is frozen once a policy has reached nine years of term
remaining.
Returns on emerging market debt do not reflect the term remaining, but rather
reflect the overall return on such debt.
PLL PPFM Page 218 January 2024
Guarantee Reserves
11.9.10 Firstly, the market consistent cost of the guarantees inherent in the with-profits
policies is calculated. How this cost, net of the value of expected future guarantee
charges and early termination profits, will change, as the prices of the growth
investments rise and fall and as volatility, credit spreads and interest rates change,
is then calculated. A mix of assets which will broadly change in line with the
change in the net cost of the guarantees is identified. This asset mix may require
a short position in growth investments to be adopted and a long position in fixed
interest securities or cash. It may also require the purchase or sale of financial
instruments such as equity options or to hold on average longer-term fixed interest
securities.
This calculation may be done in respect of specimen policies in some cases and
the results aggregated and in other cases a more approximate method is used.
As the prices of growth investments, interest rates, credit spreads and volatility
change, and in any case periodically, the appropriate asset mix for the guarantee
will be reassessed.
11.9.11 The liabilities for guaranteed annuity options are backed by fixed interest assets
whose value is expected to change broadly in line with the value of the guaranteed
annuity option liabilities when interest rates change. Swaps and /or swaptions may
be used for this purpose.
Irrespective of the fixed interest assets actually held, the asset share of specimen
policies with guaranteed annuity options will, to the extent that they are deemed to
be invested in fixed interest securities that do not form part of the growth
investments, be credited with the return on securities of duration appropriate to the
maturity date of the specimen policy.
Non-Profit Policies, Other Liabilities, Capital and Excess Assets
11.9.12 Assets representing the reserves for non-profit policies are invested in fixed
interest securities of appropriate duration. Assets representing unit-linked
liabilities which are not wholly reinsured are invested in the assets used to
determine the value of the unit liability. Assets representing RPI-linked liabilities or
expense reserves are invested in index-linked securities. Assets representing
short-term liabilities are invested in cash or short-term debt. Assets representing
capital, whether or not required to enable the fund to meet its objectives or to meet
regulatory requirements, are mainly invested in fixed interest securities.
Assets representing the estate of the Phoenix With-Profits Fund are mostly
invested in fixed interest securities. However, if the estate is large in relation to
the potential risks facing the fund, then part of the estate may be invested in
growth assets in line with the asset mix for the asset shares.
PLL PPFM Page 219 January 2024
Current Asset Policy
11.9.13 Fixed interest assets will be a mixture of approved fixed interest securities, such
as British Government gilts and other government and supranational bonds, and
other fixed interest securities, such as corporate bonds, debentures, loan notes
and emerging market debt. The mix of fixed interest asset types backing asset
shares, liabilities for guarantees or capital requirements may be different.
The agreements with the investment managers set out any limits on matters such
as:
• The types of investment that may be held.
• The maximum amount that can be invested in any single company.
• The maximum amount that can be invested in any single asset class / industry
sector / country.
• The maximum amount to which the manager might hold assets which are
different to the benchmark (guideline) portfolio in order to enhance returns.
(These include restrictions in terms of credit quality, term / duration and
amounts of individual holdings).
• The minimum credit rating quality of assets (as specified by the main rating
agencies such as Standard & Poor’s and Moody’s).
• Exposure to sectors or companies that do not align with our approach to
responsible investment, for example Tobacco
11.9.14 Investments are also made in sterling interest rate swaps to enable closer
matching of fixed interest income and outgo requirements. All swaps and
swaptions are regularly marked to market to minimise exposure to counterparty
default.
11.9.15 Growth investments may consist of equities, property and a small amount of
alternative assets such as hedge funds. Equities are split between UK equities
and overseas equities, and may include emerging markets and private equities.
With the exception of private equity, the equities are predominantly quoted and
regularly traded on a recognised stock exchange. Equities may be either actively
or passively managed relative to recognised index benchmarks. Individual stock
selection is carried out by the investment managers based on their expert
assessment of the relative prospects of available alternatives.
11.9.16 Property investments may be directly owned properties or held via collective
investment vehicles.
11.9.17 Sufficient assets are disposable at short notice without material loss in value to
meet foreseeable additional liquidity demands.
11.9.18 The proportion of different assets described in this section will vary from time to
time due to market movements and active management decisions taken by the
investment managers or the Investment Committee.
Miscellaneous
11.9.19 The fund does not hold any assets which are not normally traded.
11.9.20 The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
11.9.21 Before investing in new or novel investment instruments, the Board will obtain the
advice of the Chief Actuary and the investment managers on the benefits and risks
PLL PPFM Page 220 January 2024
of the proposition. This would include an analysis of the nature and proportion of
future outcomes in which the instrument would prove materially disadvantageous
relative to other more traditional investments. If the instrument is to be held in
material amounts in respect of with-profits policies, the Board will also seek the
opinion of the With-Profits Actuary and the With-Profits Committee.
11.9.22 If it is considered by the Board to be in the best interests of the policyholders,
further hypothecation of the assets in the fund may be introduced. For example
this may involve further hypothecation of different equity-backing ratios to further
classes or groups of policies.
11.9.23 A fixed charge over some of the fund’s assets has been provided to PLAE as
security under the reassurance arrangement and, whilst these assets are held in
separately identifiable accounts, this is not expected to impact the overall
investment strategy of the fund.
PLL PPFM Page 221 January 2024
Principle
11.10
Business Risks
As well as investment performance and counterparty exposure, and amounts
transferred to the Shareholder Fund (see section 11.12), the fund’s future ability to
continue to pay all guaranteed benefits when due, and the amounts of annual and
final bonus, will be affected by a number of other factors, ‘business risks’, that may
arise from the existing portfolio of with-profits and non-profit business. These are
listed, together with the controls which applied, in paragraph 11.10.1.
In some cases, the effect of future profits or losses (such as the increasing longevity
of annuitants) is anticipated and any changes reflected in expected outcome
immediately in discretionary payments. This reduces the likelihood that excessive
business risk exposures will apply to the longest remaining with-profits
policyholders, which is otherwise a particular risk because with-profits policies are
expected to run off more quickly than non-profit policies.
Any profits made or losses incurred as a result of a business risk will normally be
met by the fund, except where the business and the risk is wholly reinsured to the
Non-Profit Fund or another Phoenix Group subsidiary. However, the costs of any
compensation payable as a result of policies mis-sold will not affect the reasonably
expected benefits payable to policyholders. Costs specified by regulator rules as
being the responsibility of the shareholder (such as regulatory fines) will be met by
the Shareholder Fund or the Non-Profit Fund.
It is not currently envisaged that any business risks would be taken on in addition to
those to which the fund is already exposed although, if it appears to be potentially
beneficial to policyholders to do so, the exposure to risks to which the fund is
already exposed (such as by cancelling reinsurance arrangements) may be
increased. If business risks were taken on or increased, this would only be done if
the reward was expected to be better than that from other investments with broadly
equivalent risks (such as investing in shares or property). The Board would formally
consult and take account of the opinions of the Chief Actuary, the With-Profits
Actuary and the With-Profits Committee before doing so.
Existing business risk exposures will be annually reviewed as part of the
assessment of the formal regulatory capital requirements and appropriate measures
will be taken to limit risk to amounts to which it is fair for the with-profits business to
remain exposed.
Practices
11.10.1 The main business risks of the fund, and the controls that are applied to those that
Phoenix Life Limited can influence, include:
• Expenses of management – controlled mainly by outsourcing all business
activities, including policy administration and investment management. Normal
activities are outsourced on an agreed pricing basis. The main residual costs
not subject to an agreed pricing basis are project activity and certain direct
costs and fees.
• Failure of non-group outsourced services provider – part of the administration
services provided by PGMS are sub-contracted to Diligenta - controlled by
having exit plans. PGMS is liable for any additional cost of providing these
services which might arise if Diligenta were to default. Should PGMS be
unable to meet any of its obligations to provide services then Phoenix Life
Limited would request that Phoenix Group, as owners of PGMS step in to
restore the position. Should Phoenix Group not do this, then Phoenix Life
Limited would attribute any losses to the shareholder fund or Non-Profit Fund,
and the fund would only be affected if the shareholder fund or Non-Profit Fund
had insufficient excess assets to bear the losses.
PLL PPFM Page 222 January 2024
• Meeting minimum guaranteed policy benefits (where these costs are
reasonably attributable to the fund) and the cost of smoothing – controlled by
having an appropriate rate of annual bonus, limiting the extent of smoothing
and investing primarily to meet the guarantees, all whilst ensuring that
customers continue to be treated fairly.
• Fluctuations and long-term trends in death or sickness rates – fluctuations are
constrained by the use of reinsurance contracts to limit exposure on any one
insurance policy but significant risks remain from improvements in longevity on
existing annuities, deferred annuities and from future annuities under
guaranteed options.
• Changes in taxation.
• Profits or losses from investments backing non-profit business or other
liabilities and from investments which represent additional capital.
• The cost of guaranteed annuity options – risks from varying interest rates are
controlled by investing in appropriate hedging assets but significant exposure
remains in respect of improving longevity.
• Profits or losses from the early or late termination of policies – a significant
increase in the persistency of policies with onerous guarantees could cause a
significant reduction to other policy values.
• Provision of compensation for past legal or regulatory infringements, especially
due to inadequate sales practices – controlled in part by ensuring that
compensation is only paid where a legal entitlement exists.
• The cost of additional capital needed to be held for regulatory purposes or for
the optimal management of the business – controlled by regularly reviewing the
excess capital being held and by ensuring that only a commercial cost for
capital is being paid.
• Failure of reassurers – the reassurance credit risk is monitored.
• There is an arrangement which transfers the unit liability for non-profit unit-
linked liabilities to the Non-Profit Fund - the financial position of the Non-Profit
Fund is monitored.
11.10.2 In paragraph 11.4.2, how and to what extent business profits and losses are
incorporated in the asset share calculations for specimen policies are described
and so how each, if at all, affects the amounts payable under with-profits policies.
11.10.3 As a result of the approach described in paragraph 11.4.2(s), the effect of other
business profits and losses on the amounts payable under with-profits policies will
be implicitly smoothed as described in paragraph 11.6.4 and in section 11.7.
Also, as explained in paragraph 11.4.2(s), if a particularly large business profit or
loss in any one year is experienced or identified, its incorporation may be spread
in asset share calculations over a number of future years to avoid excessive
impact on policy values in the short-term.
11.10.4 The outcome from all the business risk of the fund is currently mainly pooled
across all with-profits policies in the fund, although this has not always been the
practice in the past. Any exceptions are highlighted elsewhere in this document.
11.10.5 Since January 2011, in accordance with paragraph 5.2.9, any annuities coming
into payment are transferred to the Non-Profit Fund, and the fund pays the Non-
Profit Fund a premium in respect of the liability transferred. After such transfer, all
the risks in relation to the transferred annuities are borne by the Non-Profit Fund.
PLL PPFM Page 223 January 2024
Principle
11.11
Expenses and Charges
Costs may be recovered from policies directly, for example by the cancellation of
units of unitised policies, or indirectly via bonuses and early termination values.
Where indirect costs are specific to a class of policy then, taking into account the
approximations referred to in section 11.4, such costs will be taken into account in
assessing the bonuses added to that policy class and in assessing the early
termination value payable.
Where indirect costs are not specific to a single policy class, they will be
apportioned across the policy classes to which they are relevant in a reasonable
manner, as is explained in the practices.
Implicit charges for mortality, sickness and other benefits will generally reflect the
fund’s own or insurance industry actual claims experience. Explicit charges for such
benefits will be determined in line with policy conditions; where this requires periodic
reviews in the light of experience, such reviews will be carried out and charges
adjusted accordingly.
In some cases, policy conditions restrict the type and amount of charges that may
be levied.
Practices
11.11.1 An agreement exists with PGMS to supply administration services to the fund.
This is a perpetual agreement and is not expected to be renegotiated, but charges
may be amended in respect of major regulatory change. The agreement can
however be terminated early for material failure to meet service standards or other
non compliance with the agreement. We regularly monitor service standards.
Value added fees for work outside the service level agreements are changed
separately.
The main expenses that are apportioned to the asset shares of specimen with-
profits policies relate to the fees paid to PGMS in connection with all business
activities. These charges are mainly expressed as an annual amount per policy,
irrespective of type (other than for non-profit annuities, for which the fee is lower),
increasing each year by RPI + 1%. For group pension plans, the fee is per
member rather than per policy. For policies with more than one benefit, including
premium increments, the charge is only made once. They are apportioned on this
basis.
Additional fees payable for certain other one-off activities and developments are
generally apportioned in proportion to the PGMS fees.
11.11.2 Fees are also payable to the investment managers in connection with the
management of the investments. These amounts are expressed as a percentage
of the investments under management. Where investments are via a collective
investment vehicle operated by the investment managers, the total fees payable to
the investment managers are not materially different than if those investments
were directly held.
Commission is also payable to intermediaries on some contracts and to the ceding
office under the unitised pension reassurance agreement.
PLL PPFM Page 224 January 2024
11.11.3 Other than to the extent that costs are apportioned to certain activities the costs of
which are not apportioned to asset shares or to the extent described in paragraph
11.4.2, the totality of expenses allocated to the fund will be taken into account via
the asset share calculations for specimen policies. Costs attributable to the fund
that are not apportioned to asset shares will reduce the excess assets of the fund.
It is not intended to include expenses at other than cost to asset share calculation,
other than as described in paragraph 11.4.2.
PLL PPFM Page 225 January 2024
Principle
11.12
Estate Management
The aim is to manage the fund so that there is always a small excess of the value of
the assets over the amount considered necessary on market consistent
assumptions to enable the fund to meet the aims described in the guiding principles
in section 5.
It is intended to maintain the excess at the targeted level by:
• controlling the addition of annual bonuses to policies;
• only paying final bonuses or other discretionary benefits in line with the
principles set out earlier;
• maintaining an appropriate investment strategy;
• limiting, where possible, the business risks faced;
• exercising discretion in other areas with moderation; and
• drawing on or repaying additional financial support from the shareholder in the
form of loans to the fund or otherwise.
Practices
11.12.1 The estate is the estimated realistic value of the assets less the estimated realistic
value of the liabilities. It is calculated using realistic assumptions and generally
accepted methodologies on a basis determined by the Board.
11.12.2 To the extent that any profits or losses arising in the fund are not allocated to asset
shares in accordance with section 11.4, they will act to increase or reduce the
estate. To the extent that the amounts charged to asset shares are based on
estimates or assumptions, then any difference between these and the actual
amounts will act to increase or reduce the estate.
11.12.3 The estate in the fund will be used to:
(a) assist the fund in demonstrating it has access to sufficient capital resources
to meet its liabilities and treat customers fairly;
(b) provide a buffer in the fund should adverse experience mean that the
reserves held to cover the liabilities prove insufficient;
(c) meet any costs which are charged directly to the estate, rather than to asset
shares;
(d) meet the costs of any changes which the Board believe to be necessary to
improve fairness between policyholders and / or enhance the run-off of the
fund; and
(e) enhance the benefits payable to those with-profits policies which have an
interest in the estate but always aiming to retain sufficient estate to meet the
expected amounts required for (a), (b), (c) and (d). The amount considered
by the Board to be available from time to time for such enhancements will
be referred to as the distributable estate.
11.12.4 Any enhancement in benefits on account of the distributable estate referred to in
11.12.3(e) will generally be achieved by including a temporary uplift to the asset
share for the purpose of setting final bonus rates and surrender values. However
if the distributable estate is large then consideration needs to be given to making
additions to the asset shares from the estate.
11.12.5 The amount of the estate, the distributable estate, and the potential for any
enhancements to policyholder benefits will be subject to review at least once a
year.
PLL PPFM Page 226 January 2024
11.12.6 In the event of a risk of the assets in the fund being insufficient to cover the
liabilities, charges may be made to the asset shares to restore the estate to a
target minimum level. However such charges could not be applied to any part of
the deficit caused by regulatory penalties (fines) or compensation payments
relating to events which occurred before 31 July 2009, see paragraph 5.2.18,
except to the extent that such charges are effectively reversing any estate
previously added into asset shares.
11.12.7 Providing that it is possible to do so whilst still treating policyholders fairly, it is
intended to manage the excess assets using solely the resources of the fund and
avoiding the need to draw on any external sources of capital.
In the event of the assets in the fund being insufficient to cover the liabilities, then
any past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit.
Arrangements exist for monies to be transferred from the Non-Profit Fund or
Shareholder Fund to the fund with the aim that the amount of assets in the fund
exceeds the liabilities by a small margin, should the charges described in 11.12.6
be insufficient to restore the estate. For this purpose, the possibility of distributing
any surplus assets to policyholders will not be regarded as a liability.
Transfer of such amounts back to the Non-Profit Fund or Shareholder Fund will be
made whenever emerging surplus in the fund permits.
The exercise of discretion in respect of with-profits policies will be managed with
the aim that the amounts transferred to the fund will be repaid to the extent that is
possible whilst still meeting the aims in the guiding principles in section 5. In
determining benefits under with-profits policies, any liability to transfer such
amounts back to the Non-Profit Fund or Shareholder Fund will be disregarded to
the extent that this is necessary to treat customers fairly (that is in accordance with
these Principles and Practices).
PLL PPFM Page 227 January 2024
Principle
11.13
New Business
Apart from as a result of the exercise of options under existing policies,
contractual increments and new entrants to stakeholder, occupational and ‘group
personal’ pension plans, new business is no longer accepted. The future
business risk from this source is expected to be small.
Practices
11.13.1 The fund is no longer actively seeking new business, but continues to write a small
amount of new business relating to policy options under existing contracts.
Currently there are no plans to reopen the fund to new business.
PLL PPFM Page 228 January 2024
Principle
11.14
Equity Between the Fund and Shareholders
The transfer of profits in any year from the fund to the Shareholder Fund is
restricted by the 2023 Scheme to a maximum of one ninth of the value of bonuses
added to policies in that year. Any change to the one ninth limit would require the
agreement of the Board and would be subject to approval by our regulator and the
High Court. Payments from the fund are therefore limited to those amounts
required to meet obligations under policies and reassurance agreements written in
the fund and to transferring to the Shareholder Fund the shareholders share of the
divisible profits. None of the divisible profits arising in the fund are attributed to
the other with-profits funds.
If the Board were considering making changes to increase this percentage, it
would first request and consider the advice of the Chief Actuary and take into
account the opinions of the With-Profits Actuary and the With-Profits Committee.
If it was decided to proceed, the Board would notify policyholders at least three
months in advance. It would also need to seek the agreement of Phoenix Group
and the High Court to make such a change.
From time to time, for some classes of business, less than the permitted maximum
may be transferred from the fund to the Shareholder Fund.
The fund may from time to time receive financial support from the Non-Profit Fund
or Shareholder Fund or from another member of Phoenix Group, whether in the
form of a loan or otherwise, if such support is needed to enable the fund to meet
the target excess assets described in section 11.12. The terms on which such
support is provided will be on a commercial basis which is fair and reasonable to
both parties, taking into account prevailing market conditions and the risks
involved. If such support forms part of the fund, then it will be treated as a liability
if it would otherwise increase the excess assets.
Services may be provided by the shareholders to the fund but terms for such
services will be on commercial terms which are considered to be consistent with
the risks of providing those services, or considered to be consistent with terms
which would be available for such services on an arms length commercial basis.
Practices
11.14.1 For traditional policies and PPF policies, the value of annual bonus added to
policies, discounted at the risk free yield, is determined. One ninth of that value is
transferred to the Shareholder Fund together with one ninth of the discounted
value of any interim bonus and one ninth of any final bonus. This means that the
transfer to the Shareholder Fund is 10% of the distributed surplus.
11.14.2 For other unitised business, currently only five ninety-fifths of the value of annual
or final bonus added is attributed. This is broadly equivalent to 5% of distributed
surplus.
11.14.3 For unitised business where a market value reduction is applied on claims, which
has the effect of reducing the annual bonus previously added, then there is a
corresponding reduction in the transfer to the Shareholder Fund.
11.14.4 Transfers to shareholders on pensions business are reduced by an amount
reflecting the expected additional tax arising on those transfers. Hence the net
amounts transferred to shareholders for pensions policies are lower than the 10%
and 5% referred to above.
PLL PPFM Page 229 January 2024
11.14.5 The relative apportionment of value between shareholder and policyholder will not
be affected by changes in the discount rate, as shareholder transfers are
discounted at market rates.
11.14.6 Additional tax arising from transfers to shareholders is allocated to the fund (but is
not charged to asset shares). In considering the allocation of tax and any tax
impacts that may arise from time to time fairness between the stakeholders is
considered.
11.14.7 The Board are not aware of any external or internal factors which, if they were to
change, would have a material effect on the apportionment of surplus as described
above.
11.14.8 There are no classes of business which are significantly and systematically
reducing the value of the excess assets of the fund as a result of the shareholder
transfer in respect of that class.
PLL PPFM Page 230 January 2024
12 Principles and Practices – Scottish Mutual With-Profits Fund
The Principles and Practices given in sections 12.4 to 12.14 together with the Guiding
Principles and Practices form the Principles and Practices of Financial Management for the
Scottish Mutual With-Profits Fund. Sections 12.1 to 12.3 give background information specific
to the Scottish Mutual With-Profits Fund. Subsequently in this section the use of the term ‘the
fund’ generally means the Scottish Mutual With-Profits Fund.
12.1 Fund History
The Scottish Mutual With-Profits Fund comprises the business that was
transferred to Phoenix Life Limited under the 2009 Scheme from the With Profits
Sub-Fund of Scottish Mutual Assurance Limited.
The Scottish Mutual With-Profits Fund also comprises the Smoothed Investment
Fund business that was transferred to the Phoenix Life Limited Non-Profit Fund
under the 2009 Scheme from the Other Business Sub-Fund of Scottish Mutual
Assurance Limited, and then subsequently reassured to the Scottish Mutual With-
Profits Fund.
12.1.1 The Scottish Mutual Assurance Society demutualised on 1 January 1992 and its
business was transferred to Scottish Mutual Assurance plc. Scottish Mutual
Assurance plc was subsequently renamed Scottish Mutual Assurance Limited.
From 1991 to 2006, Scottish Mutual Assurance Limited was owned by Abbey
National plc. In September 2006, Scottish Mutual Assurance Limited was
acquired by Resolution plc.
The Scottish Mutual Assurance Limited With Profits Sub-Fund closed to new
business in 2002. The Smoothed Investment Fund business written in the
Scottish Mutual Assurance Limited Other Business Sub-Fund remained open to
new business until 2008.
12.2 Types of Business
12.2.1 The with-profits business in the fund is split into different classes for the purposes
of allocating annual bonuses, final bonuses and smoothed returns as appropriate.
The split primarily depends on:
• The type of product and the method by which it participates in profits, that is
traditional with-profits business and unitised with-profits business. In addition
certain types of business for which final bonuses are not applicable are treated
separately.
• The classification for tax purposes, that is life assurance business, general
annuity business, pension business and overseas life assurance business.
• Whether the business is regular premium paying or single premium.
12.2.2 The traditional with-profits business comprises:
• Life assurance (basic life assurance and general annuity business), primarily
endowment assurances and whole of life policies.
• Pension with-profits endowments arising from the Federated Superannuation
Scheme for Universities. Some of these contain guaranteed annuity options.
• Individual pension with-profits policies. This group includes the Self-Employed
Retirement Annuity contracts (SE contracts) and the Individual Pension
Arrangement policies (IPAs) for employed persons and the Master Policy
arrangements which are essentially packaged sets of IPA benefits written
under one policy for the trustees of the scheme. Some contracts are written as
a deferred annuity and may have a guaranteed cash option whilst others
provide a cash sum at retirement and may have a guaranteed annuity option.
PLL PPFM Page 231 January 2024
• With-profits annuities.
• Group deferred annuity with-profits contracts.
• Group cash with-profits contracts.
12.2.3 The unitised with-profits business arises from unitised policies in the Non-Profit
Fund which have chosen this investment option.
Some of the with-profits units from single premium investment bonds of Scottish
Mutual International (SMI) based in Dublin, are reassured into the Scottish Mutual
With-Profits Fund.
12.2.4 The smoothed return business arises from unitised policies in the Non-Profit Fund
which have chosen the Smoothed Income Fund or Smoothed Growth Fund
investment options. The assets attributable to this business are notionally ring-
fenced.
12.2.5 The fund includes both business issued in the UK and denominated in sterling and
overseas business denominated in Sterling, Euros or US dollars. The overseas
business is reassured from SMI.
12.3 Capital Support to the Fund
The capital policy is described in section 3.2.
In certain circumstances, the shareholders will loan money to this fund. The
practices relating to the receipt of support are detailed in sections 3.3 and 5.2.
PLL PPFM Page 232 January 2024
Principle
12.4
Amounts Payable Under a With-Profits Policy
The aim of the methods employed in determining the amounts payable under a
with-profits policy is the fair treatment of all with-profits policyholders consistent
with the guiding principles.
The main guide used for determining the amounts payable under with-profits
policies is asset share calculations which are carried out for certain specimen
policies. The amounts payable will allow for a fair share of any surplus distributed,
which may be in the form of annual or final bonuses or smoothed returns.
The degree of approximation used in the application of these methods aims to be
consistent with the overall fair treatment of all with-profits policyholders.
Asset share methodology and processes will be regularly reviewed by the Board
and may change. This may include changes to the historical aspects of the
calculations as a result of a variety of factors, including changes in regulations,
improvements in the degree of approximations, maintaining equity between
classes and groups of policyholders and significant changes in the financial
condition of Phoenix Life Limited.
Policyholders have no entitlement to receive the asset shares, if any, used to
determine the bonuses for their policies.
Different bonuses are declared for different classes of with-profits business,
reflecting the different tax, type of with-profits business and product features. New
bonus classes would be required if a new type of product were developed. An
existing class would normally only be split in exceptional circumstances. Within
classes, bonuses may be further differentiated by series.
Bonus policy can be affected by a variety of factors including the financial and
solvency position of Phoenix Life Limited, the financial strength of the fund, the
expected cost of guarantees, actual and expected investment returns and
expenses, the likelihood of changes in the level of provisions and the constraints
which increases in guaranteed benefits may place on the fund, particularly in
relation to investment strategy. These factors, together with the aim to retain
flexibility in the operation of the fund, constrain annual and final bonus
declarations, smoothed return declarations and the smoothing policy. These
constraints also apply in changing economic conditions.
Bonuses can only be declared if there is surplus available for distribution or they are
guaranteed.
Practices
Asset Share Methodology
12.4.1 The basic method for asset share calculations for with-profits business uses actual
investment returns net of tax and for expenses, mortality and morbidity benefits,
uses the actual underlying experience for traditional with-profits business and uses
product charges for unitised with-profits and smoothed return business.
Asset shares are not smoothed. In particular the investment returns and
experience elements contributing to asset shares are generally not smoothed,
other than that inherent in the processes used in the derivation of the
assumptions.
PLL PPFM Page 233 January 2024
12.4.2 The following table describes the elements credited or charged to asset shares for
traditional with-profits, unitised with-profits and smoothed return business.
Element
Traditional
With-Profits
Business
Unitised With-
Profits
Business
Smoothed
Return
Business
(a)
Premiums
Premiums paid
Note (a)
Premiums paid
Note (a)
Premiums paid
Note (a)
(b)
Investment return
Allocated return
Note (b)
Allocated return
Note (b)
Allocated return
Note (b)
(c)
Investment
expenses
Actual allocated
Note (c)
Implicit in
product charges
Implicit in
product charges
(d)
Initial expenses
Actual allocated
Note (d)
Implicit in
product charges
Implicit in
product charges
(e)
Renewal expenses
Actual allocated
Note (e)
Product charges
Note (e)
Implicit in
product charges
(f)
Other expenses
Actual allocated
Note (f)
Not charged
Not charged
(g)
Tax on investment
return
Actual allocated
Note (g)
Actual allocated
Note (g)
Actual allocated
Note (g)
(h)
Tax relief on
expenses
Actual allocated
Note (g)
Implicit in
product charges
Implicit in
product charges
(i)
Mortality &
morbidity costs
Experience
Note (i)
Note (i)
Note (i)
(j)
Early terminations
Charged
Note (j)
Charged
Note (j)
Charged
Note (j)
(k)
Paid-up policies
Charged
Note (k)
Not applicable
Not applicable
(l)
Partial and regular
withdrawals
Not applicable
Note(l)
Note(l)
(m)
Surrenders at
protected dates
Not applicable
Note (m)
Note (m)
(n)
Annuity payments
Sometimes
Note (n)
Not applicable
Not applicable
(o)
Charges for the
cost of guarantees
Note (o)
Note (o)
Note (o)
(p)
Charges for the
cost of capital
Not charged
Not charged
Not charged
(q)
Distributions to
shareholders
Sometimes
Note (q)
Not applicable
Not applicable
(r)
Tax on distributions
to shareholders
Not applicable
Not applicable
Not applicable
(s)
Profit and losses
from other business
Not charged
Not charged
Not charged
Note (s)
(t)
Estate distribution
or charge
Note (t)
Note (t)
Not charged
Note (t)
(u)
Exceptional items
Not applicable
Not applicable
Not applicable
The way in which the above items are taken into account is described in the notes
below, together with how they vary by type of business. Where charged is used in
the table above this means both charged and / or credited depending on whether it
is a loss or profit.
PLL PPFM Page 234 January 2024
Notes
(a) Premiums
Premiums paid under the specimen policy. For unitised business, it is the
premiums used to purchase units which are net of any premium related policy
charges. These charges include any reduced, nil or enhanced allocation
percentages, additional initial unit charges and a bid/offer spread.
(b) Investment return
The investment returns are based on separate notional ring-fenced assets. The
smoothed return business is notionally ring-fenced. The remaining assets are split
between policies denominated in Sterling, Euros and US dollars. The investment
returns allocated to asset shares vary by type of policy as described in section
12.9. Further distinctions may be made for different classes and groups of policies
if this was considered fair. In particular, the return from any assets bought
specifically to cover guarantees may be reserved to meet the costs of these
guarantees.
(c) Investment expenses
For traditional business this is based on a best estimate of the actual expense
incurred.
(d) Initial expenses
Historically these are based on an estimate of typical costs for the year of entry.
(e) Renewal expenses
For traditional business the per policy expenses used are the same as those used
to determine the actual charges.
For unitised with-profits and smoothed return business many of the policy fees
charged have a standard provision that they are annually reviewable (in some
cases specifically in line with increases in RPI or NAE).
(f) Other expenses
For traditional business a proportion of other expenses actually incurred in
managing the fund or the business can be charged against the asset shares.
(g) Tax on investment return
Allowance for the relevant rate of tax on the respective investment classes is
applied. It is based on a best estimate of actual current tax payable.
(h) Tax relief on expenses
Tax relief is available on some expenses.
(i) Mortality and morbidity costs
For traditional with-profits business, the charge is based on the underlying
experience and is approximated by applying a percentage of a standard published
mortality table. The percentage applied is based on the results of mortality
investigations carried out from time to time.
PLL PPFM Page 235 January 2024
For some unitised with-profits business and some smoothed return business,
these costs are charged explicitly in the product charges on a monthly basis,
based on the sum at risk, by cancelling units. Any profits or losses from the
explicit charges not reflecting the actual underlying experience and costs are not
credited to asset shares. For other unitised with-profits business, the costs are
implicit in the product charges and no explicit monthly charge is applied.
For group deferred annuity and group cash traditional with-profits business, this
includes the cost of amounts used to provide benefits.
(j) Early terminations
Profits or losses arising from surrenders currently accumulate in the estate. The
surrender profits / losses on with-profits business may be applied to asset shares
by an addition to or deduction from the rate of investment return applied in the
year in which the profit or loss arises or may be accumulated in the estate and
applied as part of a distribution of the estate in a later year.
The surrender profits and losses are pooled within traditional with-profits business,
unitised with-profits business and smoothed return business separately and may
be pooled at bonus class level.
(k) Paid-up policies
Separate asset shares are not worked out for paid-up policies. Any profits or
losses arising from policies becoming paid up are treated as in note (j).
(l) Partial and regular withdrawals
These are reflected in asset share calculations only to the extent that part of the
policy has been cancelled. The proportion of the policy withdrawn is reflected in
both the underlying asset share and remaining policy values. Profits and losses
arising are treated as in note (j).
(m) Surrenders at protected dates
Profits and losses arising are treated as in note (j).
(n) Annuity payments
For traditional with-profits annuity business, these reflect the pension payments
made under the policy.
(o) Charges for the cost of guarantees
Currently no explicit charge is made for the cost of guarantees and the cost is
effectively borne by the estate. The cost of rebalancing the hedge asset to match
the guarantees may be charged through an adjustment in the net investment
return credited to asset shares for traditional and unitised with-profits business.
The ring-fenced smoothed return business may be charged for any hedge
rebalance costs if hedging assets are held for this business.
Any charges would be pooled within traditional with-profits business, unitised with-
profits business and smoothed return business separately as applicable and may
be pooled at bonus class level. However, where the cost is deemed too high for
one class of business, the charge may be made over all classes and types of
business except losses on traditional business which cannot be charged to
unitised with-profits business, unless the effect of such charges was only to
remove previous enhancements to the asset shares from the estate.
PLL PPFM Page 236 January 2024
(q) Distributions to shareholders
For traditional with-profits business, for policies issued from 1 January 1992 (that
is post demutualisation), the cost of distributions to shareholders resulting from the
cost of bonus allocated to policies, is charged to asset shares. The cost of bonus
is as described in section 12.14, using the basis applicable at the time. For
policies issued before 1 January 1992 (that is pre demutualisation), the cost of
distributions to shareholders is not charged to asset shares.
(s) Other business profit or losses
All profits and losses arising on smoothed return business are reflected in the
asset shares of smoothed return policies. However profits and losses arising on
other types of with-profits business do not impact on smoothed return business,
other than in extreme circumstances.
(t) Estate distribution or charge
Asset shares may be increased by distributions from the estate or reduced by
charges to the estate. However these distributions are not guaranteed. In the
event of the assets in the fund being insufficient to cover the liabilities, then any
past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit. See section 12.12.
The value of the demutualisation Special Bonus which was added on 1 January
1992 is included in the asset shares.
12.4.3 Asset shares are calculated for representative specimen policies when setting
bonus rates and surrender value bases for non-protected exits. Specimen policies
are chosen to represent the business and include a range of policy terms and
years of entry. The primary emphasis in selecting specimen policies is the size of
premium or sum assured. There is however a degree of averaging, particularly for
those terms where there are relatively few policies.
12.4.4 Asset share models contain some approximations, but these approximations do
not prejudice the overall fair treatment of with-profits policyholders. Whilst only
minor approximations are employed in asset share calculations, no investigations
are carried out on the level of approximation built into the resulting asset shares.
Policies that have been subject to alterations, including becoming paid up, do not
yield robust asset share calculations. For these policies, bonuses are based on
those for an equivalent unaltered policy with approximate adjustments to reflect
the differing premium and benefit payment histories.
For traditional whole life policies, final bonuses and surrender value bases may be
set with reference to those applicable for endowments.
12.4.5 Items not charged to asset shares, the effects of the approximations in the
experience assumptions and the effects of other approximations in the methods
employed feed through to the estate as described in section 12.12.
12.4.6 Asset share practices are documented.
Asset share and bonus policies are documented at a high level in various Board
(and previously SMA Board) reports and reports on asset share investigations that
have been undertaken from time to time.
Detailed specifications relating to the asset share calculations and the bonus
calculations only exist to a varying degree, but the coding within the models used
in the processes are viewable and thus document the calculations.
PLL PPFM Page 237 January 2024
Asset share assumptions are documented and this tends to include references to
their source of derivation.
For each bonus review appropriate documentation is produced and provides an
audit trail of the process, including sources of data, source and derivation of
assumptions, backing calculations, notes and correspondence. This audit trail
normally includes retaining electronic copies of the systems and calculations used
for the review.
12.4.7 Asset share models, processes and documentation are subject to a continual
process of development, improvement and refinement. Significant effects are
reported to and considered by the Board.
12.4.8 Asset share practices are not guaranteed and may be changed in future. Historic
asset shares were agreed at the time of demutualisation in 1992.
Asset share methodology and processes will be regularly reviewed by the Board
and may change. This may include changes to the historical aspects of the
calculations as a result of a variety of factors, including changes in regulations,
improvements in the degree of approximations, maintaining equity between
classes and groups of policyholders and significant changes in the financial
condition of Phoenix Life Limited.
Bonus Declarations
12.4.9 Bonus declarations are approved by the Board or committee of the Board or
delegated to senior management and then retrospectively approved by the Board.
12.4.10 For traditional with-profits business separate annual bonus scales are declared for
the following classes:
• Life traditional with-profits business
• Individual pension traditional with-profits cash based policies with an annuity
option and individual pension traditional with-profits deferred annuity contracts
with a guaranteed cash option
• With-profits annuities
• Group deferred annuity traditional with-profits business
• Group cash traditional with-profits business
Separate final bonus scales are declared for the following traditional with-profits
classes:
• Life traditional with-profits business
• Individual pension traditional with-profits cash based policies with an annuity
option
• Individual pension traditional with-profits deferred annuity contracts with a
guaranteed cash option
• Group pension traditional with-profits cash based policies with an annuity
option (additional voluntary contribution policies).
There is no final bonus applicable to with-profits annuity, group deferred annuity
and group cash pension business.
For with-profits annuity business, there may be an additional bonus.
For individual pension traditional with-profits deferred annuity policies with a
guaranteed cash option the policy sets out the guaranteed rate at which the
annuity benefits can be commuted for a cash benefit (including any tax free lump
sum) or an open market option. It is current practice to offer enhanced
commutation terms to broadly reflect the fair value of the annuity benefits being
given up, having regard to market interest rates and best estimate assumptions of
PLL PPFM Page 238 January 2024
mortality rates and forecast improvements. The enhanced commutation terms will
normally be reviewed with the same frequency and at the same time as final
bonus rates are reviewed. The continued availability of such enhanced terms is
not guaranteed.
12.4.11 For unitised with-profits business:
Separate annual bonus scales are declared for the following classes of unitised
with-profits business:
• UK unitised with-profits life - rates depend on series
• UK unitised with-profits pension - rates depend on series
• Overseas (international) unitised with-profits - rates depend on currency
Separate final bonus scales are declared for the following classes of unitised with-
profits business:
• UK unitised with-profits life regular premium - scale depends on series
• UK unitised with-profits life single premium - scale depends on series
• UK unitised with-profits pension regular premium - scale depends on series
• UK unitised with-profits pension single premium - scale depends on series
• Overseas (international) unitised with-profits - scale depends on currency
12.4.12 For smoothed return business, there are separate smoothed unit prices and
smoothing adjustments for the Smoothed Income Fund and the Smoothed Growth
Fund.
12.4.13 For traditional with-profits business where final bonus is applicable, annual
bonuses are reviewed annually and are declared in arrears in March of the
following year to which the bonus relates. Final bonuses are declared in advance
and are reviewed at least twice a year, normally from 1 January and 1 July. For
with-profits annuities, the annual bonus (and additional bonus) normally applies for
policy anniversaries during the period from 6 April to 5 April in the following year
and is declared annually shortly before the 6 April. For group deferred annuity and
group cash business, annual bonuses apply on the policy anniversary in each
calendar year and rates are declared early in the calendar year.
For unitised with-profits business, annual bonus rates are set in advance. The
time for which they will apply is not fixed and they may be reviewed at any time.
They will be reviewed at least once a year at the time of the annual bonus review
for traditional with-profits business. Final bonuses are declared in advance and
reviewed at least twice a year, normally from 1 January and 1 July.
For smoothed return business, the smoothed unit price is formula based and
changes daily and smoothing adjustments may be changed at any time.
12.4.14 The timing of final bonus declarations may be varied.
12.4.15 Final bonuses and annual bonuses declared in advance are expected to, but are
not guaranteed to apply until the next planned review date. These bonuses may
be reviewed at any time between normal planned review dates. Unitised with-
profits business final bonuses and market value reductions are particularly subject
to more frequent reviews in response to investment market movements or where
there has been, or is expected to be a high volume of surrenders. Otherwise,
additional reviews would normally only be in response to more exceptional
investment market movements.
12.4.16 Final bonus reviews also consider the amount of final bonus paid on non-protected
exits (surrenders).
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12.4.17 Bonuses are declared out of surplus arising in the year or in anticipation of surplus
arising. If there is no surplus or no expectation of surplus arising, no bonuses can
be declared, unless they are guaranteed.
Principle
12.5
Annual Bonus Rates
The aim is to set annual bonuses at a prudent level, balancing the benefit to
policyholders of increased guarantees, the aim for an element of final bonus, the
flexibility of the operation of the fund and its ability to ensure the guarantees can
be met in future. Annual bonuses may increase or decrease from declaration to
declaration and may also be nil. Annual bonuses can be declared only if there is
sufficient surplus available or if they are guaranteed.
In cases where final bonus is not applicable, smoothing of the annual bonus
rates is used as a mechanism to adhere to section 12.4 where applicable.
Practices
12.5.1 For smoothed return business, there are no bonuses and section 12.7 describes
how benefits are determined for this business. The rest of this section does not
apply to this business.
12.5.2 The Board makes decisions on annual bonus declarations taking into account a
number of factors. These factors are set out in the following paragraphs.
12.5.3 For each class of business, other than traditional with-profits business not eligible
for final bonus (see 12.5.5), the level of annual bonus is set so as to maintain a
buffer for final bonus. The future claim payouts are estimated using realistic
assumptions and the annual bonuses set at such a level that if experience turns
out to be in line with those assumptions, the overall amount of the payout paid in
the form of final bonus will be in line with a target proportion. Under current
investment conditions, the overall target is that 25% of the overall value of
payouts, calculated before any future augmentation provided by a release of the
estate, will be in the form of final bonus. Given the aggregate nature of this target,
for an individual policy, this final bonus buffer may be more or less than 25%. This
overall target is itself subject to review and may be changed. If experience does
not turn out to be in line with the assumptions then the 25% target might not be
met.
Annual bonus rates will be adjusted to keep the overall level of projected final
bonus broadly in line with the target. If necessary to remain on target, annual
bonus rates will be reduced to nil, close to nil. However some small annual
bonuses may be declared even if the final bonus buffer is below target.
Some classes of unitised with-profits business have guaranteed annual bonuses:
• UK unitised with-profits life Series I and Series II have a guaranteed increase of
3% per annum in unit prices.
• UK unitised with-profits pension Series I and Series II have a guaranteed
increase of 4% per annum on accumulation units.
There is no maximum change in the annual bonus rate; however, in the normal
course of events the declared annual bonus rates would not be expected to
change by more than 2% from one declaration to the next.
12.5.4 Where the financial position of the fund is weak, the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus buffer being above the 25% target.
PLL PPFM Page 240 January 2024
12.5.5 For traditional with-profits business where final bonus is not applicable, that is
with-profits annuity, group deferred annuity and group cash business, annual
bonuses will be set with the aim of achieving the current long-term target payout
ratio of 100% of asset share (per paragraph 12.6.2). The general approach for
group deferred annuity and group cash business is based on smoothing
investment returns and the impact of other charges and profits and losses over
five years, limiting changes in annual bonus rates to maintain a smooth
progression, but with an overriding constraint to bring payout ratios into line over a
period of five years. For with-profits annuity business the annual bonus rate is set
by comparing asset shares with the expected value of future annuity payments to
determine a level of future bonus that is expected to be supportable in the longer
term, should the assumptions made about future investment growth, life
expectancy and other factors be realised in practice.
If at any time the fund is targeting payouts at a higher proportion of asset share
than 100% on account of distributable estate, then this will be allowed for in the
smoothed investment returns with the aim that the distributable estate will
therefore be gradually reflected in policy benefits over a five year period.
For with-profits annuity business, an additional bonus may be added to smooth
changes in annual bonuses. Also additional bonuses may be added to different
groups of with-profits annuity business to allow for material differences in
experience between different groups. Additional bonuses are not a guaranteed
addition and only apply to the annuity income for the relevant year.
12.5.6 The asset share comparisons are performed for representative specimen policies
grouped according to the level at which different bonus rates are declared.
12.5.7 For traditional with-profits business where final bonus is applicable, annual bonus
rates are declared in arrears and are expressed as a percentage of the benefit
payable. For traditional with-profits business where final bonus is not applicable,
annual bonus rates are declared in advance, apply from the next policy
anniversary and are expressed as a percentage of the benefit payable. For
unitised with-profits business, annual bonus rates are declared in advance and
apply daily as an increase in the unit price (but subject to any rounding in the unit
price).
12.5.8 Where annual bonuses are declared in arrears, interim bonus rates are set with
reference to the most recent annual bonuses declared and any future anticipated
direction of these rates and may be higher or lower than the latest annual bonus
rates declared. The annual bonus rate may, however, eventually be set at a level
that differs from the interim rate.
PLL PPFM Page 241 January 2024
Principle
12.6
Final Bonus Rates
The aim is to set final bonus rates so that specimen policy payouts achieve a
target payout ratio. These final bonus rates are then adjusted for smoothing as
described in section 12.7. Final bonuses for a policy may increase or decrease
from declaration to declaration and may also be nil. Final bonuses will be
reviewed regularly, but can be reviewed at any time.
Practices
12.6.1 Final bonus is not applicable to traditional with-profits annuity, group deferred
annuity and group cash business or to smoothed return business. The rest of this
section does not apply to these types of business.
12.6.2 The current long-term target payout ratio for maturing policies is 100% of asset
share.
In this context maturity includes retirement at selected retirement age for pensions
business and surrender or withdrawal at a protected date for unitised with-profits
business. The guaranteed benefit for traditional with-profits pension business
used in the comparisons is as follows:
• The guaranteed cash benefit for cash based contracts with a guaranteed
annuity option.
• The expected cost of providing the guaranteed annuity for deferred annuity
contracts with a guaranteed cash option.
12.6.3 The actual payout ratio for maturing policies at any one time will not necessarily be
equal to the target portion due to:
• the level of accumulated guarantees; or
• the effects of smoothing.
12.6.4 Final bonuses are determined by comparing projected asset shares with the
corresponding guaranteed benefits, together with any interim bonus, for maturities
in the period under consideration. These projected asset shares allow for the
actual experience to date and expected future experience, including expected
future investment return and where relevant, shareholder transfers in respect of
the final bonus being determined. The final bonuses actually declared are based
on these figures after adjusting for smoothing as described in section 12.7.
12.6.5 The projections supporting final bonus investigations are based on actual
experience up to five months in advance of the start date of the declaration. The
projections generally consider policies maturing during the calendar year in which
the final bonus rates apply.
12.6.6 Final bonus declarations are also informed by comparisons of projected asset
shares and corresponding projected benefits for maturities in subsequent final
bonus periods and over the next couple of years.
12.6.7 The asset share comparisons are performed for representative specimen policies,
grouped according to the level at which different bonus rates are declared. For
traditional with-profits business, the primary focus is on performing the calculations
for specimen policies at the terms which contain a significant volume of policies.
For other terms approximations may be used.
PLL PPFM Page 242 January 2024
12.6.8 For traditional with-profits business final bonus rates are rounded and expressed
as a percentage of sum assured and annual bonus and are based on the number
of completed years.
Rounding may mean that resulting payout ratios deviate slightly from the target.
12.6.9 For unitised with-profits business, final bonus rates are rounded and expressed as
a percentage of the value of with-profits units. The final bonus rates depend on
start year of policy and may also vary within start year of policy if the impact of
variations in investment returns is significant.
Rounding may mean that resulting payout ratios deviate slightly from the target.
12.6.10 Final bonus scales are determined by reference to maturing representative
specimen policies.
For traditional with-profits life assurance business, the final bonus payable on a
death claim (or terminal illness claim, if applicable) is based on the final bonus rate
for a policy maturing with the same entry year, for both endowments and whole life
policies.
For unitised with-profits business, the final bonus scale applies to death claim (or
terminal or critical illness claim, if applicable) as well.
12.6.11 Final bonuses are declared in advance and are made in anticipation of a surplus
arising. Final bonuses can only be declared if there is an expectation of such
surplus arising.
12.6.12 Final bonus reviews also consider the amount of final bonus for surrenders,
including market value reductions for unitised with-profits business, based on
section 12.8.
12.6.13 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on maturities may deviate from the target payout ratios during the
period between reviews. Normally an investment return variation of up to 10%
compared to that assumed when the final bonuses were last reviewed, would be
allowed before there would be an additional final bonus review. However, where
the maturity payout ratios at the latest final bonus review were near the top or
bottom of the range described in paragraph 12.7.3, a lower level of investment
return variance may lead to an additional final bonus review.
PLL PPFM Page 243 January 2024
Principle
12.7
Smoothing
The aim is to smooth with-profits policy payouts at protected dates to manage the
volatility of with-profits policy payouts. The effect of smoothing may have a
positive or negative effect on with-profits policy payouts.
Smoothing leads to profits and losses which are anticipated to offset each other
over time. In the short-term, if these profits or losses were to become excessive,
then the smoothing policy would be reviewed.
For all business except traditional with-profits business, the non-protected exit
values may take account of day to day investment market movements and as a
result may have a market value reduction applied or in the case of smoothed
return business a smoothing adjustment applied. For traditional with-profits
business, non-protected exit values will have a degree of smoothing.
Practices
12.7.1 For traditional with-profits business where final bonus is not applicable, that is
with-profits annuity, group deferred annuity and group cash business, the
mechanism for setting annual bonuses as described in section 12.5, describes
how smoothing applies to this business. The rest of this section does not apply to
this business.
Traditional and Unitised With-Profits Business
12.7.2 Final and interim bonuses are declared in advance and are expected to, but are
not guaranteed to apply until the next planned review date. Additional reviews
would normally only occur in response to exceptional adverse investment market
movements. Thus with-profits policyholders leaving at protected dates are not
impacted by day to day investment fluctuations. This forms part of the smoothing
process.
For traditional with-profits business the calculated final bonuses may be adjusted
to give a reasonably smooth progressive scale. This forms part of the smoothing
process.
12.7.3 Final bonus reviews take into account the current maturity payout ratios and the
long-term target payout ratio per paragraph 12.6.2. The aim is to ultimately bring
maturity payout ratios for representative specimen policies in line with the long-
term target payout ratio in a smoothed manner based on the guidelines as
described in paragraph 12.7.4. The target range for payout ratios is to be between
80% and 120% of asset share before the effects of smoothing.
In this context maturity includes retirement at selected retirement age for pensions
business and surrender or withdrawal at a protected date for unitised with-profits
business.
12.7.4 For traditional with-profits policies where final bonus changes are normally made
twice a year, smoothing is applied to maturity and retirement values by limiting the
change in final bonus rates. Normally the change in final bonus rates for a
specimen policy will be limited so that the increase or reduction in total maturity or
retirement payout compared to a position where bonus rates are not changed is
not more than 7.5% at each six monthly review.
For traditional policies and unitised with-profits policies, surrender value bases are
normally reviewed twice a year, smoothing is applied by limiting the change in
immediate surrender value for specimen policies. Normally the surrender value for
PLL PPFM Page 244 January 2024
specimen model policies will not change by more than 10% at each six monthly
review. Surrender values may change in between reviews because in many cases
the surrender values are calculated using formulae that depend upon factors such
as term remaining which change over time.
However, if it is necessary to enable the fund to continue to meet the objectives
set out in the guiding principles in section 5 sometimes larger changes are made
in final bonus rates and surrender values.
If there has been a significant change in premium rates then larger changes than
those described above may be made so that final bonus rates and surrender
bases remain consistent with the premium rates on which the business was
generally written. Where premium rates were revised with the intention of
changing payouts, then smoothing will not be applied, so that the change in
payouts intended by the premium rate change does occur.
Calculations may also be carried out for specimen policies which are due to reach
their maturity date in the following few years. If these calculations show a trend in
payouts which could not be accommodated by following the normal limits on
change described above, the final bonus rate or surrender value being determined
may be adjusted so that the trend may more easily be accommodated.
For both maturity and retirement values and surrender values, any change to
payouts that results from changes in the distributable estate, if any, will be
additional to the limits described and will not be subject to smoothing. Also where
there have been significant changes in methodologies and practices, the impact
may not be managed within the normal smoothing rules.
12.7.5 The smoothing of maturity values from declaration to declaration primarily focuses
on specimen policies. The effect on the aggregate position for maturities,
incorporating all relevant business for the class of with-profits business and
grouped according to the level at which different bonus rates are declared, is also
considered. As final bonus rates are rounded, this may result in slight deviations
from the target position.
12.7.6 In adverse conditions, where the level of guaranteed benefits exceeds the target
proportion of the relevant asset shares, no final bonuses may be warranted. In
this situation, the guaranteed benefits provide a floor for maturity payouts. This
provides further protection against day to day investment fluctuations and may
further limit movements in maturity payouts for similar policies, as a result of bonus
declarations.
12.7.7 Smoothing leads to profits and losses which are anticipated to offset each other
over time. Costs may arise under paragraph 12.7.6, but such costs are the cost of
guarantees and not the cost of smoothing. The smoothing policy is not specifically
constrained by a limit on the short-term profits and losses of smoothing, but should
these become excessive, the smoothing policy may be revised. The total cost or
scale of smoothing over the shorter term should be kept small in relation to the
size of the fund. The profits and losses from smoothing and costs from
guarantees feed through to the estate and are effectively dealt with by principle
12.12 and its associated practices.
12.7.8 As the final bonus payable on life assurance business death claims is based on
the final bonus scale for maturities, there is a similar element of smoothing
operating on payouts for death claims.
12.7.9 For unitised with-profits business, surrender values will target a proportion of asset
share, as described in section 12.8. Surrender values on unitised policies may be
subject to the application of a market value reduction. Market value reductions are
regularly reviewed, normally monthly and may be revised to reflect market
PLL PPFM Page 245 January 2024
movements between normal final bonus reviews. Also it is probable that during a
period of adverse conditions, unitised final bonuses might be changed sooner and
possibly also more frequently than might apply to the traditional business.
Smoothed Return Business
12.7.10 For the Smoothed Income Fund and the Smoothed Growth Fund, smoothing is
achieved through a formulaic process. Benefits payable are the number of units
multiplied by the smoothed unit price. The smoothed unit price is calculated daily
based on the weighted arithmetic average daily unsmoothed unit price over the
previous 12 months. The weighting is 75% of the average over the previous six
months and 25% of the average over the six months before that.
The unsmoothed unit price is based on the actual underlying assets of the
smoothed fund allowing for the actual investment performance and all other profits
and losses attributable to that smoothed fund.
12.7.11 The smoothed unit price applies to all unit allocations and unit cancellations. In
addition a smoothing adjustment may be applied to unit cancellations. The
smoothing adjustment may be positive or negative, although negative smoothing
adjustments will not be applied on death or on withdrawals up to 5% of the
policyholders smoothed fund each year from the Smoothed Income Fund.
A smoothing adjustment may be applied when there is a significant difference
between the unsmoothed unit price and the smoothed unit price. Smoothing
adjustments would normally only be applied where there was more than a 10%
difference between smoothed and unsmoothed unit prices.
12.7.12 The long-term target payout ratio is 100% of asset share. The target range is for
payout ratios to be between 80% of asset share and 120% of asset share before
the effects of smoothing.
12.7.13 Smoothing leads to profits and losses which are anticipated to offset each other
over time. The smoothing policy is not specifically constrained by a limit on the
short-term profits and losses of smoothing, but should these become excessive,
the smoothing policy may be revised. The profits and losses from smoothing and
costs from guarantees feed through into the unsmoothed unit price and will
ultimately be reflected in the smoothed unit price.
12.7.14 Material changes to methods would be made only following a decision of the
Board, based on a recommendation by the With-Profits Committee.
PLL PPFM Page 246 January 2024
Principle
12.8
Surrender Values
The aim in setting non-protected exit values will be to minimise any adverse effect
on the interests of continuing policyholders and subject to this, the aim is to set
non-protected exit values so that payouts for specimen policies achieve a target
payout ratio.
Practices
Traditional With-Profits Business
12.8.1 For life business non-protected exits refer to surrenders and policies becoming
paid-up. For pensions business non-protected exits refer to transfers, early and
late retirements and policies becoming paid up.
Surrender values are targeted in the long term at 100% of asset share. The target
range for surrenders is 80% of asset share to 120% of asset share.
12.8.2 The basis for the surrender value formulae is determined by targeting the target
proportion of asset share for representative specimen policies.
12.8.3 Actual surrender payments on individual policies will not generally be in line with
the target proportion because:
• Individual asset shares are not calculated or held on the administration
systems for use in surrender value calculations. Rather surrender values are
calculated in a variety of ways for different types of policy. Typically surrender
values are based on a discounted value of the guaranteed sum at maturity or
retirement (reduced to allow for non-payment of future premiums in the case of
regular premium policies) together with an allowance, where appropriate for
final bonus.
• Specimen policies are used to determine the parameters in the surrender value
calculations. The outcome for a particular individual policy may be different
from that of the specimen policy.
• There are a limited number of parameters that may be altered in the surrender
formulae for certain products which means that the parameters are set in
aggregate across a range of specimen policies.
• As the value of assets are changing every day but the parameters in the
surrender value formulae are only reviewed infrequently, there will inevitably
often be times when, if the asset share for the specimen policies were
recalculated, surrender values would, in effect, be based on slightly larger or
smaller percentages of those asset shares than the practices would in theory
dictate.
12.8.4 In some cases, values in excess of asset share may be payable when policies are
surrendered close to maturity and the asset share of the relevant specimen policy
is less than the guaranteed benefits at maturity, or the maturity payout is in excess
of the asset share due to smoothing. This may also occur if the value of the
guaranteed benefits is high relative to asset share, due to the effective maximum
discount rate used in the surrender bases.
12.8.5 Paid-up policy benefits are determined such that the paid-up policy benefits target
similar payout ratios to surrenders. Paid-up policies continue to participate in
profits.
12.8.6 Some policies have surrender and paid-up policy calculations specified in the
policy conditions. These represent a minimum basis that is applied.
PLL PPFM Page 247 January 2024
12.8.7 Surrender value and paid-up policy value bases will normally be reviewed once a
year. However more frequent reviews might take place, in particular in response
to significant investment market movements. Surrender values and paid-up policy
values may also change more regularly following a review of final bonus rates.
12.8.8 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on surrender values may deviate from the target payout ratios during
the period between reviews.
Unitised With-Profits Business
12.8.9 Non-protected exits refer to surrenders and withdrawals, other than those at a
guarantee date, transfers, switches, early or late retirements and any excess
regular withdrawals.
Surrender values are targeted in the long term at 100% of asset share. The target
range for surrender or transfers is 80% of asset share to 120% of asset share.
12.8.10 The resulting surrender value may be subject to withdrawal charges to cover
unrecovered initial costs or the administration costs of processing the surrender.
12.8.11 Unitised with-profits business paid-up policy values are the with-profits units and
bonus units added to date and they continue to participate in profits.
12.8.12 Surrender value bases will normally be reviewed once a year, although surrender
values may change more frequently following changes in final bonuses and market
value reductions.
12.8.13 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on surrender values may deviate from the target payout ratios during
the period between reviews.
Smoothed Return Business
12.8.14 For smoothed return business, the surrender value is based on the number of
units multiplied by the smoothed unit price.
In addition a smoothing adjustment may be applied which may be positive and
increase the value or negative and reduce the value (equivalent to a market value
reduction). A smoothing adjustment may be applied if the smoothed unit price is
significantly different from the unsmoothed unit price as described in paragraph
12.7.11.
12.8.15 The long-term target payout ratio is 100% of asset share. The target range for
surrenders is for payout ratios to be between 80% of asset share and 120% of
asset share.
12.8.16 The introduction of smoothing adjustments may be smoothed and they will not
necessarily be based on the long-term target payout ratio.
12.8.17 Smoothing adjustments are reviewed on a regular basis, but may be subject to
more frequent or significant changes during periods of volatile investment
conditions.
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Principle
12.9
Investment Strategy
The fund will take investment risk only to the extent that there is a high degree of
certainty that the fund is sufficiently strong to absorb adverse experience. Within
this constraint the primary objective of the strategy will be to achieve the best
long-term investment return. The size and timing of guaranteed benefits and other
liabilities determine the investment freedom and risk tolerance.
Investments will be spread over a number of asset classes and within these asset
classes the actual holdings will normally be diversified and of an appropriate
quality. Derivatives are normally only used for efficient portfolio management or to
reduce investment risk.
The fund may hold assets which are not normally traded, but will not normally
seek to increase its exposure to such type of assets.
The investment strategy will be reviewed regularly to ensure it remains
appropriate.
Practices
12.9.1 The fund maintains two ring-fenced sets of assets backing the smoothed return
business, one in respect of the Smoothed Income Fund and one in respect of the
Smoothed Growth Fund business.
The assets backing the rest of the business are currently split over four asset
pools. The main asset pool backs the sterling denominated business. There are
two similar assets pools backing other business, one for Euro-denominated
business and one for US dollar denominated business. The remaining asset pool
covers the hedging arrangements where the return is used to meet guarantee
costs and the estate. Further splits into different asset pools may be made if the
Board considers this would be appropriate and it was considered to be in the
overall best interests of policyholders.
The ring-fenced assets and asset pools are described in more detail subsequently.
These investments are managed by the investment managers in accordance with
an investment mandate specified by the Board.
12.9.2 The investment assets are spread over a number of different asset classes, which
may include:
• Approved fixed interest securities, such as British Government gilts and other
government and supranational bonds
• Other fixed interest securities, such as corporate bonds, debentures, loan
notes and emerging market debt
• Property
• Approved variable interest securities, such as British Government index-linked
gilts
• Other variable interest securities, such as variable rate corporate bonds
• United Kingdom equity shares
• Overseas equity shares, such as European, United States of America,
Japanese, Asia Pacific and emerging markets
• Loans secured by mortgage
• Cash, such as short term deposits and money market funds
• Alternative assets such as hedge funds
• Assets to hedge mis-match risk
• Private equity
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• Derivatives.
The investments may be direct or via collective investment schemes such as unit
trusts.
With the exception of property, private equity, loans secured by mortgages, some
alternative assets and assets to hedge mis-match risk, investments are
predominately listed and traded on a recognised stock exchange. Credit quality is
controlled by investment guidelines.
The actual investments held are widely diversified within these asset classes.
The agreements with the investment managers set out any limits on matters such
as:
• The types of investment that may be held.
• The maximum amount that can be invested in any single company.
• The maximum amount that can be invested in any single asset class / industry
sector / country.
• The maximum amount to which the manager might hold assets which are
different to the benchmark (guideline) portfolio in order to enhance returns.
(These include restrictions in terms of credit quality, term / duration and
amounts of individual holdings).
• The minimum credit rating quality of assets (as specified by the main rating
agencies such as Standard & Poor’s and Moody’s)
• Exposure to sectors or companies that do not align with our approach to
responsible investment, for example Tobacco.
The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
12.9.3 Derivatives are currently used. They may also be used to implement policy
decisions where this would be efficient portfolio management.
12.9.4 Where there is a significant mis-match between assets and liabilities, assets to
hedge those risks may be purchased or a short position in certain investments
may be held. This applies both to equity risk and to interest rate risk (for example
with respect to the interest rate risk arising from guaranteed annuity options). The
hedge assets may not be fully effective at covering the mis-match risk.
12.9.5 The introduction of any new asset or liability instruments into the investment
strategy will only occur following approval by the Board. Such instruments are
only likely to be permitted for efficient portfolio management or to reduce
investment risk.
12.9.6 The fund may include assets that are not normally traded. There are no material
holdings of assets that would not be normally traded and it is not expected that
there will be any in future.
Any future assets which would not normally be traded will only be acquired
following a review by the With-Profits Committee and approval by the Board. Any
acquisition of such assets would be made after considering the run-off position of
the fund, the management of the estate and the ultimate need at some future time
to realise such assets.
12.9.7 The Board reviews the investment strategy taking account of a variety of
considerations, including our approach to responsible investment at least once a
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year. However more frequent reviews might take place, in particular in response
to adverse market movements or significant changes in the operating
environment. The Board documents the investment strategy, provides investment
ranges to the investment managers and monitors the position.
Assets backing Smoothed Return Business
12.9.8 The strategy underlying the assets backing the Smoothed Income Fund and
Smoothed Growth Fund business is that each of these funds does not rely on
other assets to maintain the investment strategy. Other than this constraint, the
principal objective is to maximise the expected returns.
12.9.9 The guideline asset mix ranges for asset shares are:
Smoothed Growth Fund
Smoothed Income Fund
Fixed interest and cash
35% to 60%
90% to 100%
Equities
35% to 60%
Nil
Property
0% to 10%
0% to 10%
The different asset mix allows for the regular withdrawal guarantees under the
Smoothed Income Fund.
Each fund may have small derivative holdings to manage guarantees. Apart from
this there is no expectation of using derivatives, other than as short-term methods
of implementing investment decisions.
From time to time the actual asset mix will be different from the guideline mix due
to market movements and active management decisions taken by the investment
managers or the Investment Committee. Fixed interest will be a mixture of
approved fixed interest securities such as British Government gilts and other
government and supranational bonds, and other fixed interest securities, such as
corporate bonds, debentures and loan notes.
Assets backing other than Smoothed Return Business
12.9.10 The investment policy will be set with the objective of maximising the return and
managing a smooth distribution of the estate, whilst taking account of the
management actions and shareholder support available. The strategy will seek to
minimise the need for any support from shareholders to cover any Pillar 1 capital
requirement.
Any external support to the fund will be provided as described in section 5.2.
12.9.11 The investment strategy is also influenced by the level of solvency of Phoenix Life
Limited and the need to be able to ensure and demonstrate adequate solvency at
all times.
12.9.12 The degree of matching between assets and liabilities will depend upon the level
of surplus assets within the fund. Where a large surplus exists, a higher level of
exposure to equities and property will normally be maintained. If there is no
surplus or it is small, matching will be closer with a lower exposure to equities and
property.
12.9.13 There are different mixes of assets for Sterling, Euro and US dollar denominated
business. The assets backing the sterling denominated business include a high
proportion of investments denominated in sterling. Similarly the assets backing
Euro and US dollar business include a high proportion of investments
denominated in their respective currencies.
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12.9.14 The proportion of equities, property and alternative assets within asset shares
varies by type of policy, according to the overall level of guaranteed benefits for
that type of policy.
For products with high levels of guarantees relative to asset shares, lower
proportions of equity, property and alternative assets are held, and for products
with low levels of guarantees relative to asset shares, higher proportions of equity,
property and alternative assets are held. The target guideline ranges for the
proportion to be invested in equities, property and alternative assets are shown in
the table below.
Type of policy
Guideline range for the proportion
to be invested in equities,
commercial property and alternative
assets
Traditional with-profits life endowment
or whole of life policies
45% - 55%
Traditional with-profits pension policies
(including with-profits annuities and
group deferred cash / pension policies)
25% - 35%
Unitised with-profits policies with
guaranteed minimum bonus rates
25% - 35%
Unitised with-profits policies with no
guaranteed minimum bonus rate
55% - 65%
The equity, property and alternative assets proportion may include private equity
and alternative assets such as hedge funds. Fixed interest will be a mixture of
approved fixed interest securities, such as British Government gilts and other
government and supranational bonds, and other fixed interest securities, such as
corporate bonds, debentures, loan notes and emerging market debt. The balance
of the asset shares is invested in fixed interest and cash.
From time to time the actual asset mix will be different from the guideline mix due
to market movements and active management decisions taken by the investment
managers or the Investment Committee.
12.9.15 Assets representing the estate of the Scottish Mutual With-Profits Fund are mostly
invested in fixed interest securities. However, if the estate is large in relation to
the potential risks facing the fund, then part of the estate may be invested in
growth investments in line with the asset mix for the asset shares.
12.9.16 If it is considered by the Board to be in the best interests of the policyholders,
further hypothecation of the assets in the fund may be introduced. For example
this may involve matching of non asset share liabilities more accurately,
hypothecation of different equity-backing ratios to further classes or groups of
policies or the hypothecation of fixed interest assets by term remaining within
asset shares to reduce the volatility of policyholder returns near maturity.
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Principle
12.10
Business Risks
The Board aims to manage its business in a prudent manner, having regard to
both the risks and rewards of which it is aware. The Board will also have regard to
the availability of suitable capital and the amount required in light of the risks being
undertaken. Some business risks are outside the control of Phoenix Life Limited.
Risks determined by the Board to arise in connection with the insurance business
of the fund are attributed to the fund. Costs and benefits are attributed in the
same manner.
Unless specifically passed through to asset share calculations, the impact of
business risks is borne by the estate. Thus with-profits policyholders are exposed
through bonuses or smoothing, following from sections 12.4 and 12.12, to the
profits and losses of the fund.
Practices
12.10.1 There is no established formal monetary limit to the taking on of business risk by
the fund but any such risk is expected to be small in relation to the overall size of
the fund. Any costs arising from business risks will be borne by the fund (or part of
the fund) which took them on and expects to profit from them if the experience is
favourable.
12.10.2 Risks taken on by Scottish Mutual prior to its demutualisation, such as mis-selling
will normally be deemed to have transferred to the fund and any associated costs
may be charged to the fund. Following demutualisation, mis-selling risks do not
fall to the fund and any associated costs will not be charged to the fund. Similarly,
other risks taken on after demutualisation, other than normal insurance risks
directly associated with the traditional with-profits policies, are normally outside the
fund.
Risks will be met by the fund where they are properly attributable to the fund in
accordance with the principles underlying the 2023 Scheme or such an attribution
is fair and equitable, having regard to policyholders’ reasonable expectation.
12.10.3 Infrastructure risks
(a) As the unit charges under the management services agreement are subject to
annual increases linked to movements in the Retail Prices Index (RPI), the fund is
exposed to the risk of higher than expected inflation.
Costs associated with day to day administrative problems are borne by PGMS.
(b) The PGMS charges are currently VAT exempt. Phoenix Life Limited retains the
risk of increase in charges due to changes in VAT rules, including any
retrospective changes.
12.10.4 As the fund is running off, there is a risk that the fixed costs will not be reduced in
line with the reducing policy volumes. This is substantially mitigated by
agreements for the provision of administration services, but this risk has not been
entirely eliminated.
The current management services agreement with PGMS is a perpetual
agreement.
12.10.5 In the event of failure by PGMS, substantial costs would be incurred in securing an
alternative supplier, especially as PGMS and / or its sub-contractors own the
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infrastructure assets. To monitor this risk the financial viability of PGMS is
regularly monitored. Should PGMS be unable to meet any of its obligations to
provide services then Phoenix Life Limited would request that Phoenix Group, as
owners of PGMS step in to restore the position. Should Phoenix Group not do
this, then Phoenix Life Limited would attribute any losses to the shareholder fund
or Non-Profit Fund, and the fund would only be affected if the shareholder fund or
Non-Profit Fund had insufficient excess assets to bear the losses.
12.10.6 There are no material reassurance treaties applicable to the fund which would
have a material impact in the event of the reassurer failing. Future new
reassurance or similar arrangements (where the fund would be exposed to the
failure of the reassurer) will only be entered into to reduce the risk within the
business and where they are cost or benefit justified.
12.10.7 Mortality and persistency experience may impact asset shares or charges directly,
but can also have an indirect effect, such as causing the level of expense charges
to vary, other than the service level charges from PGMS. Experience is regularly
investigated. The potential impact of variations in experience is also considered.
12.10.8 Although the fund is no longer actively seeking new business, there remains some
risk in respect of any new business arising and from the exercising of policy
options. For some minor classes, the new or additional benefits are on fixed terms
which are onerous.
12.10.9 Investment management services are provided to the fund by the investment
managers. Failures at the investment managers might result in losses or costs to
the fund, either through losses in the investments being managed or in securing
an alternative supplier.
12.10.10 Smoothed return business is ring fenced within each smoothed investment fund
and is only affected by profits and losses arising in respect of the business in the
respective fund.
Unitised with-profits business participates only in the investment and financial
experience including the cost of guarantees associated with this business.
Traditional with-profits business shares in all elements of the fund’s insurance
experience.
12.10.11 The fund is notionally ring-fenced with the ring-fenced portfolios of business being
the Sterling, Euro and US dollar classes of business, and within the sterling fund
there are notional divisions between unitised and traditional and between life and
different classes of pensions business. This ring-fencing is long-standing practice,
but not legally watertight in the event of insolvency of the fund or Phoenix Life
Limited.
12.10.12 Within any notionally segregated portfolio there is pooling across all categories of
policy, although to the extent that costs cannot reasonably be borne within the
class they may be charged initially to the estate and hence, indirectly, to other
classes.
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12.10.13 Other business risks which potentially impact the fund and the amounts payable
under with-profits policies are explicitly or implicitly covered under the other
principles and their associated practices, but are summarised here as follows:
• Solvency risks
• Investment risks
• Expense and charges risks
• Mortality and morbidity risks
• Persistency risks
• Taxation risks
• Guarantee risks
• Regulatory risks
• Bonus declaration risks
• Operational risks including failure of third party service providers, including third
party administrators and reassurers
• Estate management and distribution risks.
12.10.14 Phoenix Group’s strategy is to acquire closed books of insurance business. Any
arrangements impacting on Phoenix Life Limited will be discussed with our
regulator and will be approved by the Board.
12.10.15 Risks undertaken by the fund are approved by the Board. They consider the scale
of such risks and the cost / benefit justification, having regard to the availability of
suitable capital and the amount required in light of the risks being undertaken.
They also aim to ensure that risks are undertaken which are, in their opinion, to
the advantage of with-profits policyholders.
The Board approves to what extent these risks pass to asset shares. The balance
of these risks feed through to the estate. The profits and losses from risks which
pass to asset shares affect the amounts payable under with-profits policies. The
profits and losses from risks that feed through to the estate only indirectly affect
the amounts payable under with-profits policies, as part of any distribution of or
charge to the estate as described in section 12.12.
Profits and losses from business risks within the fund will normally be taken as
affecting the size of the estate. Only very large profits and losses would be treated
other than as an addition to or deduction from the estate.
12.10.16 Business risks are regularly monitored and they form part of the key insurance risk
and operational risk management processes. The risk based capital requirements
are assessed with regard to the business risks being undertaken.
Business risks attributed to the fund are reviewed at least once a year by the With-
Profits Committee.
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Principle
12.11
Expenses and Charges
Policies will either be charged product charges or be charged amounts which
represent a fair share of the actual costs of the fund.
This approach will be adjusted where necessary in order to continue to treat
customers fairly.
Product charges may be either explicit or implicit.
Where actual costs are used and where costs are specific to a policy or policy
class, then taking into account the approximations referred to in section 12.4, such
costs will be taken into account in assessing the bonuses added to that policy or
class and in assessing the early termination value payable. Where costs are not
specific to a policy or class, they will be apportioned across the policies or classes
to which they are relevant in a reasonable manner.
Practices
12.11.1 Expenses and charges applied to asset shares are product charges for unitised
with-profits business and smoothed return business and actual costs for traditional
with-profits business as described in section 12.4. For unitised with-profits and
smoothed return business stated levels of charges were disclosed in the product
and marketing literature (although there are provisions that would allow in certain
circumstances for these levels to be altered).
12.11.2 For unitised with-profits and smoothed return business the fund pays the Non-
Profit Fund 1% per annum of the value of the units, and the expenses are met by
the Non-Profit Fund.
12.11.3 In setting the expense parameters for traditional with-profits business the levels
are chosen so that if applied across all policies, they give an overall level of
expenses close to the actual expenses apportioned to the fund.
12.11.4 An agreement exists with PGMS to supply administration services to the fund.
This is a perpetual agreement and is not expected to be renegotiated, but charges
may be amended in respect of major regulatory change. The agreement can
however be terminated early for material failure to meet service standards or other
non compliance with the agreement. We regularly monitor service standards.
Value added fees for work outside the service level agreements are changed
separately.
12.11.5 Were an adverse change to the external fiscal or regulatory environment to occur
then action may be taken to reflect this within the charges and expenses.
12.11.6 The costs apportioned to any particular group of policies will only change:
• if the formulaic bases of cost charging are altered to reflect a change in the
underlying cost of the activities supporting that group of policies; or
• if the apportioned costs are allocated on a basis which more fairly reflects the
costs of the group.
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Principle
12.12
Estate Management
The estate should lie in a target range. If the estate falls outside the target range
then either the target payout ratio (in section 12.6) will be changed or asset shares
(in section 12.4) will be adjusted, to maintain the estate within the target range
where possible.
Practices
12.12.1 The smoothed return business is ring fenced and all profits and losses arising in
respect of these smoothed investment funds are reflected in the unsmoothed unit
prices. This smoothed return business does not have any interest in the estate
arising in the fund and the references in this section to potential benefit
enhancements from estate distribution do not apply to this business.
12.12.2 The estate is the estimated realistic value of the assets less the estimated realistic
value of the liabilities. It is calculated using realistic assumptions and generally
accepted methodologies on a basis determined by the Board.
12.12.3 To the extent that any profits or losses arising in the fund are not allocated to asset
shares in accordance with 12.12.2, they will act to increase or reduce the estate.
To the extent that the amounts charged to asset shares are based on estimates or
assumptions, then any difference between these and the actual amounts will act to
increase or reduce the estate.
12.12.4 The estate in the fund will be used to:
(a) assist the fund in demonstrating it has access to sufficient capital resources
to meet its liabilities and treat customers fairly;
(b) provide a buffer in the fund should adverse experience mean that the
reserves held to cover the liabilities prove insufficient.
(c) meet any costs which are charged directly to the estate rather than to asset
shares;
(d) meet the costs of any changes which the Board believe are necessary to
improve fairness between policyholders and / or enhance the run-off of the
fund; and
(e) enhance the benefits payable to those with-profits policies which have an
interest in the estate but always aiming to retain sufficient estate to meet the
expected amounts required for (a), (b), (c) and (d). The amount considered
by the Board to be available from time to time for such enhancements will be
referred to as the distributable estate.
12.12.5 Any enhancement in benefits on account of the distributable estate referred to in
12.12.4(e) will generally be achieved by including a temporary uplift to the asset
share for the purpose of setting final bonus rates and surrender values. However if
the distributable estate is large then consideration would be given to making
additions to the asset shares from the estate.
12.12.6 The amount of the estate, the distributable estate, and the potential for any
enhancements to policyholder benefits will be subject to review at least once a
year.
12.12.7 In the event of a risk of the assets in the fund being insufficient to cover the
liabilities, charges may be made to the asset share to restore the estate to a target
minimum level. However such charges could not be applied to any part of the
deficit caused by regulatory penalties (fines) or compensation payments relating to
events which occurred before 31 July 2009, see paragraph 5.2.18, except to the
extent that such charges are effectively reversing any estate previously added into
asset shares.
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12.12.8 In the event of the assets in the fund being insufficient to cover the liabilities, the
following management actions will take place:
(a) Any future planned enhancements to asset shares will be removed.
(b) If step (a) is insufficient to remove the deficit and restore an estate of at least
0.5% of aggregate asset shares, any past asset share enhancements will be
removed.
(c) If steps (a) and (b) are insufficient to remove the deficit and restore an estate
of at least 0.5% of aggregate asset shares, asset shares will be reduced or
charges will be applied to asset shares up to the level of:
• the maximum amount charged to asset shares in one year will be 1.0% of
asset shares;
• once the cumulative charges reach 5.0% of asset share, then the
maximum charge thereafter is 0.5% in one year; and
• the cumulative charges made to asset shares for any given policy where
policyholders have to bear all the costs will be limited to 7.0%.
(d) If steps (a) through to (c) have proved to be insufficient to remove the deficit
and restore an estate of at least 0.5% of aggregate asset shares, an internal
loan will be provided by the Non-Profit Fund or the Shareholder Fund under
the terms of the arrangements described in paragraph 5.2.5.
To the extent that deficits arise in respect of traditional with-profits business, no
action will be applied in respect of steps (c) through to (d) to unitised with-profits
business to address such deficits.
In determining the action to be taken, the Board will have regard to treating
customers fairly, past practices and discussions with the regulator.
Realistic surpluses arising in a subsequent period will be applied in the reverse
order to these general principles except that there is no cap to future asset share
enhancements in the event of favourable conditions.
12.12.9 Providing that it is possible to do so whilst still treating policyholders fairly, it is
intended to manage the excess assets using solely the resources of the fund and
avoiding the need to draw on any external sources of capital.
Arrangements exist for monies to be transferred from the Non-Profit Fund or
Shareholder Fund to the fund with the aim that the amount of assets in the fund
exceeds the liabilities by a small margin, should the charges described in 12.12.7
and 12.12.8 be insufficient to restore the estate. For this purpose, the possibility of
distributing any surplus assets to policyholders will not be regarded as a liability.
Transfer of such amounts back to the Non-Profit Fund or the Shareholder Fund
will be made whenever emerging surplus in the fund permits.
The exercise of discretion in respect of with-profits policies will be managed with
the aim that the amounts transferred to the fund will be repaid to the extent that is
possible whilst still meeting the aims described in section 5. In determining
benefits under with-profits policies, the Board will disregard any liability to transfer
such amounts back to the Non-Profit Fund or Shareholder Fund to the extent that
this is necessary to treat customers fairly (that is in accordance with these
Principles and Practices).
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Principle
12.13
New Business
The fund is generally no longer actively seeking new business. Policy options
under existing contracts to effect new policies are honoured.
Practices
12.13.1 The fund is generally no longer actively seeking new business, but continues to
write a small amount of new business relating to policy options under existing
contracts. Some existing group policies for pension schemes also contain rights to
affect increments for existing members and rights to add new members.
12.13.2 Currently there are no plans to generally reopen the fund to new business. The
ability of the fund to reopen is constrained by the 2023 Scheme.
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Principle
12.14
Equity Between the Fund and Shareholders
Services may be provided by the shareholders to the fund but terms for such
services will be on commercial terms which are considered to be consistent with
the risks of providing those services, or considered to be consistent with terms
which would be available for such services on an arms length commercial basis.
Shareholders receive no more than one ninth of the cost of bonuses distributed to
policyholders of traditional with-profits policies and receive the charges on unitised
with-profits business and smoothed return business, as laid down in the 2023
Scheme. Any change to the one ninth limit would require the agreement of the
Board and would be subject to approval by our regulator and the High Court.
Practices
12.14.1 The following services are provided to the fund:
• administration services by PGMS; and
• product provision (annuity products) by the Non-Profit Fund.
12.14.2 Shareholders will only provide services to the fund on commercial terms which
would require an adequate return for the risks involved in providing the services.
The profit margin for shareholders is acceptable to the fund if:
• the cost for the fund is consistent with the terms available from other providers;
or
• the profit margin is consistent with the risks borne and there are reasonably
foreseeable circumstances in which the shareholder could make a loss.
12.14.3 The allocation of profits between policyholders and shareholders is laid down in
the 2023 Scheme which states that not less than 90% of the surplus being
distributed from the fund in respect of traditional with-profits policies is allocated to
traditional with-profits policyholders. Current practice is to distribute exactly 90%
of such surplus to policyholders, leaving the remaining 10%, being one ninth of the
cost of bonus, to be transferred to shareholders. For unitised with-profits business
and smoothed return business the shareholder does not receive any share of the
surplus distributed.
The division of profits between with-profits policyholders and shareholders does
not change as a result of changes in the underlying basis used to determine the
cost of bonus as described in paragraph 12.14.5. The transfer to shareholders
remains one ninth of the cost of bonus for traditional with-profits policies as
determined in accordance with the underlying basis.
On unitised with-profits business and smoothed return business, the shareholder
receives the product charges.
12.14.4 The shareholder transfer associated with the distribution of profits from the fund
can only take place following the published annual actuarial investigation of the
long-term business of Phoenix Life Limited carried out in accordance with the
requirements of the Financial Services and Markets Act 2000 (or equivalent
subsequent legislation). The Board is responsible for the distribution of profits and
no transfer to shareholders can take place without its authority.
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12.14.5 For all traditional with-profits business, the cost of bonus is the increase in the
liabilities using a risk free discount rate (net of tax as appropriate), as a result of
the bonus declaration together with cost of bonus paid on claims since the
previous actuarial investigation as follows:
(a) Life assurance traditional with-profits business
• The cost of annual bonus is the value of any annual bonus added, discounted
using the above basis.
• The cost of final bonus is the value of any final bonus paid on death or maturity
or where applicable terminal or serious illness. The cost of any interim bonus
paid on such claims is the value of the interim bonus added, discounted using
the above basis.
• The cost of interim bonus on surrender is the value of that bonus discounted
using the above basis and the cost of final bonus is the value of the final bonus
element of the surrender value.
(b) Pensions traditional with-profits business
• The cost of annual bonus is the capital value at the selected retirement age
using the above basis, of the annual bonus added (for deferred annuity
policies) or the value (for other policies), discounted using the above basis.
• The cost of any interim bonus paid on retirements is the capital value at the
retirement date using the above basis (for deferred annuity policies) or the
value (for other policies).
• On retirement, the cost of final bonus is the excess of the capital value of the
annuity, annual bonus, interim bonus and final bonus on the commencement
basis, less the capital value of the annuity, annual bonus and interim bonus on
the above basis, subject to a minimum of nil (for deferred annuity policies) or
the value (for other policies). The capital value takes into account any element
taken as cash.
• The cost of any interim bonus on transfer is the capital value, at the selected
retirement age using the above basis, of any interim bonus added, discounted
using the above basis and the cost of any final bonus is the capital value, at the
selected retirement age using the transfer basis, of the final bonus added (for
deferred annuity policies) or the value (for other policies).
(c) Group deferred annuity and group cash business
• The cost of bonus is the cash value of the annual bonus added.
(d) With-profits annuity
• The cost of bonus is the capital value of the annual bonus added and the value
of the additional bonus for the next policy year on the published valuation
basis, but using a risk free discount rate.
12.14.6 Although the fund is no longer actively seeking new business, new business may
arise from the exercising of policy options, including payment of additional
premiums. For some minor classes, the new or additional benefits are on fixed
terms which are onerous and where future bonuses are added, then any
associated shareholder transfer would add to the strain.
PLL PPFM Page 261 January 2024
12.14.7 Where distributions to policyholders are made in anticipation of a surplus arising,
these only contribute to the cost of bonus at the next actuarial investigation and
only generate an allocation to shareholders at that time.
12.14.8 The tax charged to the fund is on a standalone mutual company basis and the
Non-Profit Fund bears any difference between the tax charged to the fund and any
tax Phoenix Life Limited incurs as a result of the fund. In particular any tax
associated with the distribution of profits from the fund to the shareholders, is
borne by the Non-Profit Fund.
PLL PPFM Page 262 January 2024
13 Principles and Practices – SPI With-Profits Fund
The Principles and Practices given in sections 13.4 to 13.14 together with the Guiding
Principles and Practices form the Principles and Practices of Financial Management for the
SPI With-Profits Fund. Sections 13.1 to 13.3 give background information specific to the SPI
With-Profits Fund. Subsequently in this section the use of the term ‘the fund’ generally means
the SPI With-Profits Fund.
13.1 Fund History
The SPI With-Profits Fund comprises the business that was transferred to Phoenix
Life Limited under the 2009 Scheme from the SPI Fund and the Special Fund of
Scottish Provident Limited.
Scottish Provident Institution’s origins date back to 1837. In 1995 the long-term
business of Scottish Provident Assurance Limited, PFM Assurance Limited and
Scottish Provident Managed Pension Funds Limited were transferred to the
Scottish Provident Institution by way of a scheme. The Scottish Provident
Institution demutualised on 1 August 2001 and transferred part of its business to
the SPI Fund of Scottish Provident Limited. Scottish Provident Limited contained
an Irish branch which included business sold in Ireland by the Scottish Provident
Institution prior to the demutualisation in 2001.
From 2001 until 2006, Scottish Provident Limited was owned by Abbey National.
In September 2006 Scottish Provident Limited was acquired by Resolution plc.
The Scottish Provident Limited SPI Fund closed to new business at the end of
2001.
The with-profits policies originally held within the Special Fund within Scottish
Provident Limited were converted into non-profit policies with guaranteed benefits
and transferred into the SPI With-Profits Fund as part of the 2009 Scheme.
The key powers attributable to the Scottish Provident Limited SPI Fund
Supervisory Committee were handed over to the With-Profits Committee under the
2009 Scheme and remain in force under the 2023 Scheme. For this fund the
With-Profits Committee has the additional responsibility for setting the investment
and bonus policy.
In 2022 policies sold in Ireland were transferred to PLAE, an Irish company within
the Group, and immediately reinsured back into the SPI With-Profits Fund. PLAE
is responsible for paying claims under these policies. For as long as the
reinsurance remains in force, amounts payable to PLAE on these policies under
the reinsurance will continue to reflect participation in the SPI With-Profits Fund at
the same level as before.
13.2 Types of Business
The with-profits business in the fund is split into different classes for the purposes
of allocating annual bonuses and final bonuses as appropriate. The split primarily
depends on:
• The type of product and the method by which it participates in profits, that is
traditional with-profits business, unitised with-profits business and deposit
administration business.
• The classification for tax purposes, that is life assurance business, general
annuity business, pension business or overseas life assurance business.
• Whether the business is regular premium paying or single premium.
Traditional with-profits pension policies are split between Self-Employed
Retirement Annuity and Personal Pension contracts (SEDA contracts) where the
PLL PPFM Page 263 January 2024
benefit available at the normal retirement date is in terms of an annuity and
Individual and Executive Pension Arrangement policies (E-Type contracts) where
the benefit available at the normal retirement date is in terms of a fund, with a
guaranteed annuity option.
The unitised with-profits business arises from unitised policies in the Non-Profit
Fund which have chosen this investment option.
The deposit administration business comprises Simplified Pension Investment
Plan policies.
The fund includes both business issued in the UK and denominated in Sterling,
and the reinsured business from PLAE which was issued as Irish branch business
and is denominated in Euros.
13.3 Capital Support to the Fund
The capital policy is described in section 3.2.
In certain circumstances the shareholders will loan money to this fund. The
practices relating to receipt of support are detailed in sections 3.3 and 5.2.
PLL PPFM Page 264 January 2024
Principle
13.4
Amounts Payable Under a With-Profits Policy
The aim of the methods employed in determining the amounts payable under a
with-profits policy is the fair treatment of all with-profits policyholders consistent
with the guiding principles.
The main guide used for determining the amounts payable under with-profits
policies is asset share calculations. The amounts payable will allow for a fair
share of any surplus distributed, which may be in the form of annual or final
bonuses.
The degree of approximation used in the application of these methods aims to be
consistent with the overall fair treatment of all with-profits policyholders.
Asset share methodology and processes will be regularly reviewed by the With-
Profits Committee and may change. This may include changes to the historical
aspects of the calculations as a result of a variety of factors, including changes in
regulations, improvements in the degree of approximations, maintaining equity
between classes and groups of policyholders and significant changes in the
financial condition of Phoenix Life Limited.
Policyholders have no entitlement to receive the asset shares, if any, used to
determine the bonuses for their policies.
Different bonuses are declared for different classes of with-profits business,
reflecting the different tax, type of with-profits business and product features. New
bonus classes would be required if a new type of product were developed. An
existing class would normally only be split in exceptional circumstances. Within
classes, bonuses may be further differentiated by series.
Bonus policy can be affected by a variety of factors including the financial and
solvency position of Phoenix Life Limited, the financial strength of the fund, the
expected cost of guarantees, actual and expected investment returns and
expenses, the likelihood of changes in the level of provisions and the constraints
which increases in guaranteed benefits may place on the fund, particularly in
relation to investment strategy. These factors, together with the aim to retain
flexibility in the operation of the fund, constrain annual and final bonus
declarations and the smoothing policy. These constraints also apply in changing
economic conditions.
Bonuses can only be declared if there is surplus available for distribution or they are
guaranteed.
Practices
Asset Share Methodology
13.4.1 The basic method for asset share calculations for with-profits business uses actual
investment returns net of tax and for expenses, mortality and morbidity benefits,
the actual underlying experience for traditional with-profits business and deposit
administration business and generally product charges for unitised with-profits
business.
Asset shares are not smoothed. In particular the investment returns and
experience elements contributing to asset shares are generally not smoothed,
other than that inherent in the processes used in the derivation of the
assumptions.
PLL PPFM Page 265 January 2024
13.4.2 The following table describes the elements credited or charged to asset shares for
traditional with-profits, unitised with-profits and deposit administration business.
Element
Traditional
With-Profits
Business
Unitised With-
Profits
Business
Deposit
Administration
Business
(a)
Premiums
Premiums paid
Note (a)
Premiums paid
Note (a)
Premiums paid
Note (a)
(b)
Investment return
Allocated return
Note (b)
Allocated return
Note (b)
Allocated return
Note (b)
(c)
Investment
expenses
Actual allocated
Note (c)
Implicit in
product charges
Actual allocated
Note (c)
(d)
Initial expenses
Actual allocated
Note (d)
Implicit in
product charges
Actual allocated
Note (d)
(e)
Renewal expenses
Actual allocated
Note (e)
Product charges
Note (e)
Actual allocated
Note (e)
(f)
Other expenses
Actual allocated
Note (f)
Not charged
Actual allocated
Note (f)
(g)
Tax on investment
return
Actual allocated
Note (g)
Actual allocated
Note (g)
Actual allocated
Note (g)
(h)
Tax relief on
expenses
Actual allocated
Note (g)
Implicit in
product charges
Actual allocated
Note (g)
(i)
Mortality &
morbidity costs
Experience
Note (i)
Note (i)
Experience
Note (i)
(j)
Early terminations
Not charged
Note (j)
Not charged
Not charged
(k)
Paid-up policies
Not charged
Note (k)
Not applicable
Not applicable
(l)
Partial and regular
withdrawals
Not applicable
Charged
Note (l)
Not applicable
(m)
Surrenders at
protected dates
Not applicable
Note (m)
Note (m)
(n)
Annuity payments
Not applicable
Not applicable
Not applicable
(o)
Charges for the
cost of guarantees
Note (o)
Note (o)
Note (o)
(p)
Charges for the
cost of capital
Charged
Note(p)
Not charged
Charged
Note(p)
(q)
Distributions to
shareholders
Not charged
Not applicable
Not applicable
(r)
Tax on distributions
to shareholders
Not charged
Not applicable
Not applicable
(s)
Profit and losses
from other business
Not charged
Not charged
Not charged
(t)
Estate distribution
or charge
Note (t)
Note (t)
Note (t)
(u)
Exceptional items
Not applicable
Not applicable
Not applicable
The way in which the above items are taken into account is described in the notes
below, together with how they vary by type of business. Where charged is used in
the table above this means both charged and / or credited depending on whether it
is a loss or profit.
PLL PPFM Page 266 January 2024
Notes
(a) Premiums
Premiums paid under the policy. For unitised business, it is the premiums used to
purchase units which are net of any premium related policy charges. These
charges include any reduced, nil or enhanced allocation percentages, additional
initial unit charges and a bid / offer spread.
(b) Investment return
The investment returns are based on separate notional ring-fenced assets. The
split is between UK and Irish business with further splits between deposit
administration business (Simplified Pension Investment Plan policies) and other
business. The investment returns allocated to asset shares vary by type of policy
as described in section 13.9. Further distinctions may be made for different
classes and groups of policies if it were considered fair. In particular, the return
from any assets bought specifically to cover guarantees may be reserved to meet
the costs of these guarantees.
(c) Investment expenses
For traditional and deposit administration business, investment expenses are
based on best estimate of the actual expense incurred prior to demutualisation,
and are fixed subsequently at an effective monthly rate of 0.01166%.
(d) Initial expenses
No new business is written in the fund other than to honour policy options or if new
members join a pension scheme insured by the fund.
Historic initial expenses are based on estimates of the typical costs for the year of
entry.
Initial expenses for increments affected are detailed in the 2023 Scheme. Those
initial expenses detailed in the 2023 Scheme include a standard provision that
they are annually reviewable (in some cases specifically in line with increases in
RPI plus 0.75%) and are limited to be within the range of 85% to 115% of actual
expenses incurred.
(e) Renewal expenses
For traditional and deposit administration business, expenses are based on the
actual costs incurred as set out in the 2023 Scheme.
For unitised business the expenses are implicit in the product charges specified in
the policy terms and conditions. However the product charges include an annual
management charge of 1.0% per annum, but asset shares are only charged an
annual management charge of 0.6% per annum for life policies and 0.85% per
annum for pension policies.
Those renewal expenses detailed in the 2023 Scheme include a standard
provision that they are annually reviewable (in some cases specifically in line with
increases in RPI plus 0.75%) and are limited to be within the range of 85% to
115% of actual expenses incurred.
(f) Other expenses
Any additional project costs will only be charged to asset shares following approval
by the With-Profits Committee.
PLL PPFM Page 267 January 2024
(g) Tax on investment return
Allowance for the relevant rate of tax on the respective investment classes is
applied.
(h) Tax relief on expenses
Tax relief is available on some expenses.
(i) Mortality and morbidity costs
For traditional with-profits business, the charge is based on the underlying
experience and is approximated by applying a percentage of a standard published
mortality table. The percentage applied varies by calendar year and is based on
the results of mortality investigations carried out from time to time.
For some unitised with-profits business, these costs are charged explicitly in the
product charges on a monthly basis, based on the sum at risk, by cancelling units.
Any profits or losses from the explicit charges not reflecting the actual underlying
experience and costs are not credited to asset shares. For other unitised with-
profits business, the costs are implicit in the product charges and no explicit
monthly charge is applied.
For deposit administration business this includes amounts used to purchase
individual pensions.
(j) Early terminations
Currently profits or losses on with-profits business surrendered early are applied to
the fund as a whole and thus affect the estate. However, in future, the surrender
profits or losses on with-profits business may be applied to the asset share by an
addition to or deduction from the rate of investment return applied in the year in
which the profit or loss arises or may be accumulated and applied at a later date.
(k) Paid-up policies
Any profits or losses arising from with-profits policies becoming paid-up are
applied to the fund as a whole and follow the practice in note (j).
(l) Partial and regular withdrawals
These are reflected in asset share calculations only to the extent that part of the
policy has been cancelled. Specifically no profits or losses resulting from partial or
regular withdrawals are credited. The proportion of the policy withdrawn is
reflected in both the underlying asset share and remaining policy values.
(m) Surrenders at protected dates
Where a guaranteed minimum surrender value is greater than would otherwise be
quoted the resulting cost is treated as a profit or loss to the fund as a whole, and
follows the practice in note (j).
(o) Charges for the cost of guarantees
This is the expected cost of meeting guaranteed benefits in excess of asset share
for all with-profits business in the fund and the cost of meeting guaranteed annuity
options on all business in the fund that are not hedged. The cost of guarantees
PLL PPFM Page 268 January 2024
can be charged to the asset share as a deduction from the rate of investment
return applied in the year in which it arises.
The cost of the rebalancing the hedge asset to match the guarantees may be
charged through an adjustment in the net investment return if no positive estate
exists.
(p) Charges for the cost of capital
This is the charge for holding risk based capital which is currently zero. The cost
of capital may be applied to the asset share as a deduction from the rate of
investment return applied in the year in which it arises or it may be accumulated to
be applied at a later date.
(t) Estate distribution or charge
Asset shares may be increased by distributions from the estate or reduced by
charges to the estate. However, these estate distributions are not guaranteed. In
the event of the assets in the fund being insufficient to cover the liabilities, then
any past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit. See section 13.12.
13.4.3 Asset shares are calculated for representative specimen policies when setting
bonus rates and surrender value bases for non-protected exits. Specimen policies
are used to represent the business and include a range of policy terms and years
of entry. The primary emphasis in selecting specimen policies is the size of
premium or sum assured. There is however a degree of averaging, particularly for
those terms where there are relatively few policies.
13.4.4 Asset share models contain some approximations, but these approximations do
not prejudice the overall fair treatment of with-profits policyholders. Whilst only
minor approximations are employed in asset share calculations, no investigations
are carried out on the level of approximation built into the resulting asset shares.
Policies that have been subject to alterations, including becoming paid up, do not
yield robust asset share calculations. For these policies, bonuses are based on
those for an equivalent unaltered policy.
For traditional whole life policies, final bonuses and surrender value bases may be
set with reference to those applicable for endowments.
13.4.5 Items not charged to asset shares, the effects of the approximations in the
experience assumptions and the effects of other approximations in the methods
employed feed through to the estate as described in section 13.12.
13.4.6 Asset share practices are documented.
Asset share and bonus policies are documented at a high level in various With-
Profits Committee (and previously SPI Fund Supervisory Committee) reports and
reports on asset share investigations that have been undertaken from time to time.
Detailed specifications relating to the asset share calculations and the bonus
calculations only exist to a varying degree, but the coding within the models used
in the processes are viewable and thus document the calculations.
Asset share assumptions are documented and this tends to include references to
their source of derivation.
For each bonus review appropriate documentation is produced and provides an
audit trail of the process, including sources of data, source and derivation of
PLL PPFM Page 269 January 2024
assumptions, backing calculations, notes and correspondence. This audit trail
normally includes retaining electronic copies of the systems and calculations used
for the review.
13.4.7 Asset share models, processes and documentation are subject to a continual
process of development, improvement and refinement. Significant effects are
reported to and considered by the With-Profits Committee.
13.4.8 Asset share practices are not guaranteed and may be changed in future. Historic
asset shares were agreed at the time of demutualisation in 2001.
Asset share methodology and processes will be regularly reviewed by the With-
Profits Committee and may change. This may include changes to the historical
aspects of the calculations as a result of a variety of factors, including changes in
regulations, improvements in the degree of approximations, maintaining equity
between classes and groups of policyholders and significant changes in the
financial condition of Phoenix Life Limited.
Bonus Declarations
13.4.9 Bonus declarations are approved by the With-Profits Committee or sub-committee
or delegated to senior management and then retrospectively approved.
13.4.10 For traditional with-profits business separate annual bonus scales are declared for
the following classes:
• UK life traditional with-profits business
• UK SEDA pension traditional with-profits business
• UK E-Type pension traditional with-profits business
• Irish life traditional with-profits business
• Irish SEDA Pension traditional with-profits business
• Irish E-Type Pension traditional with-profits business
Separate final bonus scales are declared for the following traditional with-profits
classes:
• UK life traditional with-profits
• UK E-Type traditional with-profits pension regular premium
• UK E-Type traditional with-profits pension single premium
• UK SEDA traditional with-profits pension regular premium
• UK SEDA traditional with-profits pension single premium
• Irish life traditional with-profits business (other than 10 year single premium
bond)
• Irish E-Type traditional with-profits pension regular premium
• Irish E-Type traditional with-profits pension single premium
• Irish SEDA traditional with-profits pension regular premium
• Irish SEDA traditional with-profits pension single premium
There is also a ‘maturity’ bonus on Irish SEDA traditional with-profits pension
business. This acts as a second layer of final bonus and varies by age and sex.
For individual pension self-employed deferred annuity (SEDA) traditional with-
profits deferred annuity policies the rate at which the annuity benefits can be
commuted for a cash benefit (including any tax free lump sum) or an open market
option is calculated to broadly reflect the fair value of the annuity benefits being
given up, having regard to market interest rates and best estimate assumptions of
mortality rates and forecast improvements. The commutation terms will normally
be reviewed with the same frequency and at the same time as final bonus rates
are reviewed.
PLL PPFM Page 270 January 2024
For group pension E-Type traditional with-profits deferred annuity policies the rate
at which the annuity benefits can be commuted for a cash benefit (including any
tax free lump sum) or an open market option is calculated using the contractual
cash factors written in the contract.
13.4.11 For unitised with-profits business:
Separate annual bonus scales are declared for the following classes of business:
• UK unitised with-profits life Series I
• UK unitised with-profits life Series II
• UK unitised with-profits pension Series I
• UK unitised with-profits pension Series II
• Irish unitised with-profits pension Series I
• Irish unitised with-profits pension Series II and Series III
• Irish unitised with-profits life Series.
Separate final bonus scales are declared for the following unitised with-profits
classes:
• UK unitised with-profits life Series I
• UK unitised with-profits life Series II
• UK unitised with-profits pension Series I
• UK unitised with-profits pension Series II
• Irish unitised with-profits pension Series I
• Irish unitised with-profits pension Series II and Series III
• Irish unitised with-profits life Series.
13.4.12 For deposit administration business, separate annual bonuses are declared for
each class of business:
• UK business, varying by tranche
• Irish business, varying by tranche
There is no final bonus applicable to deposit administration business.
13.4.13 For traditional with-profits business, annual bonuses are reviewed annually and
are declared in arrears in January of the following year to which the bonus relates.
Final bonuses are declared in advance and are reviewed at least twice a year,
normally from 1 January and 1 July.
For unitised with-profits business, annual bonus rates are set in advance. The
time for which they will apply is not fixed and they may be reviewed at any time.
They will be reviewed at least once a year at the time of the annual bonus review
for traditional with-profits business. Final bonuses are declared in advance and
are reviewed at least twice a year, normally from 1 January and 1 July.
For deposit administration business, the annual bonus rates are declared once a
year and apply to the policy anniversary following the calendar year just
completed.
13.4.14 The timing of final bonus declarations may be varied.
13.4.15 Final bonuses and annual bonuses declared in advance are expected to, but are
not guaranteed to apply until the next planned review date. These bonuses may
be reviewed at any time between normal planned review dates. Unitised with-
profits business final bonuses and market value reductions are particularly subject
to more frequent reviews in response to investment market movements or where
there has been, or is expected to be a high volume of surrenders. Otherwise,
additional reviews would normally only be in response to more exceptional
investment market movements.
PLL PPFM Page 271 January 2024
13.4.16 Final bonus reviews also consider the amount of final bonus paid on non-protected
exits (surrenders).
13.4.17 Bonuses are declared out of surplus arising in the year or in anticipation of surplus
arising. If there is no surplus or no expectation of surplus arising, no bonuses can
be declared except where they are guaranteed.
PLL PPFM Page 272 January 2024
Principle
13.5
Annual Bonus Rates
The aim is to set annual bonuses at a prudent level, balancing the benefit to
policyholders of increased guarantees, the aim for an element of final bonus, the
flexibility of the operation of the fund and its ability to ensure the guarantees can
be met in future. Annual bonuses may increase or decrease from declaration to
declaration and may also be nil. Annual bonuses can only be declared if there is
sufficient surplus available or where they are guaranteed.
In cases where final bonus is not applicable, smoothing of the annual bonus
rates is used as a mechanism to adhere to section 13.4 where applicable.
Practices
13.5.1 The With-Profits Committee makes decisions on annual bonus declarations taking
into account a number of factors. These factors are set out in the following
paragraphs.
13.5.2 For each class of traditional with-profits and unitised with-profits business, other
than those not eligible for final bonus (see 13.5.3), the level of annual bonus is set
so as to maintain a buffer for final bonus. The future claim payouts are estimated
using realistic assumptions and the annual bonuses set at such a level that if
experience turns out to be in line with those assumptions, the overall amount of
the payout paid in the form of final bonus will be in line with a target proportion.
Under current investment conditions, the overall target is that 25% of the overall
value of payouts, calculated before any future augmentation provided by a release
of the estate, will be in the form of final bonus. Given the aggregate nature of this
target, for an individual policy, this final bonus buffer may be more or less than
25%. This overall target is itself subject to review and may be changed. If
experience does not turn out to be in line with the assumptions then the 25%
target might not be met.
Annual bonus rates will be adjusted to keep the overall level of projected final
bonus broadly in line with the target. If necessary to remain on target, annual
bonus rates will be reduced to nil, close to nil. However, some small annual
bonuses may be declared even if the final bonus buffer is below target. Some
classes of unitised with-profits business have guaranteed annual bonuses:
• UK unitised with-profits life Series I has a guaranteed increase of 3% per
annum in unit prices.
• UK and Irish unitised with-profits pension Series I have a guaranteed increase
of 4% per annum for ordinary (or accumulation) units while initial (or capital)
units are guaranteed to increase at a rate of 4% less their additional annual
management charge.
There is no maximum change in the annual bonus rate; however, in the normal
course of events the declared annual bonus rates would not be expected to
change by more than 2% from one declaration to the next.
13.5.3 Where the financial position of the fund is weak the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus being above the 25% target.
13.5.4 For deposit administration business, annual bonus will be set at a level which,
using realistic assumptions, will bring the projected asset share and the value of
projected policy benefits broadly in line over a five year period. If at any time the
fund is targeting payouts at a higher proportion of asset share than 100% on
account of distributable estate, then this will be allowed for in the projected asset
share used for this purpose of calculating annual bonus rates, and such
PLL PPFM Page 273 January 2024
distributable estate will therefore be gradually reflected in payouts over a five year
period.
Annual bonuses are normally reviewed once a year. Changes in annual bonuses
are limited to maintain a smooth progression.
Deposit administration business has guaranteed annual bonuses:
Year premiums paid
Guaranteed bonus rate (per annum)
1975 to 1977
6.00%
1978 to 1978
5.50%
1979 to 1982
6.00%
1983 to 1993
5.25%
1994 to May 1999
4.50%
June 1999 to Sep 2005
3.00%
Oct 2005 onwards
0.50%
13.5.5 The asset share comparisons are performed for representative specimen policies
grouped according to the level at which different bonus rates are declared.
13.5.6 For traditional with-profits business, annual bonus rates are declared in arrears
and are expressed as a percentage of the benefit payable. For unitised with-
profits business, annual bonus rates are declared in advance and are applied daily
as an increase in the unit price (but subject to any rounding in the unit price). For
deposit administration business annual bonus rates are declared in arrears and
are expressed as a percentage of the notional fund.
13.5.7 Where annual bonuses are declared in arrears, interim bonus rates are set with
reference to the most recent annual bonuses declared and any future anticipated
direction of these rates and may be higher or lower than the latest annual bonus
rates declared. The annual bonus rate may, however, eventually be set at a level
that differs from the interim rate.
PLL PPFM Page 274 January 2024
Principle
13.6
Final Bonus Rates
The aim is to set final bonus rates so that specimen policy payouts achieve a
target payout ratio. These final bonus rates are then adjusted for smoothing as
described in section 13.7. Final bonuses for a policy may increase or decrease
from declaration to declaration and may also be nil. Final bonuses will be
reviewed regularly, but can be reviewed at any time.
Practices
13.6.1 Final bonus is not applicable to deposit administration business and the rest of this
section does not apply to this business.
13.6.2 The current long-term target payout ratio for maturing policies is 100% of asset
share.
In this context maturity includes retirement at selected retirement age for pensions
business and surrender or withdrawal at a protected date for unitised with-profits
business. The guaranteed benefit of traditional with-profits pension business used
in the comparisons is the capital value of the annuity and annual bonuses at
retirement for SEDA policies and for E-Type policies it is the cash sum and annual
bonuses.
13.6.3 The actual payout ratio for maturing policies at any one time will not necessarily be
equal to the target portion due to:
• the level of accumulated guarantees; or
• the effects of smoothing.
13.6.4 Final bonuses are determined by comparing projected asset shares with the
corresponding guaranteed benefits, together with any interim bonus, for maturities
in the period under consideration. These projected asset shares allow for the
actual experience to date and expected future experience, including expected
future investment return. The final bonuses actually declared are based on these
figures after adjusting for smoothing as described in section 13.7.
13.6.5 The projections supporting final bonus investigations are based on actual
experience up to five months in advance of the start date of the declaration. The
projections consider policies maturing during the calendar year in which the final
bonus rates apply.
13.6.6 Final bonus declarations are also informed by comparisons of projected asset
shares and corresponding projected benefits for maturities in subsequent final
bonus periods and over the next couple of years.
13.6.7 The asset share comparisons are performed for representative specimen policies,
grouped according to the level at which different bonus rates are declared. For
traditional with-profits business, approximations such as interpolation and
extrapolation, may be used to generate comprehensive final bonus scales.
13.6.8 For traditional with-profits business, final bonus rates are rounded and expressed
as a percentage of the sum assured (annuity or cash sum) and annual bonus and
are entry year dependent.
Rounding may mean that resulting payout ratios deviate slightly from the target.
PLL PPFM Page 275 January 2024
13.6.9 For unitised with-profits business, final bonus rates are rounded and expressed as
a percentage of the value of with-profits units. The final bonus rates depend on
year of unit allocation and may also vary within year of unit allocation if investment
returns have varied considerably over the year.
Rounding may mean that resulting payout ratios deviate slightly from the target.
13.6.10 Final bonus scales are determined by reference to maturing representative
specimen policies.
For traditional with-profits life assurance business, the final bonus payable on a
death claim (or terminal or critical illness claim, if applicable) is based on the final
bonus rate for a policy maturing with the same entry year, for both endowments
and whole life policies.
For unitised with-profits business, the final bonus scale applies to death claims (or
terminal or critical illness claim, if applicable) as well.
13.6.11 Final bonuses are declared in advance and are made in anticipation of a surplus
arising. Final bonuses can only be declared if there is an expectation of such
surplus arising.
13.6.12 Final bonus reviews also consider the amount of final bonus for surrenders,
including market value reductions for unitised with-profits business, based on
section 13.8.
13.6.13 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on maturities may deviate from the target payout ratios during the
period between reviews. Normally an investment return variation of up to 10%
compared to that assumed when the final bonuses were last reviewed, would be
allowed before there would be an additional final bonus review. However, where
the maturity payout ratios at the latest final bonus review were near the top or
bottom of the range described in paragraph 13.7.3, a lower level of investment
return variance may lead to an additional final bonus review.
PLL PPFM Page 276 January 2024
Principle
13.7
Smoothing
The aim is to smooth with-profits policy payouts at protected dates to manage the
volatility of with-profits policy payouts. The effect of smoothing may have a
positive or negative effect on with-profits policy payouts.
Smoothing leads to profits and losses which are anticipated to offset each other
over time. In the short-term, if these profits or losses were to become excessive,
then the smoothing policy would be reviewed.
For all business except traditional with-profits business, the non-protected exit
values will take account of day to day investment market movements and as a
result may have a market value reduction applied. For traditional with-profits
business, non-protected exit values will have a degree of smoothing.
Practices
13.7.1 For deposit administration business, the mechanism for setting annual bonuses
rates as described in section 13.5 describes how smoothing applies to this
business. The rest of this section does not apply to deposit administration
business.
13.7.2 Final and interim bonuses are declared in advance and are expected but are not
guaranteed to apply until the next planned review date. Additional reviews would
normally only occur in response to exceptional adverse investment market
movements. Thus with-profits policyholders leaving at protected dates are not
impacted by day to day investment fluctuations. This forms part of the smoothing
process.
For traditional with-profits business the calculated final bonuses may be adjusted
to give a reasonably smooth progressive scale, though for single premium
pensions the scale may be irregular. This forms part of the smoothing process.
13.7.3 Final bonus reviews take into account the current maturity payout ratios and the
long-term target payout ratio per paragraph 13.6.2. The aim is to ultimately bring
maturity payout ratios for representative specimen policies in line with the long-
term target payout ratio in a smoothed manner based on the guidelines as
described in paragraph 13.7.4. The target range for payout ratios is to be between
80% and 120% of asset share before the effects of smoothing.
In this context maturity includes retirement at selected retirement age for pensions
business and surrender or withdrawal at a guarantee date for unitised with-profits
business.
13.7.4 For traditional and unitised with-profits policies where final bonus changes are
normally made twice a year, smoothing is applied to maturity and retirement
values by limiting the change in final bonus rates. Normally the change in final
bonus rates for a specimen policy will be limited so that the increase or reduction
in total maturity or retirement payout compared to a position where bonus rates
are not changed is not more than 7.5% at each six monthly review.
For traditional policies with-profits policies, surrender value bases are normally
reviewed twice a year, smoothing is applied by limiting the change in immediate
surrender value for specimen policies. Normally the surrender value for specimen
model policies will not change by more than 10% at each six monthly review.
Surrender values may change in between reviews because in many cases the
surrender values are calculated using formulae that depend upon factors such as
term remaining which change over time.
PLL PPFM Page 277 January 2024
However, if it is necessary to enable the fund to continue to meet the objectives
set out in the guiding principles in section 5 sometimes larger changes are made
in final bonus rates and surrender values.
If there has been a significant change in premium rates then larger changes than
those described above may be made so that final bonus rates and surrender
bases remain consistent with the premium rates on which the business was
generally written. Where premium rates were revised with the intention of
changing payouts, then smoothing will not be applied, so that the change in
payouts intended by the premium rate change does occur.
Calculations may also be carried out for specimen policies which are due to reach
their maturity date in the following few years. If these calculations show a trend in
payouts which could not be accommodated by following the normal limits on
change described above, the final bonus rate or surrender value being determined
may be adjusted so that the trend may more easily be accommodated.
For both maturity and retirement values and surrender values, any change to
payouts that results from changes in the distributable estate, if any, will be
additional to the limits described and will not be subject to smoothing. Also where
there have been significant changes in methodologies and practices, the impact
may not be managed within the normal smoothing rules.
13.7.5 The smoothing of maturity values from declaration to declaration primarily focuses
on standard specimen policies. The effect on the aggregate position for
maturities, incorporating all relevant business for the class of with-profits business
and grouped according to the level at which different bonus rates are declared, is
also considered. As final bonus rates are rounded, this may result in slight
deviations from the target position.
13.7.6 In adverse conditions, where the level of guaranteed benefits exceeds the target
proportion of the relevant asset shares, no final bonuses may be warranted. In
this situation, the guaranteed benefits provide a floor for maturity payouts. This
provides further protection against day to day investment fluctuations and may
further limit movements in maturity payouts for similar policies, as a result of bonus
declarations.
13.7.7 Smoothing leads to profits and losses which are anticipated to offset each other
over time. Costs may arise under paragraph 13.7.6, but such costs are the cost of
guarantees and not the cost of smoothing. The smoothing policy is not specifically
constrained by a limit on the short-term profits and losses of smoothing, but should
these become excessive, the smoothing policy may be revised. The total cost of
smoothing over the shorter term should be kept small in relation to the size of the
fund. The profits and losses from smoothing and costs from guarantees feed
through to the estate and are effectively dealt with by principle 13.12 and its
associated practices.
13.7.8 As the final bonus payable on life assurance business death claims (or terminal or
critical illness claims, if applicable) is based on the final bonus scale for maturities,
there is a similar element of smoothing operating on payouts for death claims.
13.7.9 For unitised with-profits business, surrender values will target a proportion of asset
share, as described in section 13.8. Surrender values on unitised policies may be
subject to the application of a market value reduction. Market value reductions are
regularly reviewed, normally monthly and may be revised to reflect market
movements between normal final bonus reviews. Also it is probable that during a
period of adverse conditions, unitised final bonuses might be changed sooner and
possibly also more frequently than might apply to the traditional business.
PLL PPFM Page 278 January 2024
PLL PPFM Page 279 January 2024
Principle
13.8
Surrender Values
The aim in setting non-protected exit values will be to minimise any adverse effect
on the interests of continuing policyholders and subject to this, the aim is to set
non-protected exit values so that payouts for specimen policies achieve a target
payout ratio.
Practices
Traditional With-Profits Business
13.8.1 For life business non-protected exits refer to surrenders and policies becoming
paid-up. For pensions business non-protected exits refer to transfers, early and
late retirements and policies becoming paid up.
Surrender values are targeted in the long term at 100% of asset share. The target
range for surrenders or transfers is 80% of asset share to 120% of asset share
before the effects of smoothing.
13.8.2 The basis for the surrender value formulae is determined by targeting the target
proportion of asset share for specimen policies.
13.8.3 Actual surrender payments on individual policies will not generally be in line with
the target proportion because:
• Individual asset shares are not calculated or held on the administration
systems for use in surrender value calculations. Rather surrender values are
calculated in a variety of ways for different types of policy. Specimen policies
are used to determine the parameters in the surrender value calculations. The
outcome for a particular individual policy may be different from that of the
specimen policy.
• There are a limited number of parameters that may be altered in the surrender
formulae for certain products which means that the parameters are set in
aggregate across a range of specimen policies.
• As the value of assets are changing every day but the parameters in the
surrender value formulae are only reviewed infrequently, there will inevitably
often be times when, if the asset share for the specimen policies were
recalculated, surrender values would, in effect, be based on slightly larger or
smaller percentages of those asset shares than the practices would in theory
dictate.
13.8.4 In some cases, values in excess of asset share may be payable when policies are
surrendered close to maturity and the asset share of the relevant specimen policy
is less than the guaranteed benefits at maturity, or the maturity payout is in excess
of the asset share due to smoothing. This may also occur if the value of the
guaranteed benefits is high relative to asset share, due to the effective maximum
discount rate used in the surrender bases.
13.8.5 Paid-up policy benefits are determined such that the paid-up policy benefits target
similar payout ratios to surrenders. Paid-up policies continue to participate in
profits.
13.8.6 Some policies have surrender and paid-up policy calculations specified in the
policy conditions. These represent a minimum basis that is applied.
13.8.7 Surrender value and paid-up policy value bases will normally be reviewed once a
year. However more frequent reviews might take place, in particular in response
PLL PPFM Page 280 January 2024
to significant investment market movements. Surrender values and paid-up policy
values may also change more regularly following a review of final bonus rates.
13.8.8 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on surrender values may deviate from the target payout ratios during
the period between reviews.
Unitised With-Profits Business
13.8.9 Non-protected exits refer to surrenders and withdrawals, other than those at a
guarantee date, transfers, switches, early or late retirements and any excess
regular withdrawals.
Surrender values are targeted in the long term at 100% of asset share. The target
range for surrenders or transfers is 80% of asset share to 120% of asset share.
13.8.10 The resulting surrender value may be subject to withdrawal charges to cover any
unrecovered initial costs or the administration costs of processing the surrender.
13.8.11 Unitised with-profits business paid-up policy values, are the with-profits units
purchased to date and they continue to participate in profits.
13.8.12 Surrender value bases will normally be reviewed once a year, although surrender
values may change more frequently following changes in final bonuses and market
value reductions.
13.8.13 Due to fluctuations in the underlying assets and hence asset shares, the actual
payout ratio on surrender values may deviate from the target payout ratios during
the period between reviews.
Deposit Administration Business
13.8.14 All deposit administration policies have been in force at least five years and the
calculation of the surrender value is on a prescribed basis specified in the policy
documentation.
PLL PPFM Page 281 January 2024
Principle
13.9
Investment Strategy
The fund will take investment risk only to the extent that there is a high degree of
certainty that the fund is sufficiently strong to absorb adverse experience. Within
this constraint the primary objective of the strategy will be to achieve the best
long-term investment return. The size and timing of guaranteed benefits and other
liabilities determine the investment freedom and risk tolerance.
Investments will be spread over a number of asset classes and within these asset
classes the actual holdings will normally be diversified and of an appropriate
quality. Derivatives are normally only used for efficient portfolio management or to
reduce investment risk.
The fund may hold assets which are not normally traded, but will not normally
seek to increase its exposure to such type of assets.
The investment strategy will be reviewed regularly to ensure it remains
appropriate.
Practices
13.9.1 These investments are managed by the investment managers in accordance with
an investment mandate specified by the With-Profits Committee.
13.9.2 The investment assets are spread over a number of different asset classes, which
may include:
• Approved fixed interest securities, such as British Government gilts and other
government and supranational bonds
• Other fixed interest securities, such as corporate bonds, debentures, loan
notes and emerging market debt
• Property
• Approved variable interest securities, such as British Government index-linked
gilts
• Other variable interest securities, such as variable rate corporate bonds
• United Kingdom equity shares
• Overseas equity shares, such as European, United States of America,
Japanese, Asia Pacific and emerging markets
• Loans secured by mortgage
• Cash, such as short term deposits and money market funds
• Alternative assets such as hedge funds
• Assets to hedge mis-match risk
• Private equity
• Derivatives.
The investments may be direct or via collective investment schemes such as unit
trusts.
With the exception of property, private equity, loans secured by mortgages, some
alternative assets and assets to hedge mis-match risk, investments are
predominately listed and traded on a recognised stock exchange. Credit quality is
controlled by investment guidelines.
The actual investments held are widely diversified within these asset classes.
PLL PPFM Page 282 January 2024
The agreements with the investment managers set out any limits on matters such
as:
• The types of investment that may be held.
• The maximum amount that can be invested in any single company.
• The maximum amount that can be invested in any single asset class / industry
sector / country.
• The maximum amount to which the manager might hold assets which are
different to the benchmark (guideline) portfolio in order to enhance returns.
(These include restrictions in terms of credit quality, term / duration and
amounts of individual holdings).
• The minimum credit rating quality of assets (as specified by the main rating
agencies such as Standard & Poor’s and Moody’s).
• Exposure to sectors or companies that do not align with our approach to
responsible investment, for example Tobacco
The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
13.9.3 The investment policy will be set with the objective of maximising the return to
optimise the level of with-profits benefits, whilst protecting the estate and ensuring
its smooth and equitable distribution taking account of the management actions
and shareholder support available. The strategy will seek to minimise the need for
any support from shareholders to cover any Pillar 1 capital requirement.
Any external support to the fund will be provided as described in section 5.2.
13.9.4 The investment strategy is also influenced by the level of solvency of Phoenix Life
Limited and the need to be able to ensure and demonstrate adequate solvency at
all times.
13.9.5 Derivatives are currently used. They may also be used to implement policy
decisions where this would be efficient portfolio management.
13.9.6 Where there is a significant mis-match between assets and liabilities, assets to
hedge those risks may be purchased. This applies both to equity risk and to
interest rate risk (for example with respect to the interest rate risk arising from
guaranteed annuity options). The hedge assets may not be fully effective at
covering the mis-match risk.
13.9.7 The introduction of any new asset class into the investment strategy will only occur
following approval by the With-Profits Committee.
13.9.8 The fund may include assets that are not normally traded. There are no material
holdings of assets that would not be normally traded and it is not expected that
there will be any in future.
Any future assets which would not normally be traded will only be acquired
following a review and approval by the With-Profits Committee. Any acquisition of
such assets would be made after considering the run-off position of the fund, the
management of the estate and the ultimate need at some future time to realise
such assets.
13.9.9 There are different mixes of assets for UK and Irish business. The assets backing
the UK business include a high proportion of investments denominated in Sterling,
while those backing the Irish business include a high proportion of investments
denominated in Euros.
PLL PPFM Page 283 January 2024
Assets representing the estate of the SPI With-Profits Fund are mostly invested in
fixed interest securities. However, if the estate is large in relation to the potential
risks facing the fund, then part of the estate may be invested in growth
investments in line with the asset mix for the asset shares.
The assets invested to back the cost of guarantees are mainly invested in hedging
arrangements using financial instruments.
13.9.10 The proportion of equities, property and alternative assets within asset shares
varies by type of policy, according to the overall level of guaranteed benefits for
that type of policy.
For products with high levels of guarantees relative to asset shares, lower
proportions of equity, property and alternative assets are held, and for products
with low levels of guarantees relative to asset shares, higher proportions of equity,
property and alternative assets are held. The target guideline ranges for the
proportion to be invested in equities, property and alternative assets are shown in
the table below.
Type of policy
Guideline range for the proportion to
be invested in equities, commercial
property and alternative assets
Traditional with-profits life endowment
or whole of life policies
45% - 55%
Traditional with-profits pension policies
25% - 35%
Unitised with-profits pension policies
with guaranteed minimum bonus rates
25% - 35%
Unitised with-profits pension policies
with no guaranteed minimum bonus
rate
55% - 65%
Unitised with-profits life policies
55% - 65%
Deposit Administration business
25% - 35%
The equity, property and alternative assets proportion may include private equity
and alternative assets such as hedge funds. The balance of the asset shares is
invested in fixed interest and cash. Fixed interest will be a mixture of approved
fixed interest securities, such as British Government gilts and other government
and supranational bonds, and other fixed interest securities, such as corporate
bonds, debentures, loan notes and emerging market debt.
From time to time the actual asset mix will be different from the guideline asset mix
due to market movements and active management decisions taken by the
investment managers or the Investment Committee.
13.9.11 If it is considered by the With-Profits Committee to be in the best interests of the
policyholders, further hypothecation of the assets in the fund may be introduced.
For example this may involve matching of non asset share liabilities more
accurately, hypothecation of different equity-backing ratios to further classes or
groups of policies or the hypothecation of fixed interest assets by term remaining
within asset shares to reduce the volatility of policyholder returns near maturity.
PLL PPFM Page 284 January 2024
13.9.12 The With-Profits Committee reviews the investment strategy taking account of a
variety of considerations, including our approach to responsible investment at least
once a year. However more frequent reviews might take place, in particular in
response to adverse market movements or significant changes in the operating
environment. The With-Profits Committee documents the investment strategy,
provides investment ranges to the investment managers and monitors the position.
13.9.13 A fixed charge over some of the fund’s assets has been provided to PLAE as
security under the reassurance arrangement and, whilst these assets are held in
separately identifiable accounts, this is not expected to impact the overall
investment strategy of the fund.
PLL PPFM Page 285 January 2024
Principle
13.10
Business Risks
The Board aims to manage its business in a prudent manner, having regard to
both the risks and rewards of which it is aware. The Board will also have regard to
the availability of suitable capital and the amount required in light of the risks being
undertaken. Some business risks are outside the control of Phoenix Life Limited.
Risks determined by the Board to arise in connection with the insurance business
of the fund are attributed to the fund. Costs and benefits are attributed in the
same manner.
Unless specifically passed through to asset share calculations, the impact of
business risks is borne by the estate. Thus with-profits policyholders are exposed
through bonuses, following from sections 13.4 and 13.12, to the profits and losses
of the fund.
Practices
13.10.1 There is no established formal monetary limit to the taking on of business risk by
the fund but any such risk is expected to be small in relation to the overall size of
the fund.
13.10.2 Risks taken on by the Scottish Provident Limited SPI Fund prior to its
demutualisation, such as mis-selling will normally be deemed to have transferred
to the fund and any associated costs may be charged to the fund. Following
demutualisation, mis-selling risks do not fall to the fund and any associated costs
will not to be charged to the fund.
Risks will be met by the fund where they are properly attributable to the fund in
accordance with the principles underlying the 2023 Scheme or such an attribution
is fair and equitable, having regard to policyholders’ reasonable expectation.
13.10.3 Infrastructure risks.
(a) As the unit charges under the management services agreements are subject to
annual increases linked to movements in the Retail Prices Index (RPI), the fund is
exposed to the risk of higher than expected inflation.
Costs associated with day to day administrative problems are borne by PGMS.
(b) The PGMS charges are currently VAT exempt. Phoenix Life Limited retains the
risk of increase in charges due to changes in VAT rules, including any
retrospective changes.
13.10.4 As the fund is running off, there is a risk that the fixed costs will not be reduced in
line with the reducing policy volumes. This is substantially mitigated by
agreements for the provision of administration services, but this risk has not been
entirely eliminated.
The current management services agreement with PGMS is a perpetual
agreement.
Currently the costs charged to the fund are detailed in the 2023 Scheme and are
based on charges agreed following demutualisation. The Non-Profit Fund bears
any difference between the PGMS charges and the expenses charged to the fund.
PLL PPFM Page 286 January 2024
The renewal and initial expenses charged to the fund will continue to inflate but
are limited to a maximum of 115% and a minimum of 85% of actual expenses
incurred in the year by Phoenix Life Limited in respect of the fund’s business.
13.10.5 In the event of failure by PGMS, substantial costs would be incurred in securing an
alternative supplier, especially as PGMS and / or its sub-contractors own the
infrastructure assets. To monitor this risk the financial viability of PGMS is
regularly monitored. Should PGMS be unable to meet any of its obligations to
provide services then Phoenix Life Limited would request that Phoenix Group, as
owners of PGMS step in to restore the position. Should Phoenix Group not do
this, then Phoenix Life Limited would attribute any losses to the shareholder fund
or Non-Profit Fund, and the fund would only be affected if the shareholder fund or
Non-Profit Fund had insufficient excess assets to bear the losses.
13.10.6 The fund contains non-profit business and the profits or losses arising in respect of
this business fall to the fund.
13.10.7 There are no material reassurance treaties applicable to the fund which would
have a material impact in the event of the reassurer failing. Future new
reassurance or similar arrangements (where the fund would be exposed to the
failure of the reassurer) will only be entered into to reduce the risk within the
business and where they are cost or benefit justified.
13.10.8 Mortality and persistency experience may impact asset shares or charges directly,
but can also have an indirect effect, such as causing the level of expense charges
to vary, other than the service level charges from PGMS. Experience is regularly
investigated. The potential impact of variations in experience is also considered.
13.10.9 Although the fund is no longer actively seeking new business, there remains some
risk in respect of any new business arising and from the exercising of policy
options. For some minor classes, the new or additional benefits are on fixed terms
which are onerous.
13.10.10 Investment management services are provided to the fund by the investment
managers. Failures at the investment managers might result in losses or costs to
the fund, either through losses in the investments being managed or in securing
an alternative supplier.
13.10.11 Within any notionally segregated portfolio there is pooling across all categories of
policy, except that within the traditional pensions classes different bonus series
may be treated separately. If costs cannot reasonably be borne within the class
they may be charged initially to the estate and hence, indirectly, to other classes.
13.10.12 Other business risks which potentially impact the fund and the amounts payable
under with-profits policies are explicitly or implicitly covered under the other
principles and their associated practices, but are summarised here as follows:
• Solvency risks
• Investment risks
• Expense and charges risks
• Mortality and morbidity risks
• Persistency risks
• Taxation risks
• Guarantee risks
• Regulatory risks
• Bonus declaration risks
• Operational risks including failure of third party service providers, including third
party administrators and reassurers
• Estate management and distribution risks
PLL PPFM Page 287 January 2024
13.10.13 Phoenix Group’s strategy is to acquire closed books of insurance business. Any
arrangements impacting on Phoenix Life Limited will be discussed with our
regulator and will be approved by the Board.
13.10.14 Risks undertaken by the fund are approved by the Board. They consider the scale
of such risks and the cost / benefit justification, having regard to the availability of
suitable capital and the amount required in light of the risks being undertaken.
They also aim to ensure that risks are undertaken which are, in their opinion, to
the advantage of with-profits policyholders.
The With-Profits Committee approves to what extent these risks pass to asset
shares. The balance of these risks feed through to the estate. The profits and
losses from risks which pass to asset shares affect the amounts payable under
with-profits policies. The profits and losses from risks that feed through to the
estate only indirectly affect the amounts payable under with-profits policies, as part
of any distribution of or charge to the estate as described in section 13.12.
13.10.15 Business risks are regularly monitored and they form part of the key insurance risk
and operational risk management processes. The risk based capital requirements
are assessed with regard to the business risks being undertaken.
Business risks attributed to the fund are reviewed at least once a year by the With-
Profits Committee.
PLL PPFM Page 288 January 2024
Principle
13.11
Expenses and Charges
Policies will either be charged product charges or be charged amounts which
represent a fair share of the actual costs or a sub-set of the actual costs.
This approach will be adjusted where necessary in order to continue to treat
customers fairly.
Product charges may be either explicit or implicit.
Where actual costs are used and where costs are specific to a policy or policy
class, then taking into account the approximations referred to in section 13.4, such
costs will be taken into account in assessing the bonuses added to that policy or
class and in assessing the early termination value payable. Where costs are not
specific to a policy or class, they will be apportioned across the policies or classes
to which they are relevant in a reasonable manner.
Practices
13.11.1 For traditional with-profits business and deposit administration business the costs
charged to the fund are the actual costs incurred, but subject to adjustment in
accordance with the provisions of the 2023 Scheme. For unitised with-profits
business the fund is charged an annual management charge of 1% of the value of
the units.
13.11.2 The investment expenses, initial and renewal expenses are detailed in the 2023
Scheme. Any difference between the PGMS charges in respect of the fund and
those specified under the 2023 Scheme are borne by or credited to the Non-Profit
Fund.
13.11.3 For unitised with-profits business the fund pays the Non-Profit Fund 1% of the
value of the units, after allowing for any applicable final bonus or market value
reductions, and the expenses are met by the Non–Profit Fund. However, the
implicit annual management charge taken into account in determining asset
shares is 0.60% in respect of life units and 0.85% in respect of pensions units. To
the extent that the explicit charge exceeds the implicit charge, the balance falls to
the estate.
13.11.4 An agreement exists with PGMS to supply administration services to the fund.
This is a perpetual agreement and is not expected to be renegotiated, but charges
may be amended in respect of major regulatory change. The agreement can
however be terminated early for material failure to meet service standards or other
non compliance with the agreement. We regularly monitor service standards.
Value added fees for work outside the service level agreements are changed
separately.
The renewal and initial expenses charged to the fund will continue to inflate but
are limited to a maximum of 115% and a minimum of 85% of actual expenses
incurred in the year by Phoenix Life Limited in respect of the fund’s business.
13.11.5 Were an adverse change to the external fiscal or regulatory environment to occur,
then action would be taken to reflect this within the charges and expenses, subject
to the provisions of the 2023 Scheme.
PLL PPFM Page 289 January 2024
Principle
13.12
Estate Management
The estate should lie in a target range. If the estate falls outside the target range
then either the target payout ratio (in section 13.6) will be changed or asset shares
(in section 13.4) will be adjusted, to maintain the estate within the target range
where possible.
Practices
13.12.1 The estate is the estimated realistic value of the assets less the estimated realistic
value of the liabilities. It is calculated using realistic assumptions and generally
accepted methodologies on a basis determined by the Board.
13.12.2 To the extent that any profits or losses arising in the fund are not allocated to asset
shares in accordance with section 13.4, they will act to increase or reduce the
estate. To the extent that the amounts charged to asset shares are based on
estimates or assumptions, then any difference between these and the actual
amounts will act to increase or reduce the estate.
13.12.3 The estate in the fund will be used to:
(a) assist the fund in demonstrating it has access to sufficient capital resources
to meet its liabilities and treat customers fairly;
(b) provide a buffer in the fund should adverse experience mean that the
reserves held to cover the liabilities prove insufficient;
(c) meet any costs which are charged directly to the estate rather than to asset
shares;
(d) meet the costs of any changes which the With-Profits Committee believe are
necessary to improve fairness between policyholders and / or enhance the
run-off of the fund; and
(e) enhance the benefits payable to those with-profits policies which have an
interest in the estate always aiming to retain sufficient estate to meet the
expected amounts for (a), (b), (c) and (d). The amount considered by the
With-Profits Committee to be available from time to time for such
enhancements will be referred to as the distributable estate.
13.12.4 Any enhancement in benefits on account of the distributable estate referred to in
13.12.3(e) will generally be achieved by including a temporary uplift to the asset
share for the purpose of setting final bonus rates and surrender values. However
if the distributable estate is large then consideration would be given to making
additions to the asset shares from the estate.
13.12.5 The amount of the estate, the distributable estate and the potential for any
enhancements to policyholder benefits will be subject to review at least once a
year.
13.12.6 In the event of a risk of the assets in the fund being insufficient to cover the
liabilities, charges may be made to the asset shares to restore the estate to a
target minimum level. However such charges could not be applied to any part of
the deficit caused by regulatory penalties (fines) or compensation payments
relating to events which occurred before 31 July 2009, see paragraph 5.2.18,
except to the extent that such charges are effectively reversing any estate
previously added into asset shares.
PLL PPFM Page 290 January 2024
13.12.7 In the event of the assets in the fund being insufficient to cover the liabilities, the
following management actions will take place:
(a) Any future planned enhancements to asset shares will be removed.
(b) If step (a) is insufficient to remove the deficit and restore an estate of at least
0.5% of aggregate asset shares, any past asset share enhancements will be
removed.
(c) If steps (a) and (b) are insufficient to remove the deficit and restore an estate
of at least 0.5% of aggregate asset shares, asset shares will be reduced or
charges will be applied to asset shares up to the level of:
• the maximum amount charged to asset shares in one year will be 1.0% of
asset shares; and
• the cumulative charges made to asset shares for any given policy where
policyholders have to bear all the costs will be limited to 5.0%.
(d) If steps (a) through to (c) have proved to be insufficient to remove the deficit
and restore an estate of at least 0.5% of aggregate asset shares, an internal
loan will be provided by the Non-Profit Fund or the Shareholder Fund under
the terms of the arrangements described in paragraph 5.2.5.
In determining the action to be taken, the With-Profits Committee will have regard
to treating customers fairly, past practices and discussions with the regulator.
Realistic surpluses arising in a subsequent period will be applied in the reverse
order to these general principles except that there is no cap to future asset share
enhancements in the event of favourable conditions.
13.12.8 Providing that it is possible to do so whilst still treating policyholders fairly, it is
intended to manage the excess assets using solely the resources of the fund and
avoiding the need to draw on any external sources of capital.
Arrangements exist for monies to be transferred from the Non-Profit Fund or
Shareholder Fund to the fund with the aim that the amount of assets in the fund
exceeds the liabilities by a small margin, should the charges described in 13.12.6
and 13.12.7 be insufficient to restore the estate. For this purpose, the possibility of
distributing any surplus assets to policyholders will not be regarded as a liability.
Transfer of such amounts back to the Non-Profit Fund or the Shareholder Fund
will be made whenever emerging surplus in the fund permits.
The exercise of discretion in respect of with-profits policies will be managed with
the aim that the amounts transferred to the fund will be repaid to the extent that is
possible whilst still meeting the aims described in section 5. In determining
benefits under with-profits policies, the With-Profits Committee will disregard any
liability to transfer such amounts back to the Non-Profit Fund or Shareholder Fund
to the extent that this is necessary to treat customers fairly (that is in accordance
with these Principles and Practices).
PLL PPFM Page 291 January 2024
Principle
13.13
New Business
The fund is no longer actively seeking new business. Policy options under
existing contracts to effect new policies are honoured.
Practices
13.13.1 The fund is no longer actively seeking new business, but continues to write a small
amount of new business relating to policy options under existing contracts. Some
existing group policies for pension schemes also contain rights to add increments
for existing members and rights to add new members.
Currently there are no plans to reopen the fund to new business. The ability of the
fund to reopen is constrained by the 2023 Scheme.
PLL PPFM Page 292 January 2024
Principle
13.14
Equity Between the Fund and Shareholders
Services may be provided by the shareholders to the fund but terms for such
services will be on commercial terms which are considered to be consistent with
the risks of providing those services, or considered to be consistent with terms
which would be available for such services on an arms length commercial basis.
Shareholders receive no more than one ninth of the cost of bonuses distributed to
policyholders of traditional with-profits policies and receive the charges on unitised
with-profits business, as laid down in the 2023 Scheme. Any change to the one
ninth limit would require the agreement of the Board and would be subject to
approval by our regulator and the High Court.
Practices
13.14.1 The following services are provided to the fund:
• administration services by PGMS; and
• product provision (annuity products) by the Non-Profit Fund.
13.14.2 Shareholders will only provide services to the fund on commercial terms which
would require an adequate return for the risks involved in providing the services.
The profit margin for shareholders is acceptable to the fund if:
• the cost for the fund is consistent with the terms available from other providers;
or
• the profit margin is consistent with the risks borne and there are reasonably
foreseeable circumstances in which the shareholder could make a loss.
13.14.3 The allocation of profits between policyholders and shareholders is laid down in
the 2023 Scheme which states that not less than 90% of the surplus being
distributed from the fund in respect of traditional with-profits policies is allocated to
traditional with-profits policyholders. Current practice is to distribute exactly 90%
of such surplus to policyholders, leaving the remaining 10%, being one ninth of the
cost of bonus, to be transferred to shareholders. For unitised with-profits business
and deposit administration business the shareholder does not receive any share of
the surplus distributed.
The division of profits between with-profits policyholders and shareholders does
not change as a result of changes in the underlying basis used to determine the
cost of bonus as described in paragraph 13.14.5. The transfer to shareholders
remains one ninth of the cost of bonus for traditional with-profits policies as
determined in accordance with the underlying basis.
On unitised with-profits business, the shareholder receives the product charges.
13.14.4 The shareholder transfer associated with the distribution of profits from the fund
can only take place following the published annual actuarial investigation of the
long-term business of Phoenix Life Limited carried out in accordance with the
requirements of the Financial Services and Markets Act 2000 (or equivalent
subsequent legislation). The Board is responsible for the distribution of profits and
no transfer to shareholders can take place without its authority.
PLL PPFM Page 293 January 2024
13.14.5 For all traditional with-profits business, the cost of bonus is the increase in the
liabilities using a risk free discount rate (net of tax as appropriate), as a result of
the bonus declaration together with cost of bonus paid on claims since the
previous actuarial investigation as follows:
(a) Life assurance traditional with-profits business
• The cost of annual bonus is the value of any annual bonus added, discounted
using the above basis.
• The cost of final bonus is the value of any final bonus paid on death or maturity
or where applicable terminal or serious illness. The cost of any interim bonus
paid on such claims is the value of the interim bonus added, discounted using
the above basis.
• The cost of interim bonus on surrender is the value of that bonus discounted
using the above basis and the cost of final bonus is the value of the final bonus
element of the surrender value.
(b) Pensions traditional with-profits business
• The cost of annual bonus is the value of the annual bonus added (for E-Type
policies) or the capital value of annual bonus added at the selected retirement
age using the above basis (for SEDA policies), discounted using the above
basis.
• The cost of any interim bonus paid on retirement is the value of interim bonus
paid at the retirement date (for E-Type policies) or the capital value of interim
bonus paid at the retirement date using the above basis (for SEDA policies).
• On retirement the cost of final bonus is the value of final bonus paid (for E-Type
policies) or the excess of the capital value of the annuity, annual bonus, interim
bonus and final bonus on the commencement basis compared to the capital
value of the annuity, annual bonus and interim bonus on the above basis,
subject to a minimum of nil (for SEDA policies).
• The cost of any interim bonus on transfer is the value, at the selected
retirement date, of interim bonus paid, discounted using the above basis (for E-
Type policies) or the capital value, at the selected retirement age, using the
above basis, of any interim bonus added on transfer, discounted using the
above basis (for SEDA policies). The cost of any final bonus on transfer is the
value of final bonus paid on transfer (for E-Type policies) or the capital value of
final bonus added using the transfer basis (for SEDA policies).
13.14.6 Although the fund is no longer actively seeking new business, new business may
arise from the exercising of policy options, including payment of additional
premiums. For some minor classes, the new or additional benefits are on fixed
terms which are onerous and where future bonuses are added, then any
associated shareholder transfer would add to the strain.
13.14.7 Where distributions to policyholders are made in anticipation of a surplus arising,
these only contribute to the cost of bonus at the next actuarial investigation and
only generate an allocation to shareholders at that time.
13.14.8 The tax charged to the fund is based on the fund being a standalone mutual
company and the Non-Profit Fund bears any difference between the tax charged
to the fund and any tax Phoenix Life Limited incurs as a result of the fund. In
particular any tax associated with the distribution of profits from the fund to the
shareholders is borne by the Non-Profit Fund.
PLL PPFM Page 294 January 2024
14 Principles and Practices – SAL With-Profits Fund
The Principles and Practices given in sections 14.4 to 14.14 together with the Guiding
Principles and Practices form the Principles and Practices of Financial Management for the
SAL With-Profits Fund. Sections 14.1 to 14.3 give background information specific to the SAL
With-Profits Fund. Subsequently in this section the use of the term 'the fund' generally means
the SAL With-Profits Fund.
14.1 Fund History
The SAL With-Profits Fund comprises the business that was transferred into
Phoenix Life Limited from the long-term business fund of Phoenix & London
Assurance Limited (PALAL) under the 2011 Scheme.
Phoenix & London Assurance Limited was previously named Sun Alliance and
London Assurance Company Limited and was part of the Royal & Sun Alliance
group of companies.
In September 2004, Resolution Life Group Limited bought the UK life operations of
Royal & Sun Alliance and subsequently rebranded policies to Phoenix.
Phoenix & London Assurance Limited closed to new business in 2002, although it
has continued to issue policies under options on existing policies, including the
acceptance of new members to existing pension arrangements and the issue of
immediate annuities in respect of vesting pensions.
On 31 December 2009, a scheme of arrangement under Part 26 of the Companies
Act 2006 (the 2009 PALAL Scheme) became effective. Under its terms, certain
with-profits pension policyholders gave up their option to convert their maturity
value into an annuity on guaranteed rates in exchange for an immediate increase
to the value of their policy and a change to the underlying investment practices for
their policy. These polices are referred to as 2009 PALAL Scheme policies. The
same principles and practices apply to these policies as to other policies except
where indicated. In some cases, only parts of a policy were subject to the 2009
PALAL Scheme. Where this is the case, the different principles and practices
apply only to those parts.
14.2 Types of Business
The with-profits contracts in the fund mainly fall into the following categories:
• traditional endowments and whole life policies
• traditional pension policies funding for cash or a pension
• unitised with-profits single premium whole life bonds
• unitised with-profits regular premium life policies
• unitised with-profits pension policies
• final salary unitised with-profits group pension policies
The final salary unitised with-profits group pension policies arose from:
• final salary pension schemes which had a Growth Fund policy with Phoenix
Assurance Limited prior to 1996 and subsequently transferred to Sun Alliance
and London Assurance Company Limited; or
• Retirement Plan policies issued by Sun Alliance and London Assurance
Company Limited prior to 1996 which were subsequently converted to a Group
Unitised With Profits Pension investment.
PLL PPFM Page 295 January 2024
14.3 Capital Support to the Fund
The capital policy is described in section 3.2.
In certain circumstances, the shareholders will loan money to this fund. The
practices relating to receipt of support are detailed in sections 3.3 and 5.2.
PLL PPFM Page 296 January 2024
Principle
14.4
Amounts Payable Under a With-Profits Policy
The aim of the methods employed in determining the amounts payable under a
with-profits policy is the fair treatment of all with-profits policyholders consistent
with the guiding principles.
The main guide used for determining the amounts payable under with-profits
policies is asset share calculations which are carried out for certain specimen
policies. The amounts payable will allow for a fair share of any surplus distributed,
which may be in the form of annual or final bonuses.
In putting into practice the aims set out in the guiding principles and in the
application of our with-profits principles generally, we apply various degrees of
approximation in a number of different areas, the major ones being described in
paragraph 14.4.4. The Board endeavours to ensure that these approximations:
• are applied consistently;
• have a broadly neutral effect between policyholder and shareholder interests;
• where appropriate, have a broadly neutral effect over time (that is between one
generation of policyholders and another); and
• for the larger classes of business, are of broadly neutral effect within that class.
This may mean that for some smaller classes of business, a different result would
result if less approximate methods were used.
The Board controls the changes to the methods we use to determine the amounts
payable under a with-profits policy by:
• requesting and considering the advice of the Chief Actuary, of the With-Profits
Actuary and the opinion of the With-Profits Committee before making any
changes;
• assigning to the Chief Actuary the executive responsibility to continue to apply
the currently agreed methods until advised differently; and
• following legal or regulatory requirements to obtain independent expert input
where necessary.
The Board might change any assumptions used in previous years (such as
investment returns, charges, allocations of miscellaneous profits and losses)
relevant to the methods we use to meet our aims at any time:
• should they be shown to have been incorrect; or
• should legal or regulatory change render it necessary to do so; or
• if their continued application unchanged could put at risk the achievement of
our aims as set out in the guiding principles in section 5.
PLL PPFM Page 297 January 2024
Practices
Asset Share Methodology
14.4.1 The basic method for asset share calculations for with-profits business in the fund
uses an apportionment of actual investment returns net of tax and the actual
underlying experience.
Asset shares are generally not smoothed. In particular the investment returns and
experience elements contributing to asset shares are generally not smoothed,
other than that inherent in the processes used in the derivation of the assumptions
or in respect of large profits and losses from other business per paragraph
14.4.2(s).
PLL PPFM Page 298 January 2024
14.4.2 The following table describes the elements currently credited or charged to asset
shares for specimen policies.
Element
Description of Allowance
(a)
Premiums
Premiums paid under the policy
(b)
Investment return
Allocated return – note (b)
(c)
Investment
expenses
Actual allocated – note (c)
(d)
Initial expenses
Actual allocated – note (d)
(e)
Renewal expenses
Actual allocated – note (e)
(f)
Other expenses
Actual allocated – note (f)
(g)
Tax on investment
return
Actual allocated – note (g)
(h)
Tax relief on expenses
Actual allocated – note (h)
(i)
Mortality & morbidity
costs
Based on underlying experience – note (i)
(j)
Early terminations
Note (j)
(k)
Paid-up policies
No profits or losses are credited
(l)
Partial and regular
withdrawals
No profits or losses are credited other than as
described in note (o) below
(m)
Surrenders at
protected dates
No profits or losses are credited
(n)
Annuity payments
Not applicable
(o)
Charges for the cost of
guarantees
Charged – note (o)
(p)
Charges for the cost of
capital
See note (p)
(q)
Distributions to
shareholders
Actual incurred – note (q)
(r)
Tax on distributions to
shareholders
Not charged
(s)
Profit and losses from
other business
Profits or losses are credited – note (s)
(t)
Estate distribution or
charge
Distributions from or charges to the estate as
determined - note (t)
(u)
Exceptional items
Enhancement for surrender of options or guarantees –
note (u)
The way in which the above items are taken into account is described in the notes
below.
Not all the above items may necessarily apply or have applied at all times for all
types of policy. Different practices, often more approximate, may have been used
in the past and the practice is generally to continue to use the results of these
practices when determining the effect of those years on the asset share of
specimen policies.
PLL PPFM Page 299 January 2024
Notes
(b) Investment return
Each year the total return, income and capital gains / losses, made on the assets
of the fund is determined. For equity shares and property (growth investments as
described in section 14.9, as appropriate), this is done in aggregate. For fixed
interest securities, the returns are sub-divided according to the time to redemption
of the security.
The investment strategy currently adopted is described in section 14.9. In
accordance with this, generally different proportions of each type of asset are
notionally attributed to the specimen with-profits policies depending upon a
number of factors, in particular:
• the term remaining,
• the anticipated relative size of the guaranteed benefits and the asset share at
such a date, and
• whether or not the policy was subject to the 2009 PALAL Scheme.
The return attributed to each specimen policy is then the weighted average return
from each asset type using those proportions. Generally, the return on fixed
interest securities (that do not form part of the growth investments described in
section 14.9, as appropriate) will be that of the subclass of such securities issued
by the UK government with a duration which matches most closely the term
remaining of the specimen policy. For policies subject to the 2009 PALAL
Scheme, the return will be an average of the returns from the subclasses which
match the cashflow of the annuity which could be purchased with the maturity
value of the specimen policy.
For with-profits bonds and unitised with-profits pension policies without guaranteed
annuity rates, the term remaining is adjusted as described in paragraph 14.9.10.
For unitised with-profits life regular premium policies, the same asset mix applies
to all specimen policies. Also the same fixed interest return applies to all
specimen policies and there is no differentiation by term remaining.
For final salary unitised with-profits group pension policies, the same asset mix
applies to all specimen policies. Also the same fixed interest return applies to all
specimen policies and there is no differentiation by term remaining.
Any difference in return between UK government fixed interest securities and the
other fixed interest securities within the asset share is applied as a uniform
percentage adjustment across the fixed interest part of the asset shares of all
policies, irrespective of the term remaining.
The return on some types of asset, particularly derivative securities, may be
attributed to the class of policy, if any, in respect of which they are deemed to have
been purchased.
The ratio of overseas equities to UK equities is generally the same for all
specimen policies. The ratio of UK government to other fixed interest securities is
generally the same for all specimen policies. The exception is the business which
transfers some of its risks to the Phoenix Life Limited Phoenix With-Profits Fund
and this may have different ratios.
For some types of business as described in section 14.9.6 which transfer some or
all of their risks to the Phoenix With-Profits Fund, the investment return credited to
asset shares is based on the investment return of the Phoenix With-Profits Fund
using the equivalent practices described above.
PLL PPFM Page 300 January 2024
Different, more approximate, methods have been used in the past to determine the
return to attribute for a particular year to specimen policies. Our practice is to
continue to use these returns in the calculation of the asset share of those
specimen policies.
(c) Investment expenses
Actual investment expenses are charged based on those allocated to the fund in
accordance with section 14.11.
The investment expenses are expressed as a percentage charge to be applied to
the assets.
(d) Initial expenses
Initial expenses are based on PGMS charges and an uplift to cover direct costs.
These are all per policy expenses, allocated in accordance with sections 5.2 and
14.11. Commission is also payable to intermediaries on some contracts.
In the past, a proportion of sales expenses for some policy classes have been met
from the excess assets in the with-profits fund and so that the proportion is not
taken into account when calculating the asset share of specimen policies of those
classes.
(e) Renewal expenses
Renewal expenses are based on PGMS charges and an uplift to cover direct
costs. These are all per policy expenses, allocated in accordance with sections
5.2 and 14.11.
For those policy classes where there is an explicit policy fee or other charge
collected by cancellation of units or other reduction in benefits, only the expenses
not covered by these fees or charges, if any, are apportioned to the asset shares
of the specimen policies for these classes.
For final salary unitised with-profits group pension policies a charge for expenses
is made each year which is expressed as a proportion of the bonuses added in
that year. To the extent that this charge, plus the explicit policy fees or other
charges are different from the actual expenses incurred for this business, the
difference will increase or reduce the excess assets in the fund.
(f) Other expenses
The cost of compensation to with-profits policyholders provided with incorrect
advice has not been deducted from asset share calculations for specimen policies.
Compensation costs in respect of unit-linked policies issued by the company but
which fully transferred their risk into another fund within Phoenix Life Limited, have
been met by that fund.
Project and other one-off expenses incurred are included in the actual renewal
expenses charged to asset shares.
The historic costs of establishing policy administration outsource arrangements
over the period 2003 to 2005 was spread over a five year period.
Significant future project, additional activity and other one-off costs will only be
charged to asset shares following approval by the Board.
PLL PPFM Page 301 January 2024
(g) Tax on investment return
The tax charged to classes of policy subject to tax is calculated by applying the
current rates applicable to life insurance companies in respect of income
attributable to policyholders to the different elements of the investment return.
Approximate allowance is made for any deferment in tax payment, particularly in
respect of tax on unrealised capital gains (which is charged at a discounted rate to
reflect the average expected period until it is payable). If the actual tax incurred
differs from the total calculated in this way, the difference will increase or reduce
the excess assets in the with-profits fund.
(h) Tax relief on expenses
Tax relief due on the actual expenses charged is allowed for in those classes of
business that are subject to tax. Where the tax relief in respect of expenses is
deferred this is allowed for in an approximate manner. The rates of tax relief are
the average rates applicable.
(i) Mortality and morbidity costs
Amounts to cover the cost of payments in excess of asset share on death or
illness are deducted.
Where a policy class is designed to pay a benefit on death or illness which
exceeds asset share at that time, and where no explicit charge for benefit is
applicable, an annual charge is made to cover the cost of making those enhanced
payments.
Most unitised with-profits policies are subject to an explicit charge for such costs.
Any differences between the aggregate cost deducted and the total enhancements
to payment will increase or reduce the excess assets of the with-profits fund.
For other policies, the estimated annual cost of providing such benefits is
determined periodically from an analysis of recent actual mortality and illness rates
experienced by policyholders and / or from insurance industry and national
statistics. These costs are expressed as rates dependent upon various factors
including age.
The charge on each specimen policy in each year is then determined by applying
the appropriate rate to the current difference between the benefit payable on death
or illness and the asset share.
Some pension policies provide either no benefit at all on death or only a return of
premiums paid, with or without interest. For the specimen policies representing
such classes, a credit to asset share is calculated using similar principles.
(j) Early terminations
It is not the current practice to attribute to the asset share of specimen policies any
differences between the amount paid on the early termination of with-profits
policies and their estimated asset share.
Prior to 2002, profits from this source were credited to the asset share of specimen
policies and we continue to take those past profits, expressed each year as an
addition to the investment return, into account in the calculation of the asset share
for specimen policies. However, no such allocations are made to final salary
unitised with-profits group pension policies.
PLL PPFM Page 302 January 2024
(o) Charges for the cost of guarantees
The costs of meeting guarantees in the fund are periodically assessed. No
charges for guarantees are currently being made.
For policies subject to the 2009 PALAL Scheme, charges to asset shares in
respect of guarantee costs will not be applied unless in the opinion of the Board,
the With-Profits Committee and the With-Profits Actuary, and with the agreement
of the regulator, it is necessary to enable the fund to continue to meet the
objectives set out in the guiding principles and Principle 14.4.
For other policies guarantee charges may be applied. Some charges were applied
in the past but these were refunded in 2017. Should the assets of the fund be
insufficient to cover the liabilities these past charges will be re-applied to the extent
required to enable the liabilities to be covered. Should the re-application of these
past charges be insufficient to cover the liabilities then, to the extent this is due to
guarantee costs, a further annual charge may be applied. This will normally be
limited to 1.5% of asset share per annum.
The exception to the above is incremental premiums on certain Section 226
pension policies not subject to the 2009 PALAL Scheme. These are the only
contracts on which the benefits arising from new incremental premiums have an
attaching guaranteed annuity option. For these policies, the asset share for the
incremental benefit is charged with the full expected cost at the date the increment
commenced of providing the guaranteed annuity option on that increment.
(p) Charges for the cost of capital
A reinsurance arrangement was in force between May 2000 and August 2003, the
effect of which was to reduce the total capital which the company was required to
hold. The premium payable to the reinsurer was, between January 2002 and
August 2003, deducted from the asset shares of all classes of specimen policy,
other than final salary unitised with-profits group pension policies. For the earlier
part of the period in force, the premium reduced the excess assets of the with-
profits fund.
From time to time, one or more loan agreements may be in place in accordance
with section 5.2. Further details may be found in section 14.12. Interest at a
commercial rate will be payable on such loans. Where part of such a loan is
required to eliminate a deficit in the fund, then the interest payable on that part of
the loan is not currently charged to asset shares. Where part of such a loan is not
required to cover a deficit, then a deduction is currently made from asset shares to
reflect the excess of the interest payable on that part of the loan above the return
achieved by the fund from investing that part of the loan. Prior to 2005 the whole
of any interest incurred on loans to the with-profits fund was deducted in asset
share calculations.
No charge is currently made to the fund for the capital that it is necessary to retain
in the Non-Profit Fund and Shareholder Fund in order that Phoenix Life Limited
continues to have adequate capital in accordance with paragraph 5.2.6.
The asset shares of specimen policies do not receive any credit for the return
earned on excess assets held within the fund.
No charges for cost of capital are applied for final salary unitised with-profits group
pension policies.
No charge for any cost of capital arising after 31 December 2009 will be deducted
from the asset shares of specimen policies used to determine the benefits of
PLL PPFM Page 303 January 2024
policies subject to the 2009 PALAL Scheme. Moreover, in respect of 2010 and
subsequent years, the effect of the deduction of cost of capital charges from the
specimen policies used to determine the benefits of policies not subject to the
2009 PALAL Scheme will be no more than had the 2009 PALAL Scheme not been
implemented. This practice may only be changed with the agreement of the
regulator.
(q) Distributions to shareholders
The cost of distributions to shareholders resulting from the cost of bonus allocated
to policies is charged to asset shares.
(s) Other business profit or losses
It is the current practice to attribute to the asset share of most specimen policies in
most classes any other business profits or losses arising in a year, other than the
costs of any compensation payable as a result of policies mis-sold or as described
in sections 14.4.2(f), 14.4.2(j) and 14.4.2(o), expressed each year as an addition
or reduction to the investment return.
Some larger business profits or losses may be spread over a number of future
years.
No profits or losses are charged to final salary unitised with-profits group pension
policies.
These practices may be changed if the Board consider it necessary to do so to
enable the fund to meet the objectives set out in Principle 14.4.
In respect of 2010 and subsequent years, only those business profits or losses
arising from policies subject to the 2009 PALAL Scheme will be attributed (and
only attributed) to the asset shares of specimen policies used to determine the
benefits of policies subject to the 2009 PALAL Scheme. Moreover, in respect of
those years, the effect of the attribution of business profits and losses to the
specimen policies used to determine the benefits of policies not subject to the
2009 PALAL Scheme will be no more than had the 2009 PALAL Scheme not been
implemented. This practice may only be changed with the agreement of the
regulator.
(t) Estate distribution or charge
Asset shares may be increased by distributions from the estate or reduced by
charges to the estate. In the event of the assets in the fund being insufficient to
cover the liabilities, then any past asset share enhancements out of the estate will
be removed to the extent needed to remove the deficit.
No estate distribution or charge is made to final salary unitised with-profits group
pension policies.
(u) Specimens of policies subject to the 2009 PALAL Scheme receive an uplift to
asset shares. This is expressed as an additional percentage return in respect of
2009. It differs by policy class, premium mode, inception year and maturity year.
14.4.3 For traditional with-profits business, the primary focus is on performing the
calculations for specimen policies at the terms which contain a significant volume
of policies. For other terms approximations may be used.
For unitised with-profits business, the specimen policies are for every past year
(month, in the case of with-profits bonds, quarter for final salary unitised with-
profits group pension policies) of commencement.
PLL PPFM Page 304 January 2024
Separate single premium and regular premium specimen policies are used.
Policies generally reflect the average size and policyholder age for the year of
issue and term. Where final bonus rates or market value reductions are shared by
policies of different years of issue or different premium types, the specimen
policies may be grouped or otherwise averaged.
Separate specimen policies are used for policies subject to and not subject to the
2009 PALAL Scheme. These may only be changed with the agreement of the
With-Profits Actuary. Different specimen policies are also used for standard single
premiums and National Insurance contribution rebates to policies subject to the
2009 PALAL Scheme.
For final salary unitised with-profits group pension classes, the specimen policies
referred to are tranches of units issued within particular quarterly periods to give
final bonus rates which are applied to units within the policy issued at the
appropriate times.
Asset shares are not calculated for specimen whole life, paid-up and altered
policies. As a result the target ranges described in sections 14.6 and 14.8 do not
apply to policies of these types.
14.4.4 Various approximations are inherent in the asset share method described above
and in the general applications of the Principles in practice. These include:
• Investment returns are calculated monthly but may be applied uniformly over
the period within the model which is usually quarterly or six-monthly.
• The investment return itself is only calculated approximately during the course
of a year (by the use of appropriate indices) and is updated after the end of
each year to reflect the actual performance earned.
• The asset mixes used to determine investment returns may not be exactly in
line with the actual assets held.
• Carrying out the calculations (and hence changing final bonus rates) only
infrequently (such as monthly, half yearly or annually).
• An inevitable time delay before actual experience is reflected in bonus rates
and their application to policies.
• The application of bonus rates determined using a specimen policy of one type
to policies of another type (such as the use of final bonus rates determined for
standard endowment policies for low start endowments and for whole life
policies).
• Where the premium rate for a specimen policy changed in the middle of a year
of issue, the final bonus may be based on either the pre or the post change
rate.
• The use of specimen policies will usually mean that small premium policies
receive more than asset share (as many administration costs are independent
of premium size) and large premium policies less.
• The use of specimen policies only for selected terms of policy and the
interpolation of final bonus rates for intermediate terms will mean that the
amounts paid on policies of those intermediate terms will not necessarily equal
asset share.
• The calculations of final bonuses are based on specimen policies with a typical
and straightforward premium history and so the bonuses will only be
approximate for policies with complex premium histories. Similarly bonuses will
only be approximate for policies that have been altered in other ways.
• For policies which been made paid up, the use of final bonus rates applicable
to policies which have been premium paying throughout. Or, alternatively, the
application to both types of policy of final bonus rates calculated using both
specimen paid-up policies and specimen premium paying throughout policies.
• Specimen policy calculations generally assume that all policies were subject to
standard terms, including sales commission.
PLL PPFM Page 305 January 2024
Some of these approximations, as well as others not listed, will also be present in
the calculations of the excess assets of the fund from time to time.
14.4.5 Items not charged to asset shares, the effects of the approximations in the
experience assumptions and the effects of other approximations in the methods
employed feed through to the estate as described in principle 14.4.
14.4.6 The procedures have been documented that set out how the asset share
calculations described above are to be carried out and how the parameters to be
used in the calculation are to be derived each year. A permanent record is kept of
the historic parameters used. Some of the instructions for the detailed
computations are embedded within a number of computer programs.
14.4.7 Any change to the practices used, including those used to determine the excess
assets in the fund, would be subject to the procedure described in section 2.
Any material changes to the historical parameters used would, if a result of the
identification of a past inaccuracy, be notified to the Board and the With-Profits
Committee at the time of the next recommended change in bonus rates. If
considered appropriate, any changes may be phased in over a period rather than
implemented at once.
Any proposed changes to the historical parameters for other reasons would be
subject to the same processes as a change in practice.
14.4.8 Asset share practices are not guaranteed and may be changed in future.
Asset share methodology and processes will be regularly reviewed by the Board
and may change. This may include changes to the historical aspects of the
calculations as a result of a variety of factors, including changes in regulations,
improvements in the degree of approximations, maintaining equity between
classes and groups of policyholders and significant changes in the financial
condition of Phoenix Life Limited. Any changes will take into account the
requirements of the 2009 PALAL Scheme.
PLL PPFM Page 306 January 2024
Bonus Declarations
14.4.9 Bonus declarations are approved by the Board or committee of the Board or
delegated to senior management and then retrospectively approved by the Board.
14.4.10 The amount payable (or available to convert to a pension) on most traditional with-
profits policies on maturity is the total of:
• the sum assured;
• the annual bonuses added whilst the policy has been in force; and
• final bonus, if any.
Exceptions are some pension policies, where the sum assured and bonuses are
expressed as annual amounts of pension rather than as cash amounts.
The amount payable (or available to convert to a pension) on most unitised with-
profits policies on maturity is the total of:
• the value of the units; and
• final bonus, if any.
Exceptions are some pension policies which may be subject to a full or limited
market value reduction at maturity, where either is allowed under the policy
conditions.
Amounts payable on the encashment of policies at times other than maturity are
determined in different ways.
The rate, if any, of final bonus which applies to a particular policy class, date of
issue and date of maturity is currently determined in most cases with reference to
the asset share of a representative range of specimen policies.
14.4.11 Bonuses are reviewed regularly at least once a year.
The timing of annual bonus reviews is described in section 14.5.5.
The timing of final bonus reviews is described in section 14.6.4.
14.4.12 The timing of final bonus declarations may be varied.
14.4.13 Final bonuses are expected to, but are not guaranteed to, apply until the next
planned review date. These bonuses may be reviewed at any time between
normal planned review dates. Additional reviews would normally only be in
response to exceptional investment market movements.
14.4.14 Final bonus reviews also consider the amount of final bonus paid on non-protected
exits (surrenders) for policies where the surrender value calculation makes explicit
use of the current final bonus scale.
14.4.15 Bonuses are declared out of surplus arising in the year or in anticipation of surplus
arising. If there is no surplus or no expectation of surplus arising, no bonuses can
be declared.
PLL PPFM Page 307 January 2024
Principle
14.5
Annual Bonus Rates
In circumstances where the value of our assets is fairly close to the minimum
amount required to enable us to meet the guiding principles in section 5, low or nil
rates of annual bonus are likely to be added for most classes of with-profits policy.
Conversely, if the value of our assets is more than reasonably sufficient, higher
rates of annual bonus are likely to be added for many classes.
We apply separate annual bonus rates to different policy classes to reflect the
different aspects of the products, including tax treatment, country of issue, form of
benefit and extent of guaranteed benefit (although we do not differentiate between
policies of the same class with and without guaranteed annuity options except in
respect of policies subject to the 2009 PALAL Scheme). Apart from with-profits
bonds, we do not currently differentiate between different dates of issue, although
we may do so in the future if it helped us to better satisfy the aims described in the
guiding principles in section 5.
Although we no longer accept most classes of new business, other than under
options on existing policies, we might at some time introduce alternative products
into which existing customers could switch their benefits at their discretion, which
might receive different bonus rates.
Practices
14.5.1 The Board makes decisions on annual bonus declarations taking into account a
number of factors. These factors are set out in paragraphs 14.5.2 to 14.5.5.
14.5.2 Annual bonuses currently take the form of:
• additions to the sum assured (or equivalent amount) and / or to existing
bonuses (traditional policies); or
• increases in the price of units (unitised policies).
14.5.3 For each class of business, the level of annual bonus is set so as to maintain a
buffer for final bonus. The future claim payouts are estimated using realistic
assumptions and the annual bonuses set at such a level that if experience turns
out to be in line with those assumptions, the overall amount of the payout paid in
the form of final bonus will be in line with a target proportion. Under current
investment conditions, the overall target is that 25% of the overall value of
payouts, calculated before any future augmentation provided by a release of the
estate, will be in the form of final bonus. Given the aggregate nature of this target,
for an individual policy, this final bonus buffer may be more or less than 25%. This
overall target is itself subject to review and may be changed. If experience does
not turn out to be in line with the assumptions then the 25% target might not be
met.
Annual bonus rates will be adjusted to keep the overall level of projected final
bonus broadly in line with the target. If necessary to remain on target, annual
bonus rates will be reduced to nil, close to nil. However, some small annual
bonuses may be declared even if the final bonus buffer is below target.
There is no maximum change in the annual bonus rate; however, in the normal
course of events the declared annual bonus rates would not be expected to
change by more than 2% from one declaration to the next.
14.5.4 Where the financial position of the fund is weak, the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus being above the 25% target.
PLL PPFM Page 308 January 2024
14.5.5 Currently annual bonus rates are reviewed as follows:
• for traditional policies, towards the end of each year, with changes taking
effect
from 1 January; and
• for unitised policies, in time for the new rates to take effect from the 1 March
and 1 September.
However, rates may be reviewed at other time should it be considered to be
necessary to continue to adhere to the Principles.
14.5.6 Where annual bonuses are declared in arrears, interim bonus rates are set with
reference to the most recent annual bonuses declared and any future anticipated
direction of these rates and may be higher or lower than the latest annual bonus
rates declared. The annual bonus rate may, however, eventually be set at a level
that differs from the interim rate.
PLL PPFM Page 309 January 2024
Principle
14.6
Final Bonus Rates
Subject to the guiding principles set out in section 5, final bonus may be added to
policies when they terminate or when benefits are encashed for other purposes,
with the aim of ensuring, if they do not already do so, that benefits reflect fairly a
share in the profits (and losses) which have been generated within the with-profits
fund whilst the policy has been in force.
We apply separate final bonus rates to different policy classes to reflect the
different aspects of the products, including tax treatment, country of issue, form of
benefit and extent of guaranteed benefit (although not the presence or absence of
guaranteed annuity options except in respect of policies subject to the 2009
PALAL Scheme). For most policy classes, we also differentiate between different
dates of issue and different periods in force. On death and on early termination,
the final bonus added may be higher or lower than indicated above, for reasons
explained in our Practices.
Practices
14.6.1 For each specimen policy, we determine a proportion of asset share that it is
appropriate to use to best meet the guiding principles. This proportion will vary
from time to time, may be greater or lesser than 100% and may vary by class of
policy, date of issue, term remaining to a date at which a guarantee or option
applies or other relevant factor.
For each specimen policy the following are compared:
(i) the appropriate proportion of each specimen policy’s asset share (the asset
share for this purpose being inclusive of any enhancement as described in
paragraph 14.4.2); and
(ii) the total of the sum assured and the annual bonuses already added to that
specimen policy (or the value of units for a unitised policy or the value of the
annuity benefit for pre 1981 Section 226 retirement annuity policies).
If (i) is the larger, a final bonus for the specimen policy is normally set using the
methods described below. If (ii) is the larger, no final bonus will normally be set for
that specimen policy.
The target for the proportion in (i) is 100%. The proportion used for particular
specimen policies may be affected by smoothing (see section 14.7). The aim is to
maintain the proportions in (i) within the range 80% to 120% for most specimen
policies before the effects of smoothing.
For each specimen policy where a final bonus is to be set, the excess of (i) over
(ii), after any smoothing, is expressed as a percentage of:
• the sum assured only for traditional policies not subject to the 2009 PALAL
Scheme
• the sum assured plus annual bonus additions for policies subject to the 2009
PALAL Scheme (such practice not to be changed without the agreement of the
PRA);
• the value of units for unitised policies; or
• the value of the annuity, including annual bonus additions, for pre 1981 Section
226 retirement annuity policies.
This is then the new final bonus rate for all policies of the same type and duration
in force as the specimen policy.
PLL PPFM Page 310 January 2024
Where a rate is not derived for every duration, the rates applicable for other
durations are determined by interpolation or extrapolation between the rates
derived as above.
Exceptions:
(a) For unitised with-profits pensions business reinsured into the Phoenix With-
Profits Fund the same rate of final bonus applies for a given year of entry,
irrespective of the term remaining to the selected normal retirement age. The
investment returns used to calculate final bonus rates are based on
representative term remaining for this business as a whole.
14.6.2 Final bonus and market value reductions do not apply at the same time to any of
the policies.
14.6.3 Final bonus is paid on death claims on traditional whole life and endowment
policies at the rate that applied to endowment policies which commenced at the
same time and reached maturity at the date of death.
14.6.4 For all classes of policy the final bonus rates may be changed at any time. At
times when the value of the excess assets in the fund is not changing rapidly, this
is likely to mean that changes, if any, are normally made monthly for with-profits
bonds, quarterly for final salary unitised with-profits group pension policies and
one to two times per year (effective from 1 January and 1 July) for most other
classes. However, a sudden change in the value of those excess assets (such as
because of a significant change in the value of equity share markets) may cause
changes to the final bonus rates on other occasions.
14.6.5 As the value of assets are changing every day but final bonus rates are only
recalculated infrequently, there will inevitably often be times when, if the asset
shares for specimen policies were recalculated, final bonus would, in effect, be
based on slightly larger or smaller percentages of those asset shares than the
practices would in theory dictate. Normally an investment return variation of up to
10% compared to that assumed when the final bonuses were last reviewed, would
be allowed before there would be an additional final bonus review. However,
where the proportion of asset shares at the latest final bonus review was near the
top or bottom of the range described in paragraph 14.6.1(i), a lower level of
investment return variance may lead to an additional final bonus review.
PLL PPFM Page 311 January 2024
Principle
14.7
Smoothing
Smoothing refers to the practice of limiting the change in final bonus rates on any
one occasion so that the benefits paid to policyholders differ from those which
would otherwise apply and also to the practice of limiting the frequency of such
changes. Smoothing means that the value on similar policies maturing at different
times either vary little (between changes in final bonus rates) or change by no
more than a specified amount over a given period. We apply smoothing to all
classes of policy which are eligible for final bonus and to all types of claim.
However, we make more frequent and generally smaller changes to some classes
of unitised with-profits policies.
We intend smoothing to have a neutral effect over time. In other words, if applying
the limitation on the changes in rate of final bonus results for a period in different
amounts of discretionary benefits than we would otherwise have paid, then in a
subsequent period we would adjust discretionary benefits by a broadly equal and
opposite amount when circumstances and our practices allow.
Other than on death or early termination, the aim at all times is to pay policy
benefits that are close to those described under section 14.6. Accordingly, we do
not smooth very much and final bonus rates and total policy benefits may change
by relatively large amounts both on any one occasion and over a 12 month or
longer period. The cost of smoothing is not expected to be material at any time
and so no specific upper limit is imposed on it.
The smoothing principles also generally underlie the market value reductions
which may apply to most unitised policies. However, these principles are not
necessarily applied when determining the amount payable on traditional policies
which are terminated significantly early.
Practices
14.7.1 For with-profits bonds, smoothing is applied to policy benefits by means of an
adjustment to the credited investment return. However, smoothing is only applied
when asset shares are more than 95% of the asset share with the smoothing
adjustment applied to the investment return. When smoothing does apply, final
bonus rates or market value reductions are set in relation to an investment return,
including business profits and losses smoothed over three years. The smoothed
investment return over the first three years of a specimen policy is calculated in
part by reference to a deemed return in respect of the period prior to the
commencement of the policy or series. This rate is determined by the Board from
time to time.
For final salary unitised with-profits group pension policies, changes in the final
bonus rate or market value reductions are normally limited to 5% per quarter.
However, if it is necessary for the fund to continue to meet the objectives set out in
the guiding principles in section 5 or to maintain the proportions described in
paragraph 14.6.1(i) within the range set out in paragraph 14.6.1 for the majority of
specimen policies, larger changes in final bonus rates (or market value reductions)
are sometimes made.
14.7.2 For traditional and other unitised with-profits policies where final bonus changes
are normally made twice a year, smoothing is applied to maturity and retirement
values by limiting the change in final bonus rates. Normally the change in final
bonus rates for a specimen policy will be limited so that the increase or reduction
in total maturity or retirement payout compared to a position where bonus rates
are not changed is not more than 7.5% at each six monthly review.
PLL PPFM Page 312 January 2024
For traditional policies and unitised with-profits policies, surrender value bases are
normally reviewed twice a year, smoothing is applied by limiting the change in
immediate surrender value for specimen policies. Normally the surrender value for
specimen model policies will not change by more than 10% at each six monthly
review. Surrender values may change in between reviews because in many cases
the surrender values are calculated using formulae that depend upon factors such
as term remaining which change over time.
However, if it is necessary to enable the fund to continue to meet the objectives
set out in the guiding principles in section 5 sometimes larger changes are made
in final bonus rates and surrender values.
If there has been a significant change in premium rates then larger changes than
those described above may be made so that final bonus rates and surrender
bases remain consistent with the premium rates on which the business was
generally written. Where premium rates were revised with the intention of
changing payouts, then smoothing will not be applied, so that the change in
payouts intended by the premium rate change does occur.
Calculations may also be carried out for specimen policies which are due to reach
their maturity date in the following few years. If these calculations show a trend in
payouts which could not be accommodated by following the normal limits on
change described above, the final bonus rate or surrender value being determined
may be adjusted so that the trend may more easily be accommodated.
For both maturity and retirement values and surrender values, changes to payouts
resulting from any changes in the distributable estate, or from any changes in the
level of guarantee charges, will be additional to the limits described and will not be
subject to smoothing. Also where there have been significant changes in
methodologies and practices, the impact may not be managed within the normal
smoothing rules.
14.7.3 The period over which smoothing will be of neutral effect on a class of policies is
indirectly determined by the application of the above practices.
14.7.4 Applying smoothing does mean that on occasions, particularly for traditional
policies, payments are more or less than the proportion of asset share which it is
considered appropriate to pay. This difference will reduce or increase the excess
assets of the fund. There is no particular maximum accumulated cost of or benefit
to the fund which is allowed, although no smoothing accumulation would be
allowed to build up which was inconsistent with the achievements of the objectives
set out in the guiding principles in section 5.
14.7.5 Other than in the charge described in 14.4.2(o), for those unitised policies which
permit small regular withdrawals without a market value reduction being applied,
the eventual value of the uncashed units takes no account of the extent, if any, to
which the withdrawn amounts have exceeded the proportion of asset share
considered appropriate to pay at the time of each encashment.
Other than in the charge described in 14.4.2(o), for final salary unitised with-profits
group pension policies which permit units to be encashed to meet normal scheme
claims without a market value reduction being applied, the eventual value of the
uncashed units takes no account of the extent, if any, to which the withdrawn
amounts have exceeded the proportion of asset share considered appropriate to
pay at the time of each encashment.
14.7.6 Any cost to the fund of partial payments under unitised policies to which a market
value reduction does not apply does not affect the remaining value of the policies
concerned. Rather, it reduces the value of the excess assets in the fund (although
PLL PPFM Page 313 January 2024
the excess assets will be increased for charges levied in respect of such
guarantees).
PLL PPFM Page 314 January 2024
Principle
14.8
Surrender Values
Our aims when determining the amounts payable to with-profits policyholders are
to pay discretionary benefits only to an extent that would not unreasonably put at
risk our future ability to continue to pay all guaranteed benefits when due, whilst
taking account of the need to treat customers fairly relative to their reasonable
expectations and to other current and past customers.
Practices
14.8.1 Non-protected exits refer to surrenders, and transfers for pensions business.
14.8.2 For traditional policies that surrender early the aim is to make payments that are,
in aggregate and over time, across all specimen policies used in determining
surrender bases, a proportion of asset share.
14.8.3 For all policies this is currently 100%. In the past it has been the practice to target
less than 100% of asset share on surrender and this practice may be resumed in
the future should the fund have insufficient assets to cover its liabilities. However
the proportion targeted in such circumstances will be limited as described below:
• For policies not subject to the 2009 PALAL Scheme, the target proportions of
asset share on surrender referred to in 14.8.3 above will also normally not be
lower than 95% for policies with a term remaining of 10 years or more,
increasing gradually to 100% at maturity for policies with less than 10 years
remaining.
• For policies subject to the 2009 PALAL Scheme, the target proportions of
asset share on surrender referred to in 14.8.3 above will also normally not be
lower than 97% for policies with a term remaining of 10 years or more,
increasing gradually to 100% at maturity for policies with less than 10 years
remaining.
• Lower target proportions of asset share on surrender will apply if, in the
opinion of the Board, the With-Profits Committee and the With-Profits Actuary,
and with the agreement of the regulator, it is necessary to enable the fund to
continue to meet the objectives set out in the guiding principles and Principle
14.4.
14.8.4 Actual surrender payments on individual policies will not generally be in line with
the target proportion because:
• Individual asset shares are not calculated or held on our administration
systems for use in surrender value calculations. Rather surrender values are
calculated in a variety of ways for different types of policy. Typically surrender
values are based on a discounted value of the guaranteed sum at maturity or
retirement (reduced to allow for non-payment of future premiums for regular
premium policies) together with an allowance, where appropriate, for final
bonus.
• Specimen policies are used to determine the parameters in the surrender
value calculations. The outcome for a particular individual policy may be
different from that of the specimen policy.
• There are a limited number of parameters that may be altered in the surrender
formulae for certain products which means that the parameters are set in
aggregate across a range of specimen policies.
• As the value of assets are changing every day but the parameters in the
surrender value formulae are only reviewed infrequently, there will inevitably
often be times when, if the asset share for the specimen policies were
recalculated, surrender values would, in effect, be based on slightly larger or
PLL PPFM Page 315 January 2024
smaller percentages of those asset shares than the practices would in theory
dictate.
14.8.5 For the reasons given above, surrender values, when expressed as a proportion of
asset share, are expected to fall in a wide range around the target proportion.
However the parameters in the surrender value bases are reviewed periodically
with the aim that the majority of surrender values for the range of specimen
policies analysed, will fall within the range of 80% to 120% of asset share before
the effects of smoothing.
14.8.6 In some cases, values in excess of 120% of asset share may be payable when
policies are surrendered close to maturity and the asset share of the relevant
specimen policy is less than the guaranteed benefits at maturity, or the maturity
payout is in excess of the asset share due to smoothing. This may also occur if
the value of the guaranteed benefits is high relative to asset share, due to the
effective maximum discount rate used in the surrender bases.
14.8.7 For traditional policies, the method used to derive the surrender or transfer value
may not involve the explicit application of final bonus. Where the value paid is
larger than the discounted value of the guaranteed sum assured and annual
bonuses already added, an element equivalent to final bonus will be implicit in the
value. For the purposes of determining the shareholder’s entitlement to profit in
respect of any surrender or transfer, an appropriate proportion of the value paid is
deemed as representing final bonus.
14.8.8 For unitised policies, a market value reduction will be applied in most
circumstances where the calculation described in 14.6.1 results in a shortfall of the
determined proportion of asset share relative to the value of units. The amount of
the market value reduction will not exceed the amount of the shortfall. Any
reduction in market values reduction is not restricted by smoothing. Most policies
contain a date or range of dates on which no market value reduction or a limited
market value reduction will apply. Some policies also allow small regular
encashments to be made without a market value reduction applying (but otherwise
the same market value reductions apply to partial as to full encashments). The
final salary unitised with-profits group pension policies allow that a market value
reduction will not apply to units encashed to meet normal scheme claims.
As the value of assets change every day but market value reductions are only
reviewed periodically, there will inevitably often be times when, if the asset share
for the specimen policies were recalculated, surrender values would, in effect, be
based on slightly larger or smaller percentages of those asset shares than the
practices would in theory dictate. Normally an investment return variation of up to
10% compared to that assumed when market value reductions were last reviewed,
would be allowed before there would be an additional market value reduction
review.
Where bulk surrenders of final salary unitised with-profits group pension policies
are being made at a time when investment values are falling then market value
reductions may be reviewed more frequently.
14.8.9 For with-profits bonds, the date at which no market value reduction applies on
encashment is the 10th anniversary of commencement. A period of three months
following the 10th anniversary is allowed during which any encashment request
received will also benefit from no market value reduction or a limited market value
reduction. The market value reduction may also be limited prior to the 10th
anniversary so that the encashment value represents the discounted value of the
amount which would be available at the 10th anniversary. Most such dates have
now passed.
PLL PPFM Page 316 January 2024
14.8.10 The percentages described above may be changed at any time, as may the
methods of calculation. However, before any changes are made, the Board will
formally consult with and take into account the opinions of the With-Profits Actuary
and the With-Profits Committee.
PLL PPFM Page 317 January 2024
Principle
14.9
Investment Strategy
Overall, our strategy will be to invest in fixed interest securities, equity shares
(shares) and commercial property (property), either directly or through vehicles such
as unit trusts, OEICS or derivatives. Shares and property will only be held to the
extent to which this is possible without unduly putting at risk our ability to meet
guaranteed benefits as they arise. Some cash or equivalent assets may be held for
liquidity purposes.
For certain purposes, including determining the bonus rates applicable to policies,
we may take account of assets such as future profits. The investment strategy
adopted in respect of the reserves held to meet guarantees is described in
paragraphs 14.9.11 and 14.9.12 of our Practices.
We may from time to time rely on assets outside the fund to provide some or all of a
margin against future adverse change in investment markets. Our investment
strategy is, however, based upon the intention that we will meet our aims using only
the assets of the with-profits fund after repayment of any loans or other financial
support received.
We may use derivatives from time to time to make changes in our investment
dispositions more rapidly or cheaply than could be done directly through the
markets. We may also use them from time to time to reduce the risk of loss, for
example from share price falls, interest rate changes or exchange rate fluctuations.
There is no direct link between individual policies and specific assets. The
proportion of shares and property used indirectly to determine the bonuses
applicable to different policies may differ between different products, dates of issue
or term remaining to reflect the different risks to both the specific policyholders and
to policyholders and the shareholder more generally. For some with-profits policies
with relatively high guaranteed benefits, this may mean that few or no shares and
property will be deemed to be held.
Non-profit, non-linked policies are backed by fixed interest securities of appropriate
duration.
Index-linked and unit-linked liabilities are either backed to the extent possible with
close-matching assets or, in the case of unit-linked policies, the risk is transferred to
another Phoenix Life Limited fund, which does so.
We aim to restrict the maximum loss which we could suffer from the complete
default of any one external counterparty, whether through reinsurance, direct
investment or derivatives by dealing with a wide range of counterparties. In some
cases, additional precautions such as daily marking to market or deposit back are
used.
Larger, unprotected exposures are permitted to sister companies (regulated UK life
insurers) through internal reinsurance arrangements.
From time to time our investments may include a small number of properties which
are occupied by the company or by a related company and which we would not
expect to trade.
PLL PPFM Page 318 January 2024
Practices
14.9.1 There are no formal procedures in place for assets to be transferred permanently
from the Shareholder Fund to the with-profits fund. Formal loan arrangements as
described in paragraph 14.4.2(p) and section 14.14 may be in place from time to
time but would not normally be considered as permanently irrecoverable at any
time.
14.9.2 The investment strategy is regularly reviewed taking account of a variety of
considerations, including our approach to responsible investment. In particular,
reports from the investment managers, the Chief Actuary, the With-Profits Actuary
and the With-Profits Committee, and recommendations for change are considered
and, if appropriate, implemented.
14.9.3 All the guarantees to policyholders and liabilities to other creditors are not
completely matched with assets which provide a similar guarantee or payment. In
particular, often a proportion of the assets is invested in growth investments
because it is considered that, over most longer periods of time, a better return will
result. Growth investments will normally consist of equity shares (including private
equity) and commercial property. Separate investment strategies are followed for
assets equal in amount to the estimated aggregate asset shares of policies and for
assets representing additional provisions for liabilities under non-profit policies, for
guarantees on with-profits policies, for other liabilities and for the capital margins
and excess capital. Each of these strategies is described in more detail below.
14.9.4 It is not possible to implement the strategies described below with absolute
precision and any difference between the actual outcome and the theoretical
outcome will be treated as described in paragraph 14.4.2(s).
14.9.5 Investment returns allocated to the asset shares of specimen policies will reflect
the actual mix of assets held, should this be different from the theoretical mix
calculated according to paragraphs 14.9.6 to 14.9.10.
Asset Shares
14.9.6 Firstly, the appropriate asset mix for a large number of specimen policies of
different types, term remaining and commencement dates is determined.
For final salary unitised with-profits group pension policies, the asset mix is
approximately 45% in growth investments and 55% in fixed interest securities.
The asset mix for all other classes of policy is determined by the successive
application of a number of rules:
(i) For policies not subject to the 2009 PALAL Scheme, the asset mix is
approximately 50% in growth investments and 50% in fixed interest
securities with a small balance invested in cash and / or other assets such
as future profits.
For policies subject to 2009 PALAL Scheme, the asset mix is approximately
70% in growth investments and 30% in fixed interest securities with any
balance (such balance not to exceed 10%) invested in cash and / or other
assets such as future profits. From time to time, on the advice of the
investment managers for the purposes of increasing the expected return for
policyholders and subject to the approval of the With-Profits Actuary (such
approval not to be given unless it is unlikely to have a materially adverse
effect on the interests of holders of policies subject to the 2009 PALAL
Scheme), we might change the asset mix. Otherwise, the asset mix for
policies subject to the 2009 PALAL Scheme may only be changed with the
agreement of the regulator.
PLL PPFM Page 319 January 2024
For policies where the risk is transferred to the Phoenix With-Profits Fund (see
below), the asset mix is approximately 70% in growth investments and
approximately 30% in fixed interest securities with a small balance invested
in cash and/or other assets such as future profits. Growth investments will
normally consist of equity shares (including private equity) and commercial
property. However, the investment managers may also choose to hold
other types of investment within the growth investment category including
alternative assets such as hedge funds, corporate bonds, cash, total return
funds, derivatives, currencies and commodities.
Unless
(ii) There are less than nine years of term remaining, when the mixes are
changed as the term remaining reduces. The mixes change proportionately
for polices not subject to the 2009 PALAL Scheme until they are 17.5% in
growth investments and 82.5% in fixed interest securities with one year or
less of term remaining . For polices subject to the 2009 PALAL Scheme,
the mix changes proportionately until they are 35% in growth investments
and 65% in fixed interest securities with one year or less of term remaining.
For policies where the risk is transferred to the Phoenix With-Profits Fund,
the mixes change proportionately until they are 35% in growth investments
and 65% in fixed interest securities with one year or less of term remaining.
Unless (for policies not subject to the 2009 PALAL Scheme only)
(iii) The rate of return required from equity shares and commercial property (or
growth investments as appropriate) for the asset share of that specimen
policy to grow over the term remaining, after the deduction of retentions and
charges, to equal the projected guaranteed benefits at the maturity date is
more than 5% per annum gross, when the growth investments proportions
above are reduced according to the table below (and the proportion in fixed
interest securities increased to balance).
Rate of return required*
Reduction applied
5% - 7.5%
33%
7.5% - 10%
67%
10% or more
100%
(* For terms remaining of seven years or less, the dividing points of 7.5%
and 10% are higher, rising to 11% and 17% respectively for terms
remaining of one year or less).
For the purpose of determining the exposure to growth investments, the term
remaining for a with-profits bond will be taken as:
• for bonds with a future guarantee date upon which no market value reduction
will apply on surrender, the time to that guarantee date; or
• for bonds which have passed the date upon which such a guarantee applied,
10 years.
For unitised with-profits life regular premium policies, the mix in (i) applies to all
specimen policies and the rules in (ii) and (iii) above do not apply to these policies.
PLL PPFM Page 320 January 2024
The investment return credited to asset shares of the policies where the risk is
transferred to the Phoenix With-Profits Fund is based on the investment return of
the Phoenix With-Profits Fund. The following unitised with-profits policies have
such an inter fund arrangement with the Phoenix With-Profits Fund:
• unitised with-profits bonds written after September 1997;
• Executive pension plan;
• Company pension scheme;
• Company additional pension scheme;
• Individual personal pension plan;
• Group personal pension plan; and
• Personal additional pension plan.
14.9.7 The parameters defining the asset mix of policies not subject to the 2009 PALAL
Scheme may be changed from time to time. When doing so, account will be taken
of the results of stochastic modelling calculations which demonstrate the range of
reasonable parameter sets that satisfy the aims described in principle 14.9. From
within this range, one is selected which is considered to best balance the interests
of all policyholders.
The parameters defining the asset mix of policies subject to the 2009 PALAL
Scheme may only be changed with the agreement of our regulator or changes
may be made to the parameters on the advice of the investment managers and
with the agreement of the With-Profits Actuary (as referred to in paragraph
14.9.6(i)).
14.9.8 The actual proportions of different assets held will vary slightly from the specified
parameters as asset value change, although the actual mixes will be reviewed at
least annually and adjusted if necessary to bring to bring the proportions more
closely in line with the target.
14.9.9 Phoenix Life Limited has adopted two undertakings in relation to the asset mix for
policies subject to the 2009 PALAL Scheme as specified in paragraph 14.9.6. The
first undertaking is that if:
(i) the proportion of assets invested in growth investments for policies subject to
the 2009 PALAL Scheme referred to in paragraph 14.9.6(i) should fall below
a threshold of 65% (and below 65/70ths of the lower percentages applicable
for policies subject to the 2009 PALAL Scheme with less than nine years of
term remaining as referred to in paragraph 14.9.6(ii)) ("the Threshold"); or
(ii) Phoenix Life Limited intends to take any action which might reasonably be
expected to cause the proportion of assets invested in growth investments for
policies subject to the 2009 PALAL Scheme to fall or remain below the
Threshold;
then Phoenix Life Limited shall:
(iii) immediately notify our regulator of (i) the fall and the cause; or (ii) the
intended action and the reason; and
(iv) in the event of a fall, put in place actions to restore the asset mix to above the
Threshold as soon as reasonably practicable (and inform our regulator of
those actions); or
(v) in the event of an intended action, not to take that action until the Board has
consulted with the With-Profits Committee and the With-Profits Actuary and
has obtained the regulator’s non objection to the action.
PLL PPFM Page 321 January 2024
Phoenix Life Limited's second undertaking is that:
Until the proportion of assets invested in growth investments has exceeded the
Threshold for the first time, it will keep our regulator regularly informed of progress
towards that Threshold.
Either of the above High Court undertakings is capable of being amended by
agreement between Phoenix Life Limited and our regulator. No such agreement
will be effective to amend either undertaking unless produced in writing and signed
on behalf of Phoenix Life Limited and the regulator, but for the avoidance of doubt,
no amendment that is in fact produced in writing and signed will require High Court
approval.
14.9.10 All policies are grouped according to the specimen policy which most closely
represents them and the asset mix for each specimen policy is determined by
applying the rules in 14.9.6 to the policies in the group.
For policies not subject to the 2009 PALAL Scheme, the term of the fixed interest
securities reflect the term remaining. For policies subject to the 2009 PALAL
Scheme, the term of the fixed interest securities reflects the calendar years over
which a pension bought with the proceeds of the specimen policy would be paid
and this shall not be determined in any different way unless legislative change
makes it appropriate to assume that the majority of the holders of policies subject
to the 2009 PALAL Scheme who retire under their policies will no longer take
benefits predominantly in annuity form and such change in assumption is
approved by the With-Profits Actuary (such approval not to be given unless it was
unlikely to have a materially adverse effect on holders of policies subject to the
2009 PALAL Scheme). Otherwise, the term of the fixed interest securities for
policies subject to the 2009 PALAL Scheme may only be changed with the
agreement of the regulator.
For the purpose of determining the duration of the fixed interest investments, the
term remaining for a unitised with-profits bond will be taken as:
• for bonds with a future guarantee date upon which no market value reduction
will apply on surrender, the time to that guarantee date; or
• for bonds which have passed the date upon which such a guarantee applied,
five years.
For unitised with-profits pension business without guaranteed annuity rates where
the risk is transferred to the Phoenix With-Profits Fund, the fixed interest duration
is frozen once a policy has reached nine years of term remaining.
For unitised with-profits business where the risk is transferred to the Phoenix With-
Profits Fund, asset mix and the term of any fixed interest securities which form
part of the growth investments per paragraph 14.9.6(i) reflect an average term
remaining.
Returns on emerging market debt do not reflect the term remaining, but rather
reflect the overall return on such debt.
Guarantee Reserves
14.9.11 Firstly, the market consistent cost of the guarantees inherent in the with-profits
policies is calculated. How this cost, net of the value of expected future guarantee
charges and early termination profits, will change as the prices of the growth
investments rise and fall and as volatility, credit spreads and interest rates change
is then calculated. A mix of assets which will broadly change in line with the
change in the net cost of the guarantees is identified. This asset mix may require
a short position in growth investments to be adopted and a long position in fixed
interest securities or cash. It may also require the purchase or sale of financial
PLL PPFM Page 322 January 2024
instruments such as equity options or credit derivatives or the holding of fixed
interest securities with an average term which is otherwise different.
This calculation may be done in respect of specimen policies in some cases and
the results aggregated and in other cases a more approximate method is used.
As the prices of growth investments, interest rates, credit spreads and volatility
change, and in any case periodically, the appropriate asset mix for the guarantee
reserve will be reassessed.
14.9.12 The liabilities for guaranteed annuity options are backed by fixed interest assets
whose value is expected to change broadly in line with the value of the guaranteed
annuity option liabilities when interest rates change. Swaps and /or swaptions may
be used for this purpose.
Irrespective of the fixed interest assets actually held, the asset share of specimen
policies with guaranteed annuity rates will, to the extent that they are deemed to
be invested in fixed interest securities, be credited with the return on securities of
duration appropriate to the maturity date of the specimen policy.
Non-Profit Policies, Other Liabilities, Capital and Excess Assets
14.9.13 Assets representing the reserves for non-profit policies are invested in fixed
interest securities of appropriate duration. Assets representing unit-linked
liabilities which do not transfer their risk are invested in the assets used to
determine the value of the unit liability. Assets representing RPI-linked liabilities or
expense reserves are invested in index-linked securities. Assets representing
short-term liabilities are invested in cash or short-term debt. Assets representing
capital, whether or not required to enable the fund to meet its objectives or to meet
regulatory requirement, are mainly invested in fixed interest securities.
Assets representing the estate of the SAL With-Profits Fund are mostly invested in
fixed interest securities. However, if the estate is large in relation to the potential
risks facing the fund, then part of the estate may be invested in growth
investments in line with the asset mix for the asset shares.
Current Asset Policy
14.9.14 Fixed interest assets will be a mixture of approved fixed interest securities, such
as British Government gilts and other government and supranational bonds, and
other fixed interest securities, such as corporate bonds, debentures, loan notes
and emerging market debt. The mix of fixed interest asset types backing asset
shares, liabilities for guarantees or capital requirements may be different.
The agreements with the investment managers set out any limits on matters such
as:
• The types of investment that may be held.
• The maximum amount that can be invested in any single company.
• The maximum amount that can be invested in any single asset class / industry
sector / country.
• The maximum amount to which the manager might hold assets which are
different to the benchmark (guideline) portfolio in order to enhance returns.
(These include restrictions in terms of credit quality, term / duration and
amounts of individual holdings).
• The minimum credit rating quality of assets (as specified by the main rating
agencies such as Standard & Poor’s and Moody’s).
• Exposure to sectors or companies that do not align with our approach to
responsible investment, for example Tobacco
PLL PPFM Page 323 January 2024
14.9.15 Investments are also made in sterling interest rate swaps to enable closer
matching of fixed interest income and outgo requirements. All swaps and
swaptions are regularly marked to market to minimise exposure to counterparty
default.
14.9.16 Equities are split between UK equities and overseas equities and may include
emerging markets. The proportions will vary from time to time due to market
movements and active management decisions taken by the investment managers
or the Investment Committee. With the exception of private equity, the equities
are predominantly quoted and regularly traded on a recognised stock exchange.
Equities may be either actively or passively managed relative to recognised index
benchmarks. Individual stock selection is carried out by the investment managers
based on their expert assessment of the relative prospects of available
alternatives.
14.9.17 Property investments may be directly owned properties or held via collective
investment vehicles.
14.9.18 Sufficient assets are disposable at short notice without material loss in value to
meet foreseeable additional liquidity demands.
14.9.19 The proportion of different assets described in this section may vary from time to
time due to market movements and active management decisions taken by the
investment managers or the Investment Committee.
Miscellaneous
14.9.20 The fund does not hold any assets which are not normally traded.
14.9.21 The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
14.9.22 Before investing in new or novel investment instruments, the Board will obtain the
advice of the Chief Actuary and the investment managers on the benefits and risks
of the proposition. This would include an analysis of the nature and proportion of
future outcomes in which the instrument would prove materially disadvantageous
relative to other more traditional investments. If the instrument is to be held in
material amounts in respect of with-profits policies, the Board will also seek the
opinion of the With-Profits Actuary and the With-Profits Committee.
PLL PPFM Page 324 January 2024
Principle
14.10
Business Risks
As well as investment performance and counterparty exposure, and amounts
transferred to the Shareholder Fund (see section 14.12), our future ability to
continue to pay all guaranteed benefits when due, and the amounts of annual and
final bonus, will be affected by a number of other factors, ‘business risks’, that may
arise from our existing portfolio of with-profits and non-profit business. These are
listed, together with the controls which apply, in paragraph 14.10.1.
In some cases, we will anticipate the effect of future profits or losses (such as the
increasing longevity of annuitants) and reflect any changes in expected outcome
immediately in discretionary payments. This reduces the likelihood that excessive
business risk exposures will apply to the longest remaining with-profits
policyholders, which is otherwise a particular risk because with-profits policies are
expected to run off more quickly than non-profit policies.
Any profits made or losses incurred as a result of a business risk will normally be
met by the fund, except where the business and the risk was wholly transferred to
another with-profits fund within Phoenix Life Limited. However, the costs of any
compensation payable as a result of policies mis-sold by the company or its agents
will not affect the reasonably expected benefits payable to policyholders. Costs
specified by our regulator’s rules as being the responsibility of the Shareholder Fund
(such as regulatory fines) will be met by that fund.
We do not currently envisage that we would take on any business risks in addition
to those to which we are already exposed although we may, if it appears to be
potentially beneficial to policyholders to do so, increase our exposure to risks to
which we are already exposed (such as by cancelling reinsurance arrangements). If
we did take on or increase business risk, we would only do so if the reward was
expected to be better than that from other investments with broadly equivalent risks
(such as investing in shares or property). We would formally consult and take
account of the opinions of the Chief Actuary, the With-Profits Actuary and the With-
Profits Committee before doing so.
The Board will annually review existing business risk exposures as part of the
assessment of the formal regulatory capital requirements and appropriate measures
will be taken to limit risk to amounts to which it is fair for the with-profits business to
remain exposed.
Practices
14.10.1 The main business risks of the fund, and the controls that are applied to those that
Phoenix Life Limited can influence, include:
• Expenses of management – controlled mainly by outsourcing all business
activities, including policy administration and investment management. Normal
activities are outsourced on an agreed pricing basis. The main residual costs
not subject to an agreed pricing basis are project activity and certain direct
costs and fees.
• Failure of non-group outsourced services provider – part of the administration
services provided by PGMS are sub-contracted to Diligenta, - controlled by
having exit plans. PGMS is liable for any additional cost of providing these
services which might arise if Diligenta were to default. Should PGMS be
unable to meet any of its obligations to provide services then Phoenix Life
Limited would request that Phoenix Group, as owners of PGMS step in to
restore the position. Should Phoenix Group not do this, then Phoenix Life
Limited would attribute any losses to the shareholder fund or Non-Profit Fund,
PLL PPFM Page 325 January 2024
and the fund would only be affected if the shareholder fund or Non-Profit Fund
had insufficient excess assets to bear the losses.
• Meeting minimum guaranteed policy benefits (where these costs are
reasonably attributable to the fund) and the cost of smoothing – controlled by
having an appropriate rate of annual bonus, limiting the extent of smoothing
and investing primarily to meet the guarantees, all whilst ensuring that
customers continue to be treated fairly.
• Fluctuations and long-term trends in death or sickness rates – fluctuations are
constrained by the use of reinsurance contracts to limit exposure on any one
insurance policy but significant risks remain from improvements in longevity on
existing annuities, deferred annuities and (although significantly reduced by the
2009 PALAL Scheme) from future annuities under guaranteed options.
• Changes in taxation.
• Profits or losses from investments backing non-profit business or other
liabilities and from investments which represent additional capital.
• The cost of guaranteed annuity options – risks from varying interest rates are
controlled by investing in appropriate hedging assets but significant exposure
remains in respect of improving longevity.
• Profits or losses from the early or late termination of policies – a significant
increase in the persistency of policies with onerous guarantees could cause a
significant reduction to other policy values.
• Provision of compensation for past legal or regulatory infringements, especially
due to inadequate sales practices – controlled in part by ensuring that
compensation is only paid where a legal entitlement exists.
• The cost of additional capital needed to be held for regulatory purposes or for
the optimal management of the business – controlled by regularly reviewing the
excess capital being held and by ensuring that only a commercial cost for
capital is being paid.
• Profits or losses may arise from the reassurance of with-profits business.
• Failure of reassurers – the reassurance credit risk is monitored.
14.10.2 In paragraph 14.4.2, how and to what extent business profits and losses are
incorporated in the asset share calculations for specimen policies are described
and so how each, if at all, affects the amounts payable under with-profits policies.
14.10.3 As a result of the approach described in paragraph 14.4.2(s), the effect of other
business profits and losses on the amounts payable under with-profits policies will
be implicitly smoothed as described in paragraph 14.6.4 and in section 14.7.
Also, as explained in paragraph 14.4.2(s), if a particularly large business profit or
loss in any one year is experienced or identified, its incorporation may be spread
in asset share calculations over a number of future years to avoid excessive
impact on policy values in the short-term.
14.10.4 The outcome from all the business risk of the fund is currently mainly pooled
across all with-profits policies in the fund, although this has not always been the
practice in the past. Any exceptions are highlighted elsewhere in this document.
14.10.5 Since January 2011, in accordance with paragraph 5.2.9, any annuities coming
into payment are transferred to the Non-Profit Fund, and the fund pays the Non-
Profit Fund a premium in respect of the liability transferred. After such transfer, all
the risks in relation to the transferred annuities are borne by the Non-Profit Fund.
PLL PPFM Page 326 January 2024
Principle
14.11
Expenses and Charges
Our overall aim when applying charges and apportioning expenses when
determining the bonus rates to apply to different with-profits policies is to reflect the
actual costs incurred. Costs include
• sales, marketing and administration costs, including commission to
intermediaries in respect of new and existing business;
• investment management costs;
• charges for mortality, sickness and other insurance benefits; and
• charges for guarantees.
Costs may be recovered from policies directly, for example by the cancellation of
units of unitised policies, or indirectly via bonuses and early termination values.
Where indirect costs are specific to a class of policy then, taking into account the
approximations referred to in section 14.4, such costs will be taken into account in
assessing the bonuses added to that policy class and in assessing the early
termination value payable. Where indirect costs are not specific to a single policy
class, they will be apportioned across the policy classes to which they are relevant
in a reasonable manner, as is explained in our practices.
Implicit charges for mortality, sickness and other benefits will generally reflect our
own or insurance industry actual claims experience. Explicit charges for such
benefits will be determined in line with policy conditions; where this requires periodic
reviews in the light of experience, such reviews will be carried out and charges
adjusted accordingly.
In some cases, policy conditions restrict the type and amount of charges that may
be levied.
Some costs relevant to the company are incurred collectively at various levels within
the Phoenix Group hierarchy (such as general management, internal audit and IT).
A share of these costs is attributed to the company on an appropriate and objective
basis (such as time spent, headcount, salary and system usage).
We would change the way in which charges were apportioned between or allocated
to policies or classes of policy and between different funds if we considered that this
was necessary to enable us to continue to treat customers fairly. The
apportionment method may also change if it was possible to do so without ceasing
to treat customers fairly and to do so assisted in meeting one of Phoenix Group’s
other corporate objectives.
Charges for guarantees or smoothing may be made annually or by a retention from
maturity or early termination values (or by a combination of both methods). The
basis on which the charges will be determined are described in section 14.4.2 of our
practices.
Practices
14.11.1 An agreement exists with PGMS to supply administration services to the fund.
This is a perpetual agreement and is not expected to be renegotiated, but charges
may be amended in respect of major regulatory change. The agreement can
however be terminated early for material failure to meet service standards or other
non compliance with the agreement. We regularly monitor service standards.
Value added fees for work outside the service level agreements are changed
separately.
PLL PPFM Page 327 January 2024
The main expenses that are apportioned to the asset shares of specimen with-
profits policies relate to the fees paid to PGMS in connection with all business
activities. These charges are mainly expressed as an annual amount per policy,
irrespective of type (other than for non-profit annuities, for which the fee is lower),
increasing each year by RPI + 1%. For group pension plans, the fee is per
member rather than per policy. For policies with more than one benefit, including
premium increments, the charge is only made once. They are apportioned on this
basis.
Additional fees payable for certain other one-off activities and developments are
generally apportioned in proportion to the PGMS fees.
14.11.2 Fees are also payable to the investment managers in connection with the
management of the investments. These amounts are expressed as a percentage
of the investments under management. Where investments are via a collective
investment vehicle operated by the investment managers, the total fees payable to
the investment managers are not materially different than if those investments
were directly held.
Commission is also payable to intermediaries on some contracts.
14.11.3 Other than to the extent that expenses are apportioned to non-profit business or to
certain activities the expenses of which are not apportioned to asset shares (such
as mis-selling compensation) or to the extent described in paragraph 14.4.2, the
totality of expenses allocated to the fund will be taken into account via the asset
share calculations for specimen policies. Costs attributable to the fund that are not
apportioned to asset shares or non-profit business will reduce the excess assets of
the fund.
It is not intended to include expenses at other than cost to asset share calculation,
other than as described in paragraph 14.4.2.
PLL PPFM Page 328 January 2024
Principle
14.12
Estate Management
We aim to manage the size of the excess of the value of the assets over the amount
we consider necessary on market consistent assumptions to enable us to meet the
aims described in the guiding principles in section 5, so that the excess provides at
all times an adequate but not excessive margin against an adverse outcome
compared with the assumptions. The excess can be made up of assets within the
fund, the excess assets within the Non-Profit Fund and the Shareholder Fund of
Phoenix Life Limited.
We intend to maintain the excess at the targeted level by:
• controlling the addition of annual bonuses to policies;
• only paying final bonuses or other discretionary benefits in line with the
principles set out earlier;
• maintaining an appropriate investment strategy;
• limiting, where possible, the business risks we face;
• exercising discretion in other areas with moderation;
• releasing Shareholder Fund assets to the shareholder; or
• as a short-term measure, drawing on additional financial support from the
Shareholder fund or Non-Profit Fund in the form of loans to the fund or
otherwise.
Practices
14.12.1 The estate is the estimated realistic value of the assets less the estimated realistic
value of the liabilities. It is calculated using realistic assumptions and generally
accepted methodologies on a basis determined by the Board.
14.12.2 The fund is currently able to cover its liabilities from its own resources and so does
not require support by a loan from the Non-Profit Fund, although it has relied on
such loans in the past.
14.12.3 To the extent that any profits or losses arising in the fund are not allocated to asset
shares in accordance with section 14.4, they will act to increase or reduce the
estate. To the extent that the amounts charged to asset shares are based on
estimates or assumptions, then any difference between these and the actual
amounts will act to increase or reduce the estate.
PLL PPFM Page 329 January 2024
14.12.4 The estate in the fund will be used to:
(a) assist the fund in demonstrating it has access to sufficient capital resources
to meet its liabilities and treat customers fairly:
(b) provide a buffer in the fund should adverse experience mean that the
reserves held to cover the liabilities prove insufficient;
(c) meet any costs which are charged directly to the estate rather than to asset
shares;
(d) meet the costs of any changes which the Board believe are necessary to
improve fairness between policyholders and / or enhance the run-off of the
fund; and
(e) enhance the benefits payable to those with-profits policies which have an
interest in the estate but always aiming to retain sufficient estate to meet the
expected amounts required for (a), (b), (c) and (d). The amount considered
by the Board to be available from time to time for such enhancements will be
referred to as the distributable estate.
14.12.5 Any enhancement in benefits on account of the distributable estate referred to in
14.12.4(e) will generally be achieved by including a temporary uplift to the asset
share for the purpose of setting final bonus rates and surrender values. However
if the distributable estate is large then consideration would be given to making
additions to the asset shares from the estate.
14.12.6 The amount of the estate, the distributable estate and the potential for any
enhancements to policyholder benefits will be subject to review at least once a
year.
14.12.7 In the event of a risk of the assets of the fund being insufficient to cover the
liabilities, charges may be made to the asset share to restore the estate to a target
minimum level. However such charges could not be applied to any part of the
deficit caused by regulatory penalties (fines) or compensation payments relating to
events which occurred before 31 July 2009, see paragraph 5.2.18, except to the
extent that such charges are effectively reversing any estate previously added into
asset shares.
14.12.8 Providing that it is possible to do so whilst still treating policyholders fairly, it is
intended to manage the excess assets using solely the resources of the fund and
avoiding the need to draw on any external sources of capital.
In the event of the assets in the fund being insufficient to cover the liabilities, then
any past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit.
Arrangements exist for monies to be transferred from the Non-Profit Fund or
Shareholder Fund to the fund with the aim that the amount of assets in the fund
exceeds the liabilities by a small margin, should the charges described in 14.12.7
be insufficient to restore the estate. For this purpose, the possibility of distributing
any surplus assets to policyholders will not be regarded as a liability.
Transfer of such amounts back to the Shareholder Fund will be made whenever
emerging surplus in the fund, after the cost of bonuses (including shareholders
share), permits.
The exercise of discretion in respect of with-profits policies will be managed with
the aim that the amounts transferred to the fund will be repaid to the extent that is
possible whilst still meeting the aims described in the guiding principles in section
5. In determining benefits under with-profits policies, any liability to transfer such
amounts back to the Non-Profit Fund or Shareholder Fund will be disregarded to
the extent that this is necessary to treat customers fairly (that is in accordance with
these Principles and Practices).
PLL PPFM Page 330 January 2024
Principle
14.13
New Business
Apart from as a result of the exercise of options under existing policies,
contractual increments and new entrants to stakeholder, occupational and ‘group
personal’ pension plans, we no longer accept new business. The future business
risk from this source is expected to be small.
Practices
14.13.1 The fund is no longer actively seeking new business, but continues to write a small
amount of new business relating to policy options under existing contracts.
Currently there are no plans to reopen the fund to new business.
PLL PPFM Page 331 January 2024
Principle
14.14
Equity Between the Fund and Shareholders
The requirements of the 2023 Scheme are such that holders of with-profits
policies in the fund are entitled to receive at least 90% of the total distributable
profits arising from the fund. The shareholder is entitled to receive the balance.
None of the divisible profits arising in the fund are attributed to the other with-
profits funds.
If the Board were considering making changes to increase this percentage, the
Board would first request and consider the advice of the Chief Actuary and take
into account the opinions of the With-Profits Actuary and the With-Profits
Committee. If the Board still decided to proceed, the Board would notify
policyholders at least three months in advance. The Board would also need to
seek the agreement of its shareholders and, the High Court to make such a
change.
From time to time, for some classes of business, we may transfer less than the
permitted maximum from the with-profits fund to the Shareholder Fund.
If the fund requires financial support from the Non-Profit Fund or Shareholder
Fund to enable the fund to meet the target excess assets described in section
14.12, the terms on which such support is provided will be fair and reasonable to
all parties, taking into account prevailing market conditions and the risks involved.
If such support forms part of the fund, then it will be treated as a liability to the
extent that it would otherwise increase the excess assets.
Services may be provided by the shareholders to the fund but terms for such
services will be on commercial terms which are considered to be consistent with
the risks of providing those services, or considered to be consistent with terms
which would be available for such services on an arms length commercial basis.
Practices
14.14.1 For traditional policies, the value of annual bonus added to policies, discounted at
the risk free yield, is determined. One ninth of that value is transferred to the
Shareholder Fund together with one ninth of the discounted value of any interim
bonus and one ninth of any final bonus. This means that the transfer to the
Shareholder Fund is 10% of the distributed surplus.
14.14.2 For unitised business, currently only five ninety-fifths of the face value of annual or
final bonus added is attributed. This means that the transfer to the Shareholder
Fund is broadly equivalent to 5% of distributed surplus.
14.14.3 For unitised business where a market value reduction is applied on claims, which
has the effect of reducing the annual bonus previously added, then there is a
corresponding reduction in the transfer to the Shareholder Fund.
14.14.4 Transfers to the Shareholder Fund on pensions business are reduced by an
amount reflecting the expected additional tax arising on those transfers. Hence
the net amounts transferred to the Shareholder Fund for pensions policies are
lower than the 10% and 5% referred to above.
14.14.5 The relative apportionment of value between shareholder and policyholder will not
be affected by changes in the discount rate, as shareholder transfers are
discounted at market rates.
14.14.6 Additional tax arising from transfers to shareholders is allocated to the fund (but is
not charged to asset shares). In considering the allocation of tax and any tax
PLL PPFM Page 332 January 2024
impacts that may arise from time to time fairness between the stakeholders is
considered.
14.14.7 The Board are not aware of any external or internal factors which, if they were to
change, would have a material effect on the apportionment of surplus as described
above.
14.14.8 There are no classes of business which are significantly and systematically
reducing the value of the excess assets of the fund as a result of the shareholder
transfer in respect of that class.
PLL PPFM Page 333 January 2024
15 Principles and Practices – Pearl With-Profits Fund
The Principles and Practices given in sections 15.4 to 15.14 together with the Guiding
Principles and Practices form the Principles and Practices of Financial Management for the
Pearl With-Profits Fund. Sections 15.1 to 15.3 give background information specific to the
Pearl With-Profits Fund. Subsequently in this section the use of the term 'the fund' generally
means the Pearl With-Profits Fund.
15.1 Fund History
The Pearl With-Profits Fund comprises traditional and unitised with-profits
business as well as business transferred in from the NPI With-Profits Fund in
Phoenix Life Limited under the 2023 Scheme. The liability for certain unitised
with-profits investments known as Portfolio Bonds is also transferred to the fund
from the National Provident Life With-Profits Fund.
15.1.1 Pearl ceased issuing new with-profits policies in 2002 (apart from policies arising
from options on existing with-profits business).
15.2 Types of Business
15.2.1 The with-profits policies within the Pearl With-Profits Fund are internally separated
into five product groups:
• the Industrial Branch (IB) traditional business,
• the Ordinary Branch (OB) traditional business,
• the Ordinary Branch (OB) unitised business,
• the Ordinary Branch (OB) personal pension (PP) and free standing additional
contribution (FSAVC) business, and
• allocated business.
15.2.2 Industrial Branch (IB) traditional business
These are similar to the OB traditional whole life and endowment policies, as
described in 15.2.3. However, no annual bonuses were declared in the first five
years of the contract, and guaranteed minimum surrender scales apply as required
by legislation.
Groups of policies that have similar characteristics and features receive the same
annual bonus rates and the same final bonus rates. These groups are known as
bonus series.
Separate annual bonus and final bonus scales are declared for the following
classes:
• endowments
• extended endowments
• whole of life policies
15.2.3 Ordinary Branch (OB) traditional business
This product group includes traditional whole of life, deferred annuities and
endowment contracts. Benefits are payable on maturity, early termination or claim
event (e.g. death or retirement). On maturity or claim event, the guaranteed
benefits plus final bonuses are payable, except where contractual terms provide
for alternative benefits. Annual bonuses may be declared each year, and once
declared cannot be taken away. Final bonuses are not guaranteed and can be
changed at any time. On early termination, a different approach to determining
benefits payable is followed and is described in more detail in 15.8.
PLL PPFM Page 334 January 2024
Groups of policies that have similar characteristics and features receive the same
annual bonus rates and the same final bonus rates. These groups are known as
bonus series.
Separate annual bonus scales are declared for the following classes:
• life simple bonus business
• pension and general annuity fund simple bonus business
• life compound bonus business
• pension and general annuity fund compound bonus business
Simple bonuses apply generally to those policies issued before 1 February 1982.
The bonus amount is calculated either as a percentage of sum assured or
premium. For certain pension policies nominal capital sum or annuity per annum
is used instead of sum assured.
Compound bonuses apply generally to those policies issued on or after 1 February
1982. The bonus amount is calculated as a percentage of sum assured and
attaching bonuses. For certain pension policies nominal capital sum or annuity
per annum is used instead of sum assured.
Separate final bonus scales are declared for the following classes:
• life regular premium simple bonus endowment business
• life regular premium simple bonus whole of life business
• life single premium simple bonus business
• pension and general annuity fund regular premium simple bonus business
• pension and general annuity fund single premium simple bonus business
• homebuilder compound bonus business
• life, excluding homebuilder, regular premium compound bonus endowment
business
• life, excluding homebuilder, regular premium compound bonus whole of life
business
• life single premium compound bonus business
• pension and general annuity fund regular premium compound bonus business
• pensions and general annuity fund single premium compound bonus business
15.2.4 Ordinary Branch (OB) unitised with-profits business
Premiums paid by policyholders are allocated investment units at the date of the
premium payment. Benefits are payable on maturity, early termination or claim
event (e.g. death and retirement).
The units allocated to the policy increase by the daily addition of bonus units (if the
declared bonus rate is greater than zero). One rate of bonus applies to the
investment units and a different rate to bonus units previously added. Bonus units
once added cannot be taken away. The daily bonus rates are declared in advance
of the period to which they apply and can be changed at any time.
A final bonus may also be added to the policy when a claim is paid. This will be
determined for each policy individually. The amount of this bonus will vary and will
depend on premiums invested, the dates the investments were made and how
much the assets of the fund have grown since those dates compared to the
amount of daily bonus units already declared. On early termination, a different
approach to determining benefits payable is followed and is described in more
detail in 15.8.
Groups of policies that have similar characteristics and features will receive the
same daily bonus rates and the same global final bonus rate. These groups are
known as bonus series.
PLL PPFM Page 335 January 2024
Separate annual bonus and final bonus scales are declared for the following
classes:
• life policies issued in 1995
• life policies issued after 1995
• pension policies
• ISA policies
• Bonus Account policies
15.2.5 Ordinary Branch (OB) Personal Pension (PP) and Free Standing Additional
Voluntary Contributions (FSAVC)
Premiums paid by policyholders are allocated investment units at the date of the
premium payment. Benefits are payable on maturity, early termination or claim
event (e.g. death or retirement). The value of the units allocated to the policy is
set at the date of purchase and may increase as further units are allocated.
Compound interim bonus units, if applicable, are added on a daily basis but these
are not guaranteed and are superseded by annual bonus units when declared.
Compound annual bonus units may be declared each year and are guaranteed if
the policy is kept until retirement.
A final bonus may also be added to the policy. This is not guaranteed and may be
changed at any time. On early termination, a different approach to determining
benefits payable is followed and is described in more detail in 15.8.
Groups of elements of policies that have similar characteristics and features will
receive the same annual bonus rates. These groups are known as bonus series.
Separate annual bonus and final bonus scales are declared for the following
classes:
• Regular premium (including both premium paying and when premiums cease
being paid)
• Single premium (including single premium transfers)
• Protected rights DSS recurring single premium
15.2.6 Allocated business
This includes
• the with-profits component of former NPI unitised with-profits policies in the
non-profit fund, and
• the unitised with-profits investment for Portfolio Bonds passed to the fund
under an inter-fund transfer from the National Provident Life With-Profits Fund.
The former NPI With-Profits Fund business in the fund is split into three different
classes for the purposes of allocating annual bonuses and final bonuses as
appropriate. The classes are:
• Unitised with-profits business.
• Socially Responsible With-Profits business.
• Capital Account business.
Unitised with-profits bond policies (including Portfolio Bonds) are allocated units
when premiums attributable to the with-profits component are paid. The value of
the units allocated to the policy increases by the daily addition of annual bonuses
through the unit price. The rate of annual bonus is announced annually in
advance in the form of an interim rate of annual bonus, but it may be changed at
any time until formally declared as at 31 December each year.
A final bonus, increasing policy proceeds, or market value reduction, reducing
policy proceeds, may be applied on early termination or claim event. The amount
of final bonus, or market value reduction, will depend on the premium invested, the
date the investment was made, and how much the assets of the fund have grown
PLL PPFM Page 336 January 2024
since that date compared to the amount of annual bonus already declared. Market
value reductions will not be applied to claims as a result of death, or to regular
income payments.
The investment component of former NPI unitised with-profits pension policies
operates in a similar way to the unitised with-profits bonds described above.
Market value reductions will not be applied to payments on this business on death
and on some retirements, depending on contract terms.
Socially Responsible with-profits business is very much like unitised with-profits
business, but the investment is in assets selected to meet certain socially
responsible conditions.
Capital Account Pensions business does not get a final bonus and all the return is
given through the annual bonus rate. Market value reductions may still be
declared on this class of business. As for the other pensions business, payments
on death and some retirements are guaranteed to be not subject to a market value
reduction.
Groups of policies that have similar characteristics and features will receive the
same daily bonus rates and the same final bonus rates. These groups are known
as bonus series.
Separate annual bonus and final bonus scales are declared for the following
classes:
• Bonds
• Socially Responsible With-Profits Bond
• Socially Responsible With-Profits Pension
• Individual pensions
• Group pensions
• Capital Account Pensions
15.3 Capital Support to the Fund
The capital policy is described in section 3.2.
In certain circumstances, the shareholders will loan money to this fund. The
practices relating to receipt of support are detailed in sections 3.3 and 5.2.
PLL PPFM Page 337 January 2024
Principle
15.4
Amounts Payable Under a With-Profits Policy
The general aim is to pay the asset share, plus any augmentation provided by a
release of the estate of the Pearl With-Profits Fund. Payouts under with-profits
policies target 100% of unsmoothed asset shares over time subject to guarantees
and smoothing.
Asset shares are intended to be a reasonable approximation to the contribution a
policy has made to the total assets of the with-profits fund.
The bases used to determine IB policyholders’ asset shares will not be amended
from those incorporated into Pearl’s realistic balance sheet dated 30 June 2003,
however, the assumptions used to calculate the asset shares for IB business may
vary after 30 June 2003. The methodology and assumptions used to calculate the
asset shares for all other business may be altered.
Where the use of approximations does not materially affect the resulting payouts to
policyholders, then they may be used. In addition approximations may be used in
circumstances where the information needed to perform more accurate
calculations is not available (or is extremely difficult to obtain without significant
expenditure). In this case, the approach will be carried out as accurately as
possible in the Board’s opinion.
Changes may be made to past and future methodology and assumptions where
they are material and necessary to maintain equity between policyholders, or to
maintain the solvency of the fund.
The methodology, parameters and assumptions and all changes thereto are
formally documented and approved by the Board, having received advice from the
Chief Actuary, the With-Profits Actuary and from the With-Profits Committee as
appropriate.
Practices
Asset Share Methodology
15.4.1 For each of the asset share components described in this section, assumptions
and parameters that are used are based on the actual experience of the fund
using best data available at the date of investigation.
Where assumptions and parameters are not material or data not available, either
industry experience or other data may be used. Assumptions for future periods
(where used to project asset shares) are also based on the fund’s recent
experience and the Board’s expectations of the future.
Prior to 1 January 2008, asset shares for personal pension and FSAVC policies
were determined as described in 15.4.2 for traditional with-profits policies.
The Board determined to restate the asset shares for these policies at 31
December 2007 by reference to policy transfer values such that in aggregate the
asset shares for these policies did not change.
From January 2008 the asset shares for these policies are determined as the
accumulation of the restated 31 December 2007 asset share as described for
personal pension and FSAVC policies in 15.4.2.
PLL PPFM Page 338 January 2024
15.4.2 The following table describes the elements currently credited or charged to asset
shares for specimen policies.
Element
Traditional
With-Profits
IB and OB
Unitised
With-Profits
OB
Personal
Pension &
FSAVC OB
Allocated
Business
(a)
Premiums
Premiums
paid under
the policy
Premiums
paid under
the policy
Premiums
paid under
the policy
Note (a)
(b)
Investment return
Note (b)
Note (b)
Note (b)
Note (b)
(c)
Investment
expenses
Note (c)
Note (c)
Note (c)
Note (c)
(d)
Initial expenses
Note (d)
Note (d)
Note (d)
Note (d)
(e)
Renewal expenses
Note (d)
Note (d)
Note (d)
Note (d)
(f)
Other expenses
Note (d)
Note (d)
Note (d)
Note (d)
(g)
Tax on investment
return
Note (g)
Note (g)
Note (g)
Note (g)
(h)
Tax relief on
expenses
Note (g)
Note (g)
Note (g)
Note (g)
(i)
Mortality &
morbidity costs
Note (i)
Note (i)
Note (i)
Not charged
(j)
Early terminations
Note (j)
Note (j)
Note (j)
Not charged
(k)
Paid-up policies
Note (j)
Note (j)
Note (j)
Not charged
(l)
Partial and regular
withdrawals
Note (j)
Note (l)
Note (j)
Note (l)
(m)
Surrenders at
protected dates
Note (j)
Note (j)
Note (j)
Not charged
(n)
Annuity payments
Not
applicable
Not
applicable
Not
applicable
Not
applicable
(o)
Charges for the
cost of guarantees
or smoothing
Note (o)
Note (o)
Note (o)
Note (d)
(p)
Charges for the
cost of capital
Note (p)
Note (p)
Note (p)
Not charged
(q)
Distributions to
shareholders
Note (q)
Note (d)
Note (q)
Note (d)
(r)
Tax on
distributions to
shareholders
Note (r)
Note (r)
Note (r)
Note (r)
(s)
Profit and losses
from other
business
Note (s)
Note (s)
Note (s)
Note (s)
(t)
Estate distribution
or charge
Note (t)
Note (t)
Note (t)
Not
applicable
(u)
Exceptional items
Not
applicable
Not
applicable
Not
applicable
Not
applicable
Notes
(a) Premiums
For allocated business, the premiums used in asset share calculations are the
premiums paid under the specimen policy which are used to purchase units net of
PLL PPFM Page 339 January 2024
any charges. These charges may include reduced, nil or enhanced allocation
percentages, additional initial unit charges and a bid/offer spread.
(b) Investment return
The assets of the fund are currently split into a number of groups according to the
business they support:
• OB With-Profits business (unitised with-profits allocated business receives the
OB With-Profits business return)
• IB With-Profits business
• Non-Profit business in the With-Profits fund
• Capital Account Pension business
• Socially Responsible With-Profits business
• Estate
The investment return used to determine asset shares for a particular product
group is equal to the investment return achieved on the pool of assets allocated to
that product group.
The assets of the estate may be further split into a number of additional groups.
(c) Investment expenses
With the exception of unitised with-profits and allocated business, the fees for
investment services are charged to asset shares at cost via a reduction to the
investment yield credited to the assets in the fund.
For unitised with-profits and allocated business, an annual management charge is
deducted, partly in lieu of a charge for investment services.
(d) Expenses
With the exception of unitised with-profits and allocated business, expenses
representing the actual level of expenses attributed to the policies are deducted
from asset shares. Current expense deductions are based on the service
agreement the fund has with its service company and investment managers. The
deductions for expenses incurred prior to the service agreement, are based on
expense analyses, where available. In certain circumstances, large exceptional
expenses may be spread over a number of years.
The service company charges the fund a fixed charge per policy and these costs
are charged to individual policies, via a reduction to the investment yield credited
to the asset shares. These costs increase in line with the service agreement with
the service company.
Directly levied fees which cover costs not already covered by service company
charges or investment services charges will be spread in a fair manner across all
relevant policies at cost either as a flat monetary addition to the per policy charge
or via a reduction to the investment yield credited to the asset shares. This may
include treating some of the expenses as arising in future years.
For unitised with-profits and allocated business, an annual management charge is
deducted, in lieu of the above expenses, guarantee costs, the recognition of gains
and losses and shareholder profit where applicable.
(g) Tax on investment return
The amount of tax allocated to each individual policy is based on the policyholders’
tax liability of that individual policy, ignoring any synergy benefit from being
invested along with other policies. As a result, the total policyholder tax charge
PLL PPFM Page 340 January 2024
made against policyholder asset share may be different from the tax charge paid
by the fund overall. Any difference between the two will be credited / charged to
the estate.
(i) Mortality and morbidity costs
Charges are made to asset shares for meeting the cost of mortality and other risks
under individual policies, with the exception of asset shares for allocated business.
(j) Early terminations
Credits or charges are made to asset shares for profits or losses arising from
surrenders, with the exception of asset shares for allocated business.
(l) Partial and regular withdrawals
For unitised with-profits policies asset shares are charged for the actual payouts
made to policyholders for regular income payments and partial surrenders.
For allocated business claim payments are charged to asset shares. These refer
to payments to policies net of any penalties.
(o) Charges for the cost of guarantees or smoothing
Smoothing and guarantee adjustments are determined for and shared among the
with-profits policies in accordance with the product groups below:
Group 1: Industrial Branch (IB) – Traditional Business
Group 2: Ordinary Branch (OB) – Traditional Business, Ordinary Branch (OB) –
Unitised With-Profits (UWP), Ordinary Branch (OB) – Personal Pension (PP) and
Free Standing Additional Voluntary Contribution (FSAVC)
The fund is credited / debited with smoothing, guarantee and miscellaneous profits
/ losses. Such profits / losses arise from the differences between claim payments
and asset shares. The aim is that wherever possible, such payments should be
met by the asset shares through smoothing, guarantee and miscellaneous
adjustments.
Guarantee adjustments
For OB business, a charge of 0.10% per annum deducted from the investment
return has been made from 1 April 2002 to 30 June 2007 to reflect the cost of
guarantees. The level of this charge is determined by the Board, given actual cost
of guarantees and policyholders’ reasonable expectations. On 1 July 2007 this
charge was capitalised and deducted from asset shares.
For IB business, no charge will be made for the cost of guarantees up to 30 June
2007. Any excess of actual guarantee costs over charges is borne by the estate. If
the estate is or may be at risk then the asset shares may be adjusted.
From 1 July 2007 there is a periodic charge or credit for the costs of guaranteed
benefits. This will normally be determined every six months. This charge or credit
is determined at the end of each period as the difference in the realistic cost of
meeting guarantees and the value of the assets held in respect of the guarantees
adjusted for guarantees paid in the period for the relevant product group.
The charge or credit is restricted to a maximum of 1% of the relevant product
group policy asset shares per annum. To the extent that the limit is exceeded, the
excess will be carried forward and charged or credited, as appropriate, in the
following period, subject to Board discretion. The estate may be used to reduce
PLL PPFM Page 341 January 2024
guarantee adjustments to asset shares if in the opinion of the Board these would
lead to an unfair outcome.
The charge or credit is applied as a percentage charge or credit to asset shares,
with the same percentage applying to all relevant product group policies.
Smoothing adjustments
From 1 July 2007 there is a periodic charge or credit for the costs of smoothing.
This will normally be determined every six months. This charge or credit is
determined at the end of each period as the aggregate cost of smoothing on the
relevant product group business during that period. The estate may be used to
reduce smoothing adjustments to asset shares if in the opinion of the Board these
would lead to an unfair outcome.
The charge or credit is applied as a percentage charge or credit to asset shares,
with the same percentage applying to all relevant product group policies.
The estate funds smoothing adjustments on a temporary basis until they are
charged back to asset shares.
(p) Charges for the cost of capital
No charge is currently made to the fund for the cost of capital as the fund does not
rely on any capital support from the Non-Profit Fund or Shareholder Fund. The
capital policy is described in section 3.5. The practices relating to receipt of
support are detailed in section 5.2
(q) Distributions to shareholders
This is equal to a certain proportion of the cost of policyholders’ bonuses. The
proportion is subject to a maximum of 1/9th.
(r) Tax on distributions to shareholders
Shareholders’ tax in respect of transfers from the fund is charged to the estate.
(s) Other business profit or losses
Credits or charges are made to asset shares for profits or losses arising from other
business, with the exception of asset shares for allocated business.
The fund contains non-profit business, and this will generate a profit or loss. In
addition, profits and losses will emerge from other sources, for example
surrenders.
(t) Estate distribution or charge
There is a one off increase to asset shares to reflect the special bonus, paid as a
result of the segregation of funds under Project Pacific.
Asset shares may be increased by distributions from the estate or reduced by
charges to the estate. However these distributions are not guaranteed. In the
event of the assets in the fund being insufficient to cover the liabilities then, in the
first instance, any past asset share enhancements out of the estate will be
removed to the extent needed to remove the deficit. See section 15.12. Any
removal of past estate distributions will be limited to the amount of these past
distributions. The enhancement to reflect the special bonus under Project Pacific
will not be removed. The allocated business does not participate in any estate
distribution or charge. See section 15.12.1.
PLL PPFM Page 342 January 2024
15.4.3 All changes to methodology, parameters and assumptions are formally approved
by the Board, having received advice from the Chief Actuary, the With-Profits
Actuary and from the With-Profits Committee as appropriate.
15.4.4 Except where payment of a contractual benefit results in a higher amount, and
except where the amount cannot reasonably be compared with a calculated asset
share, the target for policy claim payments is that at least 90% fall between 80%
and 120% of the unsmoothed asset share. Where notional policies are used for
this purpose, the policy claim payment will not be compared to its own asset share
but rather would be adjusted to the size of the notional policy and then compared
to the asset share of the notional policy. The longer term aim is to make
aggregate policy claim payments of 100% of unsmoothed asset share though the
outcome in any particular year may vary from this longer term aim.
PLL PPFM Page 343 January 2024
Principle
15.5
Annual Bonus Rates
The Board sets bonus rates by reference to asset shares.
Policies are grouped into bonus series consisting of broadly similar policies. A
new bonus series would be introduced if the Board felt that it was both compatible
with with-profits policyholders’ reasonable expectations (PRE) and necessary to
maintain equity between different groups of policyholders.
For business other than allocated business, the annual bonus is usually set with a
view that a proportion of the final payout will be made up of final bonus.
If, in the opinion of the Board, the regulatory requirements of the fund are, or may
be, at risk then bonus rates, surrender values and the amount of smoothing may
change. In these circumstances, significant weight will be given to the current
economic conditions when setting bonus rates (which could be reduced to zero).
Practices
15.5.1 In all cases, these practices will be overridden if, in the opinion of the Board, the
regulatory requirements of the fund are, or may be, at risk (because of for
example, significant changes in market values of assets, or business losses). In
these circumstances, the build-up of guarantees may be reduced through the
declaration of a low or zero annual bonus.
15.5.2 The methodology, parameters and assumptions and all changes thereto are
formally documented and approved by the Board, having received advice from the
Chief Actuary, the With-Profits Actuary and from the With-Profits Committee as
appropriate.
IB and OB traditional with-profits
15.5.3 For traditional business, the annual bonus rate is normally reviewed at the end of
each calendar year. The annual bonus may be set to zero. If a non-zero level is
set, it is allocated to the policy on 1 January in the following year, providing all
premiums due at that time have been paid.
15.5.4 No interim bonuses are declared in respect of IB and OB traditional business.
15.5.5 For compound bonus policies where the policyholder has stopped paying
premiums and conditions for continuing to participate in future bonuses have been
met, the rate of annual bonus payable is halved.
Where policyholders cease premiums under a simple bonus policy, the policy
becomes non-profit for a reduced amount and no further bonuses will be allocated.
15.5.6 The level of annual bonus is set so as to maintain a buffer for final bonus.
The future claim payments are estimated using realistic assumptions and the
annual bonuses set at such a level that if experience turns out to be in line with
those assumptions, the overall amount of the payout paid in the form of final bonus
will be in line with the proportion specified.
Under current investment conditions, the overall target is that 25% of the overall
value of payouts, calculated before any augmentation provided by the release of
the estate, will be in the form of final bonus.
PLL PPFM Page 344 January 2024
Given the aggregate nature of this target, for an individual policy, this final bonus
buffer may be more or less than 25%. The overall target is itself subject to review
and may be changed.
15.5.7 If the estimated payouts detailed in 6.5.6 indicate that the level of final bonus is in
the overall value of payouts is less than 25% then the annual bonus will be set to
zero.
15.5.8 Where the financial position of the fund is weak the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus buffer being above the 25% target.
15.5.9 Normally the declared annual bonus rate would not be expected to be more than
2% different to that declared in the previous year.
OB personal pension and free standing additional voluntary contribution
business
15.5.10 For personal pension and free standing additional voluntary contribution business,
the annual bonus rate is normally reviewed at the end of each calendar year. The
annual bonus rate may be set to zero.
An interim daily bonus for policyholders claiming during the year is declared. The
interim bonus can be changed at any time and is set by reference to the expected
level of annual bonus. If the expected level of annual bonus changes, the interim
bonus will be adjusted to reflect this.
15.5.11 The level of annual bonus is set so as to maintain a buffer for final bonus.
The future claims payouts are estimated using realistic assumptions and the
annual bonuses set at such a level that if experience turns out to be in line with
those assumptions, the overall amount of the payout in the form of final bonus will
be in line with the proportion specified.
Under current investment conditions, the overall target is that 25% of the overall
value of payouts, calculated before any augmentation provided by release of the
estate, will be in the form of final bonus.
Given the aggregate nature of this target, for an individual policy this final bonus
buffer may be more or less than 25%. This overall target is itself subject to review
and may be changed.
15.5.12 If the estimated payouts detailed in 6.5.10 indicate that the level of final bonus in
the overall value of payouts is less than 25% then the annual bonus will be set to
zero.
15.5.13 Where the financial position of the fund is weak the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus buffer being above the 25% target.
15.5.14 Normally the declared annual bonus rate would not be expected to be more than
2% different to that declared in the previous year.
OB unitised with-profits business
15.5.15 Daily bonus rates, as described in 6.2.4 are set with regard to the expected
average return in the medium term future on the underlying assets, less
• the expected level of tax and charges, as appropriate;
• a margin to allow for gains and losses; and
PLL PPFM Page 345 January 2024
• a margin for final bonus.
The deductions above may vary in size from time to time. The rates of daily bonus
may be changed at any time, although they are normally reviewed quarterly. The
periodic review of bonus rates has regard to profits and losses on terminating
policies.
Allocated Business
15.5.16 Annual bonus rates for the calendar year are normally declared at 31 December
and interim bonus rates for the following year are set at the same time.
15.5.17 For allocated business, other than Capital Account business, interim bonus rates
are set at a level of the expected average return in the medium term future on the
underlying assets, less the expected level of tax and charges as appropriate less a
margin to allow for either some final bonus to emerge or market value reductions
to reduce. The margin may vary in size from time to time. The interim bonus rates
may be changed at any time.
15.5.18 For Capital Account business, it is intended to set the interim bonus rate at the
start of each year at a level consistent with the expected return on the underlying
assets, plus or minus an adjustment designed to bring the business more closely
into line with the asset shares.
15.5.19 The declared annual bonus rates would normally be the same as the interim
bonus rates or less, if in the opinion of the Board, the regulatory requirements of
the fund are, or may be, at risk by declaring rates equal to the interim rates.
15.5.20 Annual bonus rates on allocated business other than Capital Account business
would not normally be expected to reduce or increase by more than two percent
per annum.
15.5.21 Annual bonus rates on Capital Account business would not normally be expected
to reduce or increase by more than two percent per annum.
PLL PPFM Page 346 January 2024
Principle
15.6
Final Bonus Rates
The Board sets bonus rates by reference to asset shares.
Policies are grouped into bonus series consisting of broadly similar policies. A
new bonus series would be introduced if the Board felt that it was both compatible
with with-profits policyholders’ reasonable expectations (PRE) and necessary to
maintain equity between different groups of policyholders.
For business other than allocated business, the annual bonus is usually set with a
view that a proportion of the final payout will be made up of final bonus.
Practices
15.6.1 The sections below refer to the practices for setting final bonuses, before any
augmentation to final bonus provided by a release of the estate, for each of the
main lines of business.
In all cases, these practices will be overridden if, in the opinion of the Board, the
regulatory requirements of the fund are, or may be, at risk (because of, for
example, significant changes in market values of assets, or business losses). In
these circumstances, the Board may target payouts at less than 100% of asset
shares, subject to paying out a minimum of the guaranteed benefits.
15.6.2 The methodology, parameters and assumptions and all changes thereto are
formally documented and approved by the Board, having received advice from the
Chief Actuary, the With-Profits Actuary and from the With-Profits Committee as
appropriate.
IB and OB traditional, personal pension and FSAVC with-profits business
15.6.3 Final bonuses are normally reviewed and set every six months such that the final
payout targets 100% of unsmoothed asset share over time subject to guarantees
and smoothing.
15.6.4 For business other than PP and FSAVC, the final bonus rate is determined for
each bonus year by reference to the projected asset shares of the policies. Where
bonus year is the year from which the policy becomes entitled to participate in
bonuses.
For PP and FSAVC, up to and including 31 December 2007, a similar approach is
adopted but the final bonus rate is determined for each year the policy participates
in profits (see 6.6.8 for the approach to be adopted thereafter).
For PP and FSAVC, the asset share calculations, which underlie the bonus rates,
are performed using notional policies with relevant characteristics, such as age
and level of benefits, for each bonus series. In these calculations, approximations
and considerations of materiality may be applied in determining the notional
policies used.
For IB and OB traditional business, the aggregate asset share, which underlies
bonus rates, is calculated by summing the individual asset shares for notional
policies with relevant characteristics such as age and sum assured for each bonus
series. In each of these calculations, approximations and considerations of
materiality may be applied in determining the notional policies used.
15.6.5 In performing this exercise, for business other than IB and OB traditional business,
any excess of guaranteed benefits over asset shares are ignored. This is done so
PLL PPFM Page 347 January 2024
that if the guaranteed benefit under a notional policy is greater than asset share,
this does not result in a reduction of final bonus on other notional policies.
In performing this exercise for IB and OB traditional business any excess of the
aggregate guaranteed benefits over the aggregate asset shares for a given bonus
year are ignored. This is done so that if the aggregate guaranteed benefits for a
given bonus year is greater than aggregate asset shares, then this does not result
in a reduction of final bonus on other bonus years.
15.6.6 The unsmoothed final bonus rates may be further adjusted as described in 6.7 to
allow for smoothing and consistency between bonus years.
15.6.7 The same final bonus rates apply for both death and maturity where the final
bonus is paid on death.
15.6.8 With effect from 1 January 2008, final bonuses for PP and FSAVC are not as
described above but are determined for each individual policy element such that
the final payout targets 100% of unsmoothed asset share over the time subject to
guarantees and smoothing.
15.6.9 Full weight is given to recent economic experience in determining asset shares.
As such payouts are similarly impacted, unless the smoothing process acts so as
to restrict this link between the asset shares and payouts.
OB unitised with-profits business
15.6.10 Final bonuses are determined for each individual policy such that the final payout
targets 100% of unsmoothed asset share over time subject to guarantees.
15.6.11 A global final bonus rate is determined for each bonus series. This rate is
determined by comparing the aggregate asset share with the sum of the
investment units and the bonus units for the bonus series. The global final bonus
rate is normally reviewed and set fortnightly.
15.6.12 An individual policy final bonus rate is calculated by comparing the sum of the
investment units and the bonus units allocated to the policy to the asset share for
the policy.
15.6.13 The applicable final bonus rate is set by reference to the calculated individual rate
having regard to the global rate for the bonus series.
15.6.14 Full weight is given to recent economic experience in determining asset shares.
As such payouts are similarly impacted, unless the smoothing process acts so as
to restrict this link between the asset shares and payouts.
Allocated business
15.6.15 Final bonuses are determined such that the final payout targets 100% of asset
share over time subject to guarantees and smoothing. The asset share
calculations, which underlie the bonus rates, are performed using notional policies
with relevant characteristics, such as age and level of sum assured, for each
bonus series. In these calculations, approximations or considerations of
materiality may be applied in determining the notional policies used.
15.6.16 Final bonus rates are determined for each tranche of business, typically grouped
quarterly by date of premium payment. Separate bonus rates are determined for
Socially Responsible with-profits business and other reinsured business excluding
Capital Account business. No final bonus is applicable to Capital Account
business.
PLL PPFM Page 348 January 2024
15.6.17 Rates are normally reviewed monthly and are changed at least quarterly and are
subject to smoothing.
PLL PPFM Page 349 January 2024
Principle
15.7
Smoothing
To avoid significant changes in benefits over time for policies within the same
bonus series, or for certain similar groups of policies within bonus series,
smoothing is applied. This limits the changes in payouts from one period to the
next.
Where smoothing is applied it is intended for smoothing costs after 1 July 2007 to
be neutral over time. This will be achieved by tracking the payouts made to
policyholders and debiting / crediting the smoothing cost to asset shares. The
estate of the Pearl With-Profits Fund may be used to reduce smoothing
adjustments to asset shares if in the opinion of the Board these would lead to an
unfair outcome. Given the process there is no total scale or cost of smoothing to
the fund over the shorter term that should not be exceeded.
Practices
15.7.1 The sections below set out the smoothing practices for the main lines of business.
In all instances, the smoothing approach described for each product group applies
equally to different generations of policyholders. There is no overall limit to the
cost of smoothing for any product, but smoothing is subject to the overall solvency
of the fund and the existence of sufficient excess assets of the with-profits fund to
meet regulatory requirements.
15.7.2 Smoothing is applied to payouts determined before any augmentation to final
bonus for release of the estate. The augmentation to final bonus for any release
of the estate is unsmoothed.
15.7.3 Profits / losses from this smoothing are shared among the with-profits policies in
accordance with the product groups below:
Group 1: Industrial Branch (IB) traditional business
Group 2: Ordinary Branch (OB) traditional business, Ordinary Branch (OB)
unitised with-profits (UWP), Ordinary Branch (OB) personal pension (PP) and free
standing additional voluntary contribution (FSAVC).
Profits and losses arising from smoothing Group 1 policies are shared among
Group 1 policies.
Profits and losses arising from smoothing Ordinary Branch (OB) traditional
business, Ordinary Branch (OB) personal pension (PP) and free standing
additional voluntary contribution (FSAVC) are shared among the Group 2 policies.
15.7.4 The aim is that, wherever possible, such profits and losses should be met by the
asset shares through smoothing adjustments.
15.7.5 The methodology, parameters and assumptions and all changes thereto are
formally documented and approved by the Board, having received advice from the
Chief Actuary, the With-Profits Actuary and from the With-Profits Committee as
appropriate.
PLL PPFM Page 350 January 2024
Industrial Branch (IB) and Ordinary Branch (OB) traditional business,
personal pension (PP) and free standing additional voluntary contributions
(FSAVC)
15.7.6 For traditional policies where final bonus changes are normally twice a year
smoothing is applied to maturity or retirement values, and is done by limiting the
changes in final bonus rates. Normally the change in final bonus rates for a policy
will be limited so that the increase or reduction in total maturity or retirement
payout (excluding any estate distribution) compared to a position where bonus
rates are not changed is not more than 7.5% at each six monthly review.
15.7.7 For traditional policies, surrender value bases are normally reviewed twice a year,
and smoothing is applied by limiting the change in immediate surrender value for
policies. Normally the surrender value for specimen model policies will not change
by more than 10% at each six monthly review. Surrender values may change in
between reviews because in many cases the surrender values are calculated
using formulae that depend on factors such as term remaining which change over
time.
15.7.8 However, if it is necessary to enable the fund to continue to meet the objectives
set out in the guiding principles in section 5 sometimes larger changes are made
in final bonus rates and surrender values.
If there has been a significant change in premium rates then larger changes than
those described above may be made so that final bonus rates and surrender
bases remain consistent with the premium rates on which the business was
generally written. Where premium rates were revised with the intention of
changing payouts, then smoothing will not be applied, so that the change in
payouts intended by the premium rate changes does occur.
For both maturity and retirement values, and surrender values, any change to
payouts that results from changes in the distributable estate, if any, will be
additional to the limits described and will not be subject to smoothing. Also where
there have been significant changes in methodologies and practices, the impact
may not be managed within the normal smoothing rules.
For PP and FSAVC policies, the smoothing applied to surrender values is
described in 15.8.11
Ordinary Branch (OB) – Unitised With-Profits (UWP)
15.7.9 The payouts under UWP policies are set to target the asset share and there is no
maximum amount by which the level of payout can change from year to the next.
However given the fact that the bonuses do not reflect day to day market
movements, there will be a series of over and underpayments relative to the asset
share which are met from the estate.
Allocated business
15.7.10 The targets under allocated business are set to target the asset share and there is
no maximum amount by which the level of payout can change from one year to the
next. However, given the bonuses do not reflect the day to day movements, there
will be a series of over and underpayments relative to the asset share.
15.7.11 There is no automatic method for smoothing. However, extreme changes in the
investment return may be smoothed by setting different final bonuses or market
value reductions than would normally be the case. The extent of such smoothing
is reduced if discontinuances become excessive; for example if this would
otherwise impact the financial security of the fund or lead to significant inequity.
PLL PPFM Page 351 January 2024
Principle
15.8
Surrender Values
Surrender values will be set with reference to the policy’s asset share, plus any
augmentation provided by release of the estate. The fund applies market value
reductions, or changes to surrender bases for with-profits policies that are not
unitised, to reflect changes in underlying asset shares. Surrender values may be
subject to smoothing, and may vary considerably in line with movement in asset
shares. Surrender values as determined will be subject to guaranteed minimums,
where provided by the contract terms.
Practices
15.8.1 Non-protected exits refer to surrenders and transfers for pension business.
15.8.2 The practices applying to the calculation of surrender values for with-profits
policies vary by product and are described below. Certain policies have surrender
values guaranteed in the contract or prescribed by regulation. Where the
application of these practices produces surrender values that are below these
levels, the guaranteed or regulatory benefits will be paid.
15.8.3 Except for levels prescribed by regulation and guarantees, these practices will be
overridden if in the opinion of the Board, the regulatory requirements of the fund
are, or may be, at risk. In these circumstances the Board may set payouts to
target less than 100% of asset share.
15.8.4 The surrender values of non-profit policies within the with-profits fund are not
described in these practices.
15.8.5 The methodology, parameters and assumptions and all changes thereto are
formally documented and approved by the Board, having received advice from the
Chief Actuary, the With-Profits Actuary and from the With-Profits Committee as
appropriate.
Industrial Branch (IB) and Ordinary Branch (OB) – Traditional business,
Personal Pension (PP) and Free Standing Additional Voluntary Contribution
(FSAVC)
15.8.6 Surrender values are based on a formula designed to ensure surrender values
paid meet the target in 15.4.4. The asset share calculations, for this purpose, are
performed using notional policies with relevant characteristics, such as age and
level of sum assured / benefits. In these calculations, approximations or
considerations of materiality may be applied in determining the notional policies
used.
15.8.7 While asset shares are targeted, the operation of the formula means that some
surrender payments will be higher or lower than asset shares. For example, the
amounts payable to policies surrendering in the first few years of the policy’s life
may exceed asset shares, particularly where the asset share is negative (for
example as a result of expenses). In addition, in between review dates
fluctuations in asset shares will also lead to payments varying by asset shares.
15.8.8 In the circumstances described, any overpayment relative to asset share is funded
from the estate of the Pearl With-Profits Fund until passed back to the asset
shares, and any underpayment is credited to the estate of the Pearl With-Profits
Fund until credited back to the asset shares.
PLL PPFM Page 352 January 2024
15.8.9 Surrender values are normally reviewed every six months. However, the fund may
review surrender values whenever it is deemed necessary.
15.8.10 For the avoidance of doubt, in the approach described above, surrender values at
particular policy durations are not related or compared to the actual maturity
benefits of policies of the same duration.
15.8.11 With effect from 1 January 2008, surrender values for PP and FSAVC policies are
smoothed for each individual policy element such that the maximum year on year
change in payouts, under normal circumstances is 15%, rather than the process
described above. Underlying this maximum change in payouts is the scale
detailed in 15.7.7. This limit is not subject to regular review. In making this
comparison any premiums paid in the previous year are not taken into account.
Ordinary Branch (OB) – Unitised With-Profits (UWP)
15.8.12 Surrender values are equal to the value of investment units less any fixed
penalties applied plus the value of the bonus units added plus any final bonus as
determined using the same approach as the maturity final bonus.
15.8.13 For a small group of policies issued during 1995, market value reductions may be
applied. The aim of the market value reduction is to broadly equate surrender
payments to asset shares. The market value reductions are implemented as a
reduction to the final bonus and can lead to negative final bonus.
15.8.14 Where no market value reduction applies, there is no distinction made between
surrendering and maturing policies when determining final bonus.
15.8.15 Market value reductions do not apply to UWP policies sold since 1 January 1996.
15.8.16 Any strain on regular withdrawals arising from the exercise of contractual options
will be borne by the estate of the Pearl With-Profits Fund.
Allocated business
15.8.17 A final bonus, increasing policy proceeds, or market value reduction, reducing
policy proceeds, may be applied on early termination or claim event. The amount
of final bonus, or market value reduction, will depend on the premium invested, the
date the investment was made, and how much the assets of the fund have grown
since the date compared to the amount of annual bonus already declared. Market
value reductions will not be applied to claims as a result of death, or to regular
income payments, or on some retirements depending on contract terms.
15.8.18 Final bonuses are determined such that the final payout targets 100% of asset
share over time subject to guarantees and smoothing. The asset share
calculations, which underlie the bonus rates, are performed using notional policies
with relevant characteristics, such as age and level of sum assured for each bonus
series. In these calculations approximations or considerations of materiality may
be applied in determining the notional policies used.
15.8.19 Final bonus rates are determined for each tranche of business, typically grouped
quarterly by date of premium payment. Separate bonus rates are determined for
Socially Responsible With-Profits business and other reinsured business excluding
Capital Account business. No final bonus is applicable to Capital Account
Pensions business.
15.8.20 Rates are normally reviewed monthly and are changed at least quarterly and are
subject to smoothing.
PLL PPFM Page 353 January 2024
Principle
15.9
Investment Strategy
The investment strategy for the fund is set to maximise returns having regard to
the solvency position of the fund, the nature and extent of guarantees in the
portfolio, the expected liquidity requirements to meet cash outflows and with
reference to the asset mix for peer group companies. The assets of the fund are
invested in a range of asset classes with varying degrees of risk.
The fund aims to hold a target percentage of its assets within each asset class so
as to maintain an asset mix which is consistent with the interests of policyholders
(subject to such constraint as may be necessary to meet solvency and regulatory
capital requirements. The investment mandate given to the investment managers
contains detailed requirements as to the type of asset that are acceptable
investments and the target percentage of each asset class that the fund aims to
hold. The mandate gives a range of values within which the actual proportion
invested in each asset class must lie, which allows the investment managers
some flexibility in order to try and maximise returns within the risk requirements of
the fund. The investment mandate has counterparty limits within it. The objective
is to avoid significant aggregate exposure to any individual counterparty limit.
Within each asset class, as far as possible, a diversified range of assets subject to
counterparty limits will be held. Shareholder Funds are not taken into account
when setting investment strategy.
The fund may invest in derivative instruments to implement investment decisions
where it is deemed efficient to do so. In addition, derivatives may be used to
change the risk profile of the fund. Any derivative investments will be subject to
counterparty limits as well as the approval of the Investment Committee.
The target percentage invested in each asset class will be altered in
circumstances where there is an unacceptably high risk that regulatory capital
requirements may be breached, that guarantees may not be met, or that it will not
be possible to apply the stated smoothing policy. If in the opinion of the Board,
the regulatory requirements of the fund are or may be at risk, then the investment
mix of assets held will be adjusted as deemed necessary. At the same time, if
appropriate to enable the fund to pursue an investment strategy in the best
interests of policyholders, regard shall be taken of any excess assets over
regulatory capital requirements (if any) in the Non-profit Fund and Shareholder
Fund (but not any other fund) in setting investment policy, if this is considered
necessary to ensure that the investment policy is consistent with policyholders’
reasonable expectations.
No future material investments will be made on behalf of the fund in non-tradeable
assets.
Assets allocated to the fund may be hypothecated providing that, in the opinion of
the Board, having taken appropriate advice (including appropriate actuarial
advice) the hypothecation:
(i) is unlikely to have a material adverse effect on the interests of any group or
generation of holders of policies allocated or reassured to the fund;
(ii) is unlikely to have an adverse effect on the interests of holders of policies
allocated or reassured to the fund considered as a whole; and
(iii) is unlikely, where applicable, to have a material adverse effect on the interests
of any group or generation of policyholders in any other with-profits fund.
Practices
PLL PPFM Page 354 January 2024
15.9.1 The Board receives advice on its investment strategy for the fund from its
Investment Committee taking account of a variety of considerations, including our
approach to responsible investment. The Board will also receive advice from the
With-Profits Committee and the With-Profits Actuary on any material proposals to
change investment mix, or invest in new types of asset.
15.9.2 The investment strategy is documented in a series of investment management
agreements between the fund and its investment managers. The Investment
Committee oversees the investment managers to ensure that the investments held
are in accordance with the investment management agreements.
15.9.3 The investment management agreements set out any limits on matters such as:
• The types of investment that may be held.
• The maximum amount that can be invested in any single currency.
• The maximum amount that can be invested in any single asset class /
investment sector / country.
• The maximum extent to which the manager might hold assets which are
different to the benchmark (guideline) portfolio in order to enhance returns
(these include restrictions in terms of credit quality, term / duration and
amounts of individual holdings).
• The minimum credit rating quality of assets (as specified by the main rating
agencies such as Standard & Poor’s and Moodys).
• The maximum amount of gearing within the fund (that is, the maximum
amount of borrowing the fund may undertake to invest in new assets)
• Exposure to sectors or companies that do not align with our approach to
responsible investment, for example Tobacco.
15.9.4 Before investing in new types of investment, the Board will obtain the advice of the
investment managers and the Investment Committee on the benefits and risks.
The Board will also notify the With-Profits Actuary and the With-Profits Committee
of these proposed new types of investment and they may then, at the Board’s
request or on their own initiative, provide the Board with their own advice.
15.9.5 The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
Asset Mix
15.9.6 The assets within the fund are separated into different asset pools. This separation
may be either physical (where the investment managers run a separately
identifiable asset pool) or notional (where rather than holding separate assets, we
internally apportion the returns within the fund as if separate asset pools were
held).
15.9.7 Different asset pools, with different asset mixes are currently held in respect of:
(1) asset shares
(2) liabilities for options and guarantees
(3) liabilities for Non-profit policies and other liabilities
(4) the estate of the Pearl With-Profits Fund.
15.9.8 Within asset shares, the asset mix is set separately for:
(a) OB With-Profits business (excluding: (c) and (d) below)
(b) IB With-Profits business
(c) Socially Responsible With-Profits business, and
(d) Capital Account Pensions business.
PLL PPFM Page 355 January 2024
15.9.9 Currently, the same asset mix is adopted for policies of type (a) and (b) above but
different asset mixes may be adopted in future.
15.9.10 The overall asset mix of the fund is the result of combining the assets in each of
the underlying asset pools.
15.9.11 Regular calculations to assess the assets and liabilities of the fund and the amount
of capital that would be needed to withstand a range of adverse shocks are carried
out. The asset mix, including the asset mix within asset shares, will be altered in
circumstances where there is an unacceptably high risk that regulatory capital
requirements may be breached, that guarantees may not be met, or that it will not
be possible to apply the stated smoothing policy.
15.9.12 Assets held outside of the fund may have their own separately determined asset
mix.
Asset Shares
15.9.13 The fund aims to maintain an exposure to growth investments for OB and IB With-
Profits business. Growth investments have higher risk than other investments
(such as cash and bonds) but are expected to produce a higher long-term return.
The value of the Growth investments may therefore be more volatile. Growth
investments will normally consist of equity shares (including private equity),
commercial property and hedge funds. However, the investment managers may
also choose to hold other types of investment within the growth investment
category. If holdings in other types of investments are to be anything more than a
very small proportion of the growth investments then this will be subject to the prior
agreement of the Investment Committee.
15.9.14 The equity shares will be held in a mix of UK and overseas companies, the
majority of which are listed and traded on the major stock exchanges. However
the equity shares will also include a proportion of private equity investments which
are less liquid and may therefore take longer to sell, should the fund wish to.
Some of the private equity investments involve commitments to make further
investments if called. Some of the private equity investments are structured in
such a way as to give a higher risk reward profile making them potentially more
volatile.
Within the equity shares there is a very small exposure (less than 1% of asset
share) to the equity of collateralised debt obligation structures which are also less
liquid and potentially more volatile.
15.9.15 The property investments may be in both UK and overseas properties, and may be
held directly, or through specialist funds.
A significant proportion of the property investment is through specialist funds.
Some of the specialist funds are geared which means they have borrowed against
their properties to increase the potential profits or losses. Some of the specialist
funds are structured so that the returns from the underlying property are split to
offer different investors a different investment profile, such as lower returns with
lower risk or higher returns with higher risk. The fund holds various types of such
instruments in its growth investments. Some of the specialist funds have end
dates at which they will be liquidated, with the underlying assets being sold and
returned to investors. Where the specialist funds have borrowings that become
repayable at a certain date, then they will have to refinance those borrowings, or
sell assets to repay the borrowings. Consequently the value of an investment in a
specialist fund may be affected by the expected availability and cost of borrowing
at the refinance date, as well as by the value of its assets.
PLL PPFM Page 356 January 2024
15.9.16 The hedge funds are invested in a range of different funds running different
specialist strategies, across different territories.
15.9.17 The balance of the asset shares that are not invested in growth investments are
invested in a mixture of cash and fixed interest securities (bonds issued by
governments and corporate bonds issued by companies). Although such
investments are generally considered to be lower risk than the growth
investments, the values of such investments can still be significantly affected by
market rates of interest, company or government defaults or debt restructures, and
the levels of market liquidity. A small amount is held in a fund of leveraged loans.
The majority of the bonds that are not issued by governments will normally be
investment grade (i.e. rated BBB- or higher by a recognised rating agency), but the
fund may also have an exposure to lower rated or unrated bonds, including
emerging market bonds and high yield bonds.
Hypothecation of fixed interest assets by term remaining was introduced from 1
January 2020 for traditional policies to reduce the volatility of policyholder returns
near maturity. The return on the fixed interest assets attributed to the traditional
policy asset share will reflect the term remaining of the policy.
15.9.18 Returns on emerging market debt do not reflect the term remaining, but rather
reflect the overall return on such debt.
15.9.19 If it is considered by the Board to be appropriate, then, subject to actuarial advice,
further hypothecation of the assets in the fund may be introduced.
15.9.20 Although the asset shares are invested in a number of assets that might be
considered higher risk in their own right, by having exposure to a range of different
assets and risks, the overall investment mix within the asset shares is well
diversified and is designed to give an appropriate overall balance between risk and
return.
15.9.21 The guideline asset mix ranges for asset shares are:
All business
Fixed interest and cash
35% to 55%
Equities including
private equity and
alternative assets
35% to 55%
Property
5% to 15%
Although the overall equity range will remain applicable, over time the target
percentages for private equity and alterative assets will reduce.
15.9.22 From time to time the actual asset mix will be different from the guideline mix due
to market movements and active management decisions taken by the investment
managers or the Investment Committee.
Liabilities for Policy Options and Guarantees
15.9.23 We assess how the expected cost of the guarantees and options inherent in the
with-profits policies, net of the value of expected future guarantee charges and
early termination profits, will change as the prices of the growth investments rise
and fall and as market volatilities and interest rates change. A mix of assets which
will broadly change in line with the change in the net cost of the guarantees is
identified. This asset mix may require a short position in growth investments to be
adopted and a long position in fixed interest securities or cash. It may also require
the use of financial instruments such as interest rate swaps, interest rate options,
equity futures, equity options or other derivatives.
PLL PPFM Page 357 January 2024
15.9.24 Because the appropriate asset mix to back guarantees and options will change as
the prices of growth investments, interest rates, credit spreads and volatility
change, it is not possible in practice for our investments to match exactly these
liabilities. However we periodically assess the appropriate asset mix, and may
make interim changes if there have been particularly large market movements.
Liabilities for Non-profit policies and other liabilities
15.9.25 Assets backing the liabilities for non-profit policies are invested in fixed interest
securities chosen to broadly match the duration and amount of the liabilities.
Assets backing unit-linked liabilities which are not wholly reinsured are invested in
the assets used to determine the value of the unit liability. Assets backing RPI-
linked liabilities or expense reserves are invested in index-linked securities or
inflation linked derivatives. Assets backing short-term liabilities are invested in
cash or short-term debt. Assets backing additional benefits granted to certain
policyholders with mortgage endowment policies, and certain pension
policyholders whose policies were missold, are invested using a similar approach
to that described in 15.9.23 above.
Estate
15.9.26 Assets representing the estate of the Pearl With-Profits Fund are mostly invested
in fixed interest securities. However if the estate is large in relation to the potential
risks facing the fund, then part of the estate may be invested in growth
investments in line with the asset mix of the asset shares.
Currency
15.9.27 The currency exposure arising from any investment in overseas equities or
emerging markets is not normally hedged, and so the return achieved by the fund
depends on both performance of the investments and any movement in currency
exchange rates. Currency exposures from any other types of investments
denominated in currencies other than sterling are normally hedged, unless the
liabilities that the assets are backing are also denominated in another currency.
Derivatives
15.9.28 Derivatives are normally only used for efficient portfolio management or to reduce
investment risk. For example derivatives may be used to make changes in
investment allocations more rapidly or cheaply than could be done directly through
the markets. Similarly, for example, they are also used to improve the matching of
the assets and liabilities. Derivatives having the effect of growth investments will
be treated as such.
Investment Managers
15.9.29 The majority of the investments are currently managed by the investment
managers, who may outsource the management of some of the assets under
arrangements in place with other specialist managers.
15.9.30 The hedge funds are managed by the investment managers although they are
then invested in a range of other hedge funds run by other managers.
PLL PPFM Page 358 January 2024
Assets not normally traded
15.9.31 The fund does not currently hold any material assets such as properties occupied
by Phoenix Life Limited or shareholdings in subsidiary companies, that would not
normally be traded because of their strategic importance to the fund or the
Phoenix Group.
PLL PPFM Page 359 January 2024
Principle
15.10
Business Risks
Subject to any future hypothecation of assets in the fund, with-profits policyholders
are entitled to share in the total profits of the fund, and therefore are exposed to
the business risks of the fund including the ongoing maintenance of other existing
with-profits policies and non-profit policies in the fund. Existing business risks are
monitored on a regular basis.
The fund seeks to avoid taking on new business risks and is managed in such a
way as to minimise the existing business risks.
Where a business risk (other than the provision of guaranteed and contractual
benefits charged to asset shares; smoothing risk; and the profits or losses on non-
profit business associated with a particular bonus series of with-profits business)
results in additional cost or reserve requirements and the fund has been deemed
liable, the aim will be to charge these additional costs to the Pearl With-Profits
Fund estate. In doing this, distinction will be made between IB and OB business,
where possible. If the estate is exhausted then the costs will be met by the
Shareholder, either from the Non-Profit Fund or the Shareholder Fund.
The profits / losses from the provision of guaranteed and contractual benefits
charged to asset shares, smoothing risk, and the profits or losses on non-profit
business associated with a particular bonus series of with-profits business are
shared among the with-profits policies in accordance with the product groups
below:
Group 1: Industrial Branch (IB) - Traditional Business
Group 2: Ordinary Branch (OB) – Traditional Business, Ordinary Branch (OB)
Unitised With-Profits (UWP), Ordinary Branch (OB) – Personal Pension (PP) and
Free Standing Additional Voluntary Contribution (FSAVC)
Should the grouping above have no flexibility to absorb any losses emerging (due
to, for example, guarantees), the losses will be treated in the same way as other
business risks, as detailed above.
For allocated business, no profits or losses arising from non-profit policies are
shared with this business.
Practices
15.10.1 The fund is no longer taking on any additional types of business risk. For the
current business risks, there are limited opportunities to affect the impact of such
risks on the fund.
15.10.2 Current and potential sources of business risk are described below.
Non-profit business
15.10.3 The most material non-profit business in the fund relates to certain policies, which
have been made paid-up. In the normal course of events, profits or losses can be
expected to arise from miscellaneous sources, such as mortality or surrender.
These profits or losses are credited in accordance with principle 6.10 above.
Pensions mis-selling
15.10.4 The fund has agreed to compensate certain policyholders who were incorrectly
advised to transfer out of company pension schemes and into personal pensions
and full reserves have been established. There is still a risk that the reserve may
PLL PPFM Page 360 January 2024
not be sufficient. The cost of this exercise (including compensation costs) is borne
by the Pearl With-Profits Fund estate.
Other liability issues
15.10.5 There is a risk that other liabilities may arise that have not yet been discovered. If
such an issue were to emerge, this could result in a requirement for compensation
payments to be made. The aim is that wherever possible, such payments should
be met by the Pearl With-Profits Fund estate.
Smoothing Risk
15.10.6 The fund is credited / debited with profits/losses arising from the with-profits
policies. Such profits / losses arise from the differences between claim payments
and asset shares. The aim is that wherever possible, such profits / losses should
be met by the asset shares. Refer to 6.7.
Insurance Risk
15.10.7 These cover the risk that certain contractual benefits become significantly more
valuable and as a result reduce asset shares. This would only happen if there
were an additional cost in excess of current amounts provisioned against them.
An example of this risk is guaranteed annuity options.
15.10.8 The fund has provided certain guarantees in relation to shortfalls under mortgage
endowment policies and full reserves have been established. There is still a risk
that the reserve may not be sufficient. The cost of this residual guarantee,
including any additional reserves which may be required if current reserves prove
not to be sufficient (including compensation costs) is borne by the Pearl With-
Profits Fund estate.
Outsourcer Risk
15.10.9 Investment management services have been outsourced to the investment
managers and administration services have been outsourced to Phoenix Group
Management Services Limited (PGMS). There is a risk that the investment
managers and / or PGMS fail to provide an adequate service or cease to trade.
Should PGMS be unable to meet any of its obligations to provide services then
Phoenix Life Limited would request that Phoenix Group, as owners of PGMS step
in to restore the position. Should Phoenix Group not do this, then Phoenix Life
Limited would attribute any losses to the Shareholder Fund or Non-Profit Fund,
and the fund would only be affected if the Shareholder Fund or Non-Profit Fund
had insufficient excess assets to bear the losses.
PLL PPFM Page 361 January 2024
Principle
15.11
Expenses and Charges
The fund is charged for the costs of managing the Industrial Branch (IB) and
Ordinary Branch (OB) – Traditional Business, Personal Pension (PP) and Free
Standing Additional Voluntary Contribution (FSAVC) with-profits business. A fair
and equitable attribution system based on actual incurred costs will be used. The
costs may be charged to asset shares via an annual management charge. Where
services are provided by other related companies within the Group Structure,
these will be charged on commercial terms. Any changes to these terms will be
subject to the approval of the Board.
Ordinary Branch (OB) - Unitised With-Profits (UWP) and allocated business with-
profits business is levied a specified annual management charge which may be
varied if the costs of managing the business change materially.
Any changes applied to with-profits policies in the fund by reference to solvency or
financial position or prospects shall be determined by reference to the solvency or
financial position or prospects of the Pearl With-Profits Fund only.
Practices
15.11.1 Administrative services are currently provided to the fund by the service company.
Investment services are provided by a number of investment management
companies.
15.11.2 The agreement with the service company is a perpetual agreement and is not
expected to be renegotiated, but charges may be amended in respect of major
regulatory change. The agreement can however be terminated for material failure
to meet service standards or other non-compliance with the agreement. We
regularly monitor service standards.
Value added fees for work outside the service level agreements are charged
separately.
Investment performance is monitored continuously and the arrangements with the
investment management companies may be terminated in accordance with agreed
notice periods.
15.11.3 There are three kinds of charges levied on asset shares in the fund, excluding
UWP and allocated business:
(a) The service company charges the fund a fixed charge per policy and these
costs are charged to individual policies at cost that may be via a reduction to
the investment yield credited to asset shares.
(b) The fees for investment services are charged to asset shares at cost via a
reduction to the investment yield credited to the assets in the fund.
(c) Directly levied fees which cover costs not already covered by (a) or (b) will
be spread in a fair manner across all relevant policies at cost either as a flat
monetary addition to the per policy charge or via a reduction to the
investment yield credited to asset shares. This may include treating some
of the expenses as arising in future years.
15.11.4 For UWP and allocated business, an annual management charge is deducted in
lieu of the above expenses and other costs.
PLL PPFM Page 362 January 2024
15.11.5 The With-Profits Actuary will review annually any charges (per 15.11.3 c) levied on
the fund for reasonableness relative to the service received.
15.11.6 The total charges levied on asset shares will be smaller than the total fund
expenses, as these charges do not include any allowance for investment
management fees associated with the estate, which are borne by the estate itself.
PLL PPFM Page 363 January 2024
Principle
15.12
Estate Management
The distributable estate is part of the estate of the Pearl With-Profits Fund.
The intention is that the estate of the Pearl With-Profits Fund other than the
distributable estate will be large enough to support existing policyholders’
reasonable expectations by providing:
• For any excess of guaranteed benefits over asset shares.
• For the temporary cost of smoothing payouts.
• Guarantee adjustments and smoothing adjustments which in the Board’s
opinion are chargeable to the estate.
• Security through protection against adverse experience.
• Support for the financing of new business (should any be written).
• For shareholders’ tax in respect of transfers from the fund.
• For any tax paid by the Pearl With-Profits Fund not charged against
policyholder asset shares.
In addition the estate will be used to provide investment freedom for the fund,
permitting exposure to volatile assets.
If, in the opinion of the Board, the estate more than provides for the elements
listed above, then the distributable estate will be released. The released
distributable estate would be used to augment the benefits of with-profits
policyholders via additions to final bonus (and hence shareholders will receive
their share) over the lifetime of the fund. That part of the released estate not paid
out at any time will be retained to augment future policy payouts.
If the estate other than the distributable estate is insufficient to provide for the
elements listed above, then the deficit will, so far as possible, be made good
through a reduction in the distributable estate previously released but not paid out
(and retained to augment future policy payouts) at the relevant time
The allocated business has no rights to share in the estate of the Pearl With-
Profits Fund.
Practices
15.12.1 The allocated business does not have any interest in the estate arising in the fund
and references in this section to potential benefit enhancements from estate
distribution do not apply to this business.
15.12.2 The estate is the estimated realistic value of the assets less the estimated realistic
value of the liabilities. It is calculated using realistic assumptions and generally
accepted methodologies on a basis determined by the Board.
15.12.3 To the extent that any profits or losses arising in the fund are not allocated to asset
shares in accordance with 15.4.2, they will act to increase or reduce the estate.
To the extent that the amounts charged to asset shares are based on estimates or
assumptions, then any difference between these and the actual amounts will act to
increase or reduce the estate.
15.12.4 The estate in the fund will be used to:
(a) assist the fund in demonstrating it has access to sufficient capital resources to
meet its liabilities and treat customers fairly;
(b) provide a buffer in the fund should adverse experience mean that the reserves
held to cover the liabilities prove insufficient;
PLL PPFM Page 364 January 2024
(c) meet any costs which are charged directly to the estate rather than to asset
shares;
(d) to meet the costs of any changes to which the Board believe are necessary to
improve fairness between policyholders and/or enhance the run-off of the fund.
(e) enhance the benefits payable to those with-profits policies which have an
interest in the estate but always aiming to retain sufficient estate to meet the
expected amounts required for (a), (b), (c) and (d). The amount considered by the
Board to be available from time to time for such enhancements will be referred to
as the distributable estate.
15.12.5 Any enhancement in benefits on account of the distributable estate referred to in
15.12.4(e) will generally be achieved by including a temporary uplift to the asset
share for the purpose of setting final bonus rates and surrender values. However if
the estate is large then consideration would be given to making additions to the
asset shares from the estate.
15.12.6 The amount of the estate, the distributable estate, and the potential for any
enhancements to policyholder benefits will be subject to review at least once a
year.
15.12.7 In the event of the assets in the fund being insufficient to cover the liabilities, then
any past asset share enhancements out of the estate will be removed to the extent
needed to remove the deficit.
PLL PPFM Page 365 January 2024
Principle
15.13
New Business
The approach to setting the volume of new business written is that new business
will be accepted only if it is the opinion of the Board, after taking actuarial advice,
that the proposed volume and terms are attractive to the fund and fair to incoming
and existing policyholders.
Practices
15.13.1 The fund is not open to new business and there are no plans to reopen the fund to
new business, although the Board reserves the right to do so.
15.13.2 Certain new with-profits policies are issued as a result of policyholders exercising
options on existing policies.
PLL PPFM Page 366 January 2024
Principle
15.14
Equity Between the Fund and Shareholders
At least 90% of surplus distributed in the fund is allocated to with-profits
policyholders.
Any changes to the above would require the agreement of the Board and would
be subject to approval by the High Court.
Practices
15.14.1 Currently 90% of the surplus distributed is allocated to With-Profits policyholders.
A higher proportion applies to the allocated business.
15.14.2 The division of profits between with-profits policyholders and shareholders will not
change as a result of a change in the underlying basis on which the surplus is
calculated.
15.14.3 There are no other significant factors that would affect the proportion of surplus
allocated to shareholders.
15.14.4 The estate subsidises shareholder transfers for some lines of business currently
accepting increments. Increments are only accepted when the fund is contractually
obliged to do so.
PLL PPFM Page 367 January 2024
16. Principles and Practices – SERP Fund
The Principles and Practices given in sections 16.4 to 16.14 together with the Guiding
Principles and Practices form the Principles and Practices of Financial Management for the
SERP Fund. Sections 16.1 to 16.3 give background information specific to the SERP Fund.
Subsequently in this section the use of the term ‘the fund’ means the SERP Fund.
16.1 Fund History
16.1.1 The SERP Fund comprises the self employed retirement plan (‘SERP’) business
originally written by National Provident Institution and subsequently managed by
National Provident Life Limited, before being transferred to Phoenix Life
Assurance Limited, then finally transferred into the SERP Fund in Phoenix Life
Limited under the 2023 Scheme.
16.2 Types of Business
16.2.1 Self employed retirement plans (SERPs) are policies originally approved under
Section 620 of the Income and Corporation Taxes Act 1988. The policies are
characterised by the promise of an annuity benefit at a future date (or an
alternative benefit on death), in return for an agreed series of premium payments.
Annual bonuses declared are added to the annuity benefit, as is any final bonus
payable. Final bonus rates vary by the date the policy commenced.
16.3 Capital Support for the Fund
16.3.1 The capital policy is described in section 3.2.
In certain circumstances, the shareholders will loan money to this fund.
The practices relating to receipt of support are detailed in sections 3.3 and 5.2.
PLL PPFM Page 368 January 2024
Principle
16.4
Amounts Payable Under a With-Profits Policy
The benefits payable on SERP policies will not be less than the value of the
guaranteed benefits.
Except where the value of the guaranteed benefits are higher, asset share
techniques are used as a guide to determining payouts with the intention that all
policyholders are treated fairly and that aggregate payouts will target 100% of the
asset share, plus any augmentation provided by a release of any estate that might
arise in the SERP Fund.
Asset shares are calculated from the asset shares determined as at 1 January
2010, using the methods in use by National Provident Life Limited at 31 December
2009, accumulated by reference to the investment return on the assets underlying
the Asset Share Fund and the expense and mortality experience of the fund.
Open market option and tax-free cash values will represent a fair value of the
annuity benefits given up.
Approximations are only used where it is necessary, for example, due to
insufficient data or systems constraints.
Significant changes to the methods and data used to determine payouts require
the approval of the Board. Changes to historical data are only made if they are
found to be incorrect.
Practices
Asset Share Methodology
16.4.1 Payout amounts are determined by reference to asset share calculations, subject
to the smoothing practices described in 16.7, with a minimum payout of the value
of the guaranteed benefits.
16.4.2 The initial asset shares used are the asset shares as at 1 January 2010. Details
of how those asset shares were calculated are not included here. Not all the items
described in the table in 16.4.3 would necessarily have applied at all times for all
types of policy in the past. Different practices, often more approximate, may have
been used in the past and the practice is generally to continue to use the results of
these practices when determining the effect of those years on the asset shares of
specimen policies.
16.4.3 The asset share is broadly the accumulation of past premiums allowing for
investment return, tax, expenses, cost of mortality, (where appropriate) the cost of
capital and other charges (see below).
The following table describes the elements credited or charged to asset shares for
specimen SERP policies.
PLL PPFM Page 369 January 2024
Element
Description of allowance
(a)
Premiums
Premiums paid under the policy
(b)
Investment return
Allocated return
Note (b)
(c)
Investment
expenses
Note (c)
(d)
Initial expenses
Not Applicable
(e)
Renewal expenses
Note (e)
(f)
Other expenses
Not charged
(g)
Tax on investment
return
Not charged
Note (g)
(h)
Tax relief on
expenses
Not charged
Note (g)
(i)
Mortality & morbidity
costs
Experience
Note (i)
(j)
Early terminations
Not charged
(k)
Paid-up policies
Not charged
(l)
Partial and regular
withdrawals
Not applicable
(m)
Surrenders at
protected dates
Not applicable
(n)
Annuity payments
Not applicable
(o)
Charges for the cost
of guarantees or
smoothing
Guarantee costs not charged, Note (o)
Smoothing costs Note (b)
(p)
Charges for the cost
of capital
Not charged
(q)
Distributions to
shareholders
Note (q)
(r)
Tax on distributions
to shareholders
Not charged
Note (q)
(s)
Profit and losses
from other business
Not applicable
(t)
Estate distribution or
charge
Note (t)
(u)
Exceptional items
Not applicable
The way in which the above items are taken into account is described in the notes
below. Where charged is used in the table above this means both charged and /
or credited depending on whether it is a loss or profit.
Notes
(b) Investment return
The investment return allocated to asset shares is determined from the return on
the assets underlying the Asset Share Fund as specified in practices 16.7.3 and
16.9.3. The investment return for determining asset shares is then increased or
decreased as appropriate by the adjustment in respect of past smoothing costs in
accordance with 16.7.2.
PLL PPFM Page 370 January 2024
For the purposes of determining payouts, asset shares are calculated as at the
midpoint of the financial year of claim. Estimates of investment returns are used
where the investment return for the year of claim and the previous year are not
known at the date of calculation. The actual rates of investment returns
(determined as above) are used in any subsequent calculation of asset shares
once the actual investment returns have been determined.
(c) Investment expenses
The investment management expenses deducted from asset shares are based on
the expenses set out in Schedule 17 of the 2023 Scheme, namely, the lower of
- 0.1125% of funds under management; and
- the equivalent charge incurred by the National Provident Life With-Profits Fund
for similar services under the terms of the 2023 Scheme.
(e) Expenses
The expenses deducted from asset shares are based on the expenses set out in
Schedule 17 of the 2023 Scheme, for the calendar year ending 31 December
2010, namely:
• £53.97 per annum for each premium paying policy; and
• £21.68 per annum for each non-premium paying policy,
increased each July by the change in the Retail Price Index over the previous 12
months, plus 1%.
The expenses will be subject to a cap such that the total increase (in percentage
terms) applying to the above after 31 December 2009 shall not at any time be
more than the total increase (in percentage terms) in the same period which
applies to charges for similar services incurred by the National Provident Life With-
Profits Fund under the 2023 Scheme.
The amounts deducted from asset shares will be adjusted to take account of
policies becoming claims.
(g) Tax
No tax is currently brought into the asset share calculation since no tax is currently
payable on the investment return allocated to asset shares, nor is there tax relief
on any of the expenses brought into the asset share calculations.
(i) Mortality
The mortality rates used for asset shares are based on recent experience.
(o) Cost of guarantees
No charge will be made to asset shares in respect of guarantee costs.
(q) Distribution to shareholders
Shareholders are not entitled to any surplus arising in the SERP Fund
(t) There is no expectation that any estate will arise in the future. However, to the
extent that an estate did arise, this would be used to augment the benefits payable
under policies in the fund.
16.4.4 For SERP regular premium business, except where the value of guaranteed
benefits are higher, payouts are based on asset shares calculated for a number of
specimen policies commencing in each previous final bonus period and becoming
payable in the current calendar year. For each final bonus period, the specimen
PLL PPFM Page 371 January 2024
policies are chosen to represent a range of premium levels. Payouts on an
individual policy are then based on the final bonus rate determined for the
specimen policy representing the range of premium levels within which the actual
premium level for the individual policy falls.
16.4.5 Except where payment of a guaranteed benefit results in a higher amount, and
except where the amount cannot be reasonably compared with a calculated asset
share, the target range for policy payouts is 80% to 120% of asset share.
16.4.6 The range applies to both maturity payments and transfer payments. It is
expected that at least 90% of cases would fall within the target range. The range
has been determined and will be monitored by reference to specimen SERP
policies.
16.4.7 The assumptions used to calculate fair values for the open market option and tax-
free cash are the best estimates of interest, mortality and expenses as follows:
• Interest rates are derived from the SONIA swaps curve.
• Future mortality experience follows best estimate assumptions based on recent
experience and forecast improvements.
• Expenses reflect the costs of administering the open market option net of the
expected savings from Phoenix Life Limited not administering the pension.
16.4.8 Open market option and tax-free cash values are currently reviewed each week
using the then current yields for specimen policies. If the difference compared to
the current basis is more than 2.75% in any week or if the difference over a three
week period is more than 2.5%, then the open market option and tax-free cash
values are normally updated.
16.4.9 The methodology and assumptions used to determine payouts are documented by
papers submitted to, and approved by, the Board, having received advice from the
With-Profits Actuary and from the With-Profits Committee as appropriate.
Investment returns, expenses and charges are documented by internal
memoranda.
PLL PPFM Page 372 January 2024
Principle
16.5
Annual Bonus Rates
In circumstances where the value of guaranteed benefits is close to or in excess
of asset shares, no annual bonus is likely to be declared. Conversely, if asset
shares were to exceed the value of the guarantees, consideration would be given
to declaring an annual bonus.
As the fund is closed to new business it is not anticipated that any new series of
bonus rates will be necessary.
Practices
16.5.1 Annual bonus rates are normally declared annually at 31 December. The value of
the guaranteed benefits is currently close to or well in excess of asset shares for
all SERP policies. This is expected to remain the position and it is therefore
expected that no annual bonus will be declared for the foreseeable future.
16.5.2 There is currently no maximum amount by which annual bonuses would alter were
they to be introduced; however, in the normal course of events the declared
annual bonus rates would not be expected to change by more than 2% from one
declaration to the next.
PLL PPFM Page 373 January 2024
Principle
16.6
Final Bonus Rates
SERP policyholders will not receive less than the value of the guaranteed benefits
under the relevant policy. Subject to this, for maturities and retirements, the aim is
to set final bonuses so that the total payout is targeted on the asset share, subject
to smoothing (see section 16.7).
Practices
16.6.1 Final bonuses are normally reviewed twice each year at 30 June and 31
December, but may be changed without notice at any time. Such an interim
change would normally be because economic conditions have changed leading to
a larger than expected gap between the levels of payouts and the underlying asset
shares.
16.6.2 Final bonuses are currently set so the payout is targeted at 100% of the asset
share but the amount payable may differ from this target because of the impact of
smoothing.
16.6.3 Where the policy provides for a return of fund benefit to be payable on death, the
amount payable on death will be determined as if the policyholder could have
retired at the date of death, including any final bonus then payable.
PLL PPFM Page 374 January 2024
Principle
16.7
Smoothing
Payouts are usually smoothed so as to avoid excessive differences in payouts on
similar policies over short periods of time.
A smoothing account is maintained within the Asset Share Fund which is credited
or debited with the difference between the payouts (excluding any increase due to
payment of guaranteed benefits) and the asset shares. The smoothing account is
accumulated each year at the rate of return on the Asset Share Fund.
The intention is that smoothing will be cost neutral over time. If necessary,
payouts will be amended to help ensure that the cost of smoothing does tend
towards zero, and the aim will be to adjust payouts so that any outstanding
smoothing account balances are small within a limited period of time.
The Board may change the way it smooths payouts at any time, or may cease to
smooth payouts, if the Board deems it necessary to protect the financial position
of the fund. In such circumstances, it may also adopt a different approach to
smoothing by claim type.
The basis for calculating transfer values will be reviewed from time to time so that
transfer values remain broadly consistent with the targeted level of payouts.
Practices
16.7.1 The smoothing account will be reduced (or increased) by amending the investment
return credited to asset shares. The resulting change in the asset shares will be
credited or debited to the smoothing account.
16.7.2 The reductions (or increases) in investment return credited to asset shares each
year are normally determined to cover one half of the then current smoothing
account balance. However, a higher fraction may be used if the Board deems it
necessary to protect the financial position of the fund.
16.7.3 Payouts are normally determined using asset shares in the year of claim. The
investment return credited is only calculated approximately during the course of a
year (by the use of appropriate indices) and is updated after the end of each year
to reflect the actual performance earned. This applies to all generations of
policyholders.
16.7.4 Payouts are also normally determined so that the amount payable is consistent
with the asset share for a sample policy of similar size, entry date and age attained
as the actual policy.
16.7.5 Although we normally smooth so that we avoid excessive changes in payouts,
large changes in payouts may be allowed under some circumstances if it is
necessary in the interests of fairness or for the fund to meet its objectives.
PLL PPFM Page 375 January 2024
Principle
16.8
Surrender Values
Asset share techniques are used as a guide to determining payouts with the
intention that all policyholders are treated fairly and that aggregate payouts will
target 100% of the asset share.
Practices
16.8.1 Except where payment of a guaranteed benefit results in a higher amount, and
except where the amount cannot be reasonably compared with a calculated asset
share, the target range for policy payouts is 80% to 120% of asset share.
16.8.2 The range applies to both maturity payments and transfer payments. It is expected
that at least 90% of cases would fall within the target range. The range has been
determined and will be monitored by reference to specimen SERP policies.
PLL PPFM Page 376 January 2024
Principle
16.9
Investment Strategy
The investment strategy will be consistent with the sound financial management of
the fund.
The investment strategy will aim to ensure there are sufficient liquid assets to
meet claims as they fall due.
The investment strategy for the estate may differ from the investment strategy of
the Asset Share Fund.
Derivatives may be used to implement investment policy ahead of physical sales
and purchases of assets. Derivatives are also used to match certain policy
liabilities or to provide protection against increases in policy liabilities.
The maximum counterparty risk is that agreed with the investment managers from
time to time, as authorised by the Investment Committee.
The investment policy in respect of the fund is determined by the Board. Such
investment policy shall take account of (but shall not be bound by) the advice of
the With-Profits Committee and With-Profits Actuary, and shall have regard to the
need for the investments to be suitable for the purpose to which they will be put.
The investment return credited to individual asset shares may be based on the
investment return on a notional portfolio of assets, as opposed to the return on the
Asset Share Fund.
Practices
16.9.1 The investment strategy for the fund is reviewed formally at least once a year.
The Board sets the investment strategy for the different parts of the fund, and
approves the investment mandate, taking account of a variety of considerations,
including our approach to responsible investment. The investment mandate
specifies what proportion of the fund is to be invested in each of the asset classes,
within agreed tolerances, and sets out within each asset class:
• the restrictions on holdings of any particular asset or group of assets,
• exposure to sectors or companies that do not align with our approach to
responsible investment, for example Tobacco, and
• the acceptable levels of credit risk.
16.9.2 The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
16.9.3 The Board has to approve any new or novel form of investment, including
alternative assets.
16.9.4 The investment returns allocated to asset shares, before adjusting for investment
expenses and smoothing costs, are set equal to the returns on the assets backing
the Asset Share Fund net of the direct costs of investment.
16.9.5 The fund does not hold any assets which are not normally traded.
PLL PPFM Page 377 January 2024
Principle
16.10
Business Risks
The fund is closed to new business and ring-fenced. The business risks it is
exposed to are, therefore, expected to be confined to those associated with
maintaining the existing policies of the fund.
The fund will not take on new business risks and will be managed in such a way
as to minimise the existing business risks.
SERP policyholders will not be directly exposed to the risks associated with the
cost of providing guarantees on other SERP policies or any other business risks.
No charge will be made to asset shares in respect of guarantee costs or the costs
associated with any other business risks and, to the extent that the estate has
insufficient assets to meet these costs, the shortfall would be met by support
under the capital policy.
Practices
16.10.1 It is not expected that the fund will take on any further business risks. The more
significant business risks are outlined below.
16.10.2 Investment management services have been outsourced to the investment
managers and administration services have been outsourced to Phoenix Group
Management Services Limited (PGMS). There is a risk that the investment
managers and / or PGMS fail to provide an adequate service or cease to trade.
Should PGMS be unable to meet any of its obligations to provide services then
Phoenix Life Limited would request that Phoenix Group, as owners of PGMS step
in to restore the position. Should Phoenix Group not do this, then Phoenix Life
Limited would attribute any losses to the Shareholder Fund or Non-Profit Fund,
and the fund would only be affected if the Shareholder Fund or Non-Profit Fund
had insufficient excess assets to bear the losses.
16.10.3 Policyholders are exposed to the risk of changes in future interest rates, the
expenses of administering annuities and longevity, causing a reduction in open
market option and tax-free cash values upon vesting.
PLL PPFM Page 378 January 2024
Principle
16.11
Expenses and Charges
The charges and expenses that can be deducted from the fund are set out in the
2023 Scheme.
All direct costs of investment are borne by the fund and reduce the investment
return on the fund assets.
The 2023 Scheme requires that the amount that can be deducted from the fund in
respect of taxation must not exceed that which the fund would have incurred had it
been a separate mutual life assurance company.
Practices
16.11.1 Certain specific expenses set out in the 2023 scheme and per policy charges are
not charged to the fund at cost. The per policy charges charged to the fund
exceed the cost which results in a shareholder benefit arising from investments the
shareholder has made. Since policyholders have not contributed to this
investment the reduced charges are not passed on to them.
PLL PPFM Page 379 January 2024
Principle
16.12
Estate Management
The size of the estate will reflect the financial position of the fund.
The fund relies on support provided under the terms of the capital policy.
Repayment of that support will have first priority on any assets in excess of
liabilities in the fund
Practices
16.12.1 The estate will be used to meet any losses incurred by the fund as a result of
business risk, to provide a buffer against adverse experience, to meet guarantee
costs as they arise and to meet any other costs necessary to ensure that payouts
meet the reasonable expectations of policyholders.
16.12.2 The size of the estate will be monitored to ensure it remains adequate to meet the
purposes set out in 16.12.1 and its regulatory liabilities. Capital support, if
required, will be provided under the terms of the capital policy.
PLL PPFM Page 380 January 2024
Principle
16.13
New Business
The fund is closed to new business.
Practices
16.13.1 There are no plans to reopen to new business.
PLL PPFM Page 381 January 2024
Principle
16.14
Equity between the Fund and Shareholders
The 2023 Scheme provides that holders of with-profits policies in the fund are
entitled to receive the whole of the distributable surplus arising in the fund. Any
change to this position would require the agreement of the Board and would be
subject to approval by the High Court.
SERP policyholders are entitled to receive the higher of their guaranteed benefits
and benefits targeted on 100% of asset shares If the guaranteed benefits exceed
the relevant asset share, the amount of the excess will be met first from the estate
and second by support under the capital policy
Practices
16.14.1 No interest will be charged on any support provided under the terms of the capital
policy. All other charges and expenses to the fund will be made as set out in
16.11
PLL PPFM Page 382 January 2024
17. Principles and Practices – London Life With-Profits Fund
The Principles and Practices given in sections 17.4 to 17.14 together with the Guiding
Principles and Practices form the Principles and Practices of Financial Management for the
London Life With-Profits Fund. Sections 17.1 to 17.3 give background information specific to
the London Life With-Profits Fund. Subsequently in this section the use of the term ‘the fund’
generally means the London Life With-Profits Fund.
17.1 Fund History
17.1.1 The London Life With-Profits Fund comprises the business that was transferred
into Phoenix Life Limited from the London Life With-Profits Fund of Phoenix Life
Assurance Limited under the 2023 Scheme. This includes both traditional and
unitised with-profits business.
17.1.2 Previously this was business from the Life With-Profits Fund and Pensions With-
Profits Fund of London Life Limited, which consisted of business transferred into
Phoenix Life Assurance Limited from the London Life sub-fund of Australian
Mutual Provident Society (AMP) and the UK branch of the Australian Mutual
Provident Society in 1997.
17.1.3 With-profits business within the fund is managed in participation pools. These
participation pools arise from the separate management practices of product
groups within the former AMP UK business and the former London Life business.
17.1.4 Under the terms of the 2023 Scheme, the London Life With-Profits fund within
Phoenix Life Limited is managed as a 100:0 with-profits fund.
17.2 Types of Business
17.2.1 The following table summarises London Life with-profits products. The product
group identifier PGn will be used in this document to identify the products.
participation pool
product group
PG
Former London Life products
Life Compound Bonus
Endowment assurance
Whole-life assurance
Deferred annuities
PG01
PG02
PG03
Life Cash Bonus
Endowment assurances
Whole-life assurance
PG04
PG05
Pensions Compound Bonus
Old series deferred annuities – without Guaranteed Annuity
Option (GAO)
Old series deferred annuities – with-GAO
New-series endowments
Single premium buyouts ‘Pension Protector’
Annual premium deferred annuities ‘PC Contracts’
Group pension
PG06
PG07
PG08
PG09
PG10
PG11
Pensions Simple Bonus
Deferred annuity
Immediate annuity
Group pensions
PG12
PG13
PG14
Pensions Unitised With-Profits
Endowments
PG15
Life Unitised With-Profits policies
Whole-life
PG16
post 1997 products
With-Profits Annuity
With-Profits Annuity ‘Secure Pension Plus’
PG17
Former AMP UK products
Life Compound Bonus
Endowments
Whole-life
PG18
PG19
Pensions Compound Bonus
Regular premium pure endowments
Regular premium pure endowments with GAR
PG20
PG21
PLL PPFM Page 383 January 2024
17.3 Capital Support for the Fund
17.3.1 The capital policy is described in section 3.2.
In certain circumstances, the shareholders will loan money to this fund.
The practices relating to receipt of support are detailed in sections 3.3 and 5.2.
PLL PPFM Page 384 January 2024
Principle
17.4
Amounts Payable Under a With-Profits Policy
The overall aim in setting with-profits policy payouts is that payouts should be
determined having regard to the experience of each of the with-profits participation
pools, the financial position of Phoenix Life Limited, and the fair treatment of with-
profits policyholders.
This aim will be achieved by determining payouts with reference to asset shares.
For all products this means that payouts (with the exception of deaths) are targeted
at 100% of asset share, on average, after allowing for smoothing, plus any
augmentations provided by a release of the estate. Smoothing is described in
section 17.7.
On death the policy payout is specified in the terms of most contracts and
generally carries a final bonus. This amount may be more or less than asset share.
Asset shares will be calculated in accordance with generally accepted actuarial
principles.
Assumptions that relate to the past will only be changed in the event that errors are
discovered in them. Other assumptions are reviewed annually in the light of
current experience.
Changes in methods or assumptions that lead to changes in policyholder benefits
or expectations would be subject to Board approval after receiving appropriate
actuarial advice and advice from the With-Profits Committee.
Practices
Asset Share Methodology
17.4.1 Payout amounts are determined by reference to asset share calculations, other
than payouts on death which will generally be determined in accordance with the
policy terms and conditions.
For surrenders, transfers, early retirements and maturing policies, the target
payout is normally the asset share. The actual payout will depend on smoothing.
Guaranteed benefits can exceed asset shares. In this instance, the payout will be
the guaranteed benefit.
17.4.2 Individual asset shares are not calculated for every single policy but may be
calculated for notional policies with the results used to set payouts for a range of
similar policies within a particular product group.
17.4.3 The 2023 Scheme includes restrictions that prevent new types of asset share
charges being introduced to any asset share pool.
17.4.4 For policies belonging to small product groups (PG03 and PG16), asset shares
are not calculated but are determined by comparing with the asset shares of other
similar product groups.
17.4.5 Where asset shares are calculated, conventional techniques are used, in
accordance with generally accepted actuarial practice. The asset share is broadly
the accumulation of past premiums allowing for investment return, tax, expenses,
cost of mortality, (where appropriate) the cost of capital and other charges (see
below).
PLL PPFM Page 385 January 2024
The following table describes the elements credited or charged to asset shares for
specimen with-profits policies.
Element
Description of allowance
(a)
Premiums
Premiums paid under the policy
Note (a)
(b)
Investment return
Allocated return
Note (b)
(c)
Investment
expenses
Note (c)
(d)
Initial expenses
Allocated in accordance with 2023 Scheme
Note (d)
(e)
Renewal expenses
Allocated in accordance with 2023 Scheme
Note (d)
(f)
Other expenses
Actual allocated
Note (f)
(g)
Tax on investment
return
Actual allocated
Note (g)
(h)
Tax relief on
expenses
Actual allocated
Note (h)
(i)
Mortality & morbidity
costs
Experience
Note (i)
(j)
Early terminations
Not charged
(k)
Paid-up policies
Not charged
(l)
Partial and regular
withdrawals
Not applicable
(m)
Surrenders at
protected dates
Not applicable
(n)
Annuity payments
Not applicable
(o)
Charges for the cost
of guarantees or
smoothing
Charged
Note (o)
(p)
Charges for the cost
of capital
Note (p)
(q)
Distributions to
shareholders
Not applicable
Note (q)
(r)
Tax on distributions
to shareholders
Not applicable
Note (r)
(s)
Profit and losses
from other business
Profits or losses are credited
(t)
Estate distribution or
charge
Distributions from or charges to the estate as determined
Note (t)
(u)
Exceptional items
Not applicable
Notes
(a) Premiums
The calculation of asset shares requires the accumulation, to date, of all past
premiums. For all major product classes, a full premium history is generally known
and is used in the calculation of asset share; the exceptions being:
• For regular premium products that have been altered, or have been converted
to paid-up policies, where the full premium history is not readily available.
PLL PPFM Page 386 January 2024
These policies are excluded from the asset share process and alternative
methods are used to set payouts. These methods are set out in the
appropriate sections describing how final bonuses are calculated.
• For London Life old-series deferred annuity products (PG06 and PG07) a full
premium history is not readily available for premiums prior to 1987. However,
an effective premium history is recreated from the benefits purchased up to
that date, and asset shares calculated accordingly.
(b) Investment return
The rate of investment return credited to asset shares within a participation pool is
determined at the end of the calendar year from the rates of return on the assets
notionally allocated to that pool, see section 17.9.
The rate of investment return credited to the participation pool is determined from
the investment return on each notionally allocated asset class and the proportion
of the participation pool notionally invested in each asset class.
Assumptions for the period that pre-date the first calculation of asset shares have
been obtained using a combination of historical corporate information and market
rates of return.
(c) Investment expenses
Asset share investment returns are net of investment transaction costs and costs
incurred through investment in collective investment schemes. Additional
investment management expenses incurred in respect of assets backing asset
shares are expressed as an annual management charge and further reduce the
investment return allocated to with-profits policies.
(d) Initial and Renewal Expenses
Expenses charged to the fund had been prescribed since 31 December 1997,
under the terms of previous schemes, which applied until 30 September 2017.
From 1 October 2017, expenses representing the actual level of expenses
attributed to the policies are deducted from asset shares. Current expense
deductions are based on the service agreement the fund has with its service
company and investment managers.
Further details of the expense provisions are set out in 17.11.
(f) Other expenses
One-off costs, for example costs arising from changes in legislation, will be
charged to the fund and to asset shares to the extent that the event that gives rise
to the cost relates to the fund or the with-profits policies. For example, changes to
legislation related to pensions will result in charges to with-profits pension policies
only.
(g) Tax on investment return
Tax parameters vary according to the rates of tax applicable for the various
components of investment return, for example income and capital gains, in each
calendar year.
Investment return rates are reduced to allow for the appropriate rate of tax.
Expenses are reduced to allow for tax relief, where appropriate.
Currently no tax is payable on Pensions business.
PLL PPFM Page 387 January 2024
(h) Tax relief on expenses
Tax relief on expenses will be determined in accordance with the tax rules
applying to the type of policy.
(i) Mortality and morbidity costs
A mortality charge is deducted from asset shares based on the expected cost of
providing death benefits. The expected cost is calculated by multiplying the cost of
deaths, i.e. the amount by which death benefits exceed asset shares, by the
expected death rate. The expected death rate is based on the experience of the
fund and industry experience and is reviewed infrequently.
(o) Charges for the cost of guarantees
Product groups PG07, PG09 and PG10 offer both cash and annuity benefits at
retirement. Consequently, these products provide a guaranteed rate for
converting cash into annuity. A reasonable charge is deducted for the cost of
providing this guaranteed conversion rate. No other deductions are made from
asset shares.
(p) Charges for the cost of capital
No charge for the cost of capital is reflected in the asset shares for product groups
PG01 to PG14 and PG17.
For product groups PG18 to PG21, a charge for capital is made for calendar years
up to and including 1997.
For unitised with-profits business, product groups PG15 and PG16, a cost of
capital charge is deducted from the investment return on asset shares, currently
0.25% p.a.
(q) Distributions to shareholders
There is no distribution to shareholders.
(r) Tax on distributions to shareholders
There is no distribution to shareholders.
(t) Estate distribution or charge
The 2023 Scheme provides for the possibility of an estate arising in the fund
although, on implementation of the 2023 Scheme the value of the estate was zero.
The basis on which amounts can be credited or debited to the estate is described
more fully in 17.12. To the extent that an estate was to arise, it will be used to
augment policyholder benefits. However, it is considered highly unlikely that any
estate in the London Life With-Profits Fund will arise.
17.4.6 The methods used to determine asset shares are well established and no changes
are anticipated. All changes to methodology, parameters and assumptions are
formally approved by the Board, having received advice from the Chief Actuary,
the With-Profits Actuary and from the With-Profits Committee as appropriate.
17.4.7 Approximate methods will be used when the methodologies prescribed require the
use of information that is not readily available; or for small classes of business,
where it is not practical to use the full approach.
PLL PPFM Page 388 January 2024
Approximate methods do not necessarily lead to the same payout as the full
method being applied directly. The fund allows these approximate methods to be
used provided that the resultant return to policyholders is comparable with the
returns paid to other policyholders, allowing for the differing nature of their policies.
17.4.8 Bonuses are set according to the experience of the 9 different participation pools.
Accordingly, separate asset shares will be determined for products within each of
the participation pools.
The participation pools contain products of a similar nature. However, not all
products within the same participation pool are exactly the same and hence
different products within a particular participation pool will not necessarily get the
same bonus rates. The specific mechanisms for arriving at bonus rates for each
pool are set out below.
17.4.9 The key principles, assumptions and methods used to determine asset shares,
and the methods used to determine bonus rates are documented in internal
company reports.
All bonus declarations will be approved by the Board following reports by the With-
Profits Actuary which would formally summarise the methods and assumptions
used in deriving those bonus rates.
PLL PPFM Page 389 January 2024
Principle
17.5
Annual Bonus Rates
Annual bonus rates will be determined separately for different participation pools.
Annual bonuses form one part of the fund’s overall distribution to policyholders.
The remainder will be distributed as a final bonus. The fund gives priority to final
bonus over annual bonus.
Practices
17.5.1 Annual bonuses are reviewed towards the end of a calendar year, for declaration
at 31 December.
17.5.2 Annual bonuses declared at 31 December will apply to policies, on their policy
anniversaries with effect from:
• the following 1 July for all former London Life traditional with-profits
policies, PG01-PG14
• the following 1 May for all former AMP UK traditional with-profits policies,
PG18 – PG21
• 1 January for all unitised with-profits policies, PG15 & PG16
• 1 July for all With-Profits Annuity policies, PG17
17.5.3 Annual bonus rate changes are implemented after the Board has considered a
report by the With-Profits Actuary and subsequently approved the changes.
TRADITIONAL WITH-PROFITS POLICIES (all products except PG15 - PG17)
17.5.4 For all participation pools (with the exception PG04, PG05 and PG13 - which are
discussed below), the level of annual bonus is set so as to maintain a buffer for
final bonus. The future claim payouts are estimated using realistic assumptions
and the annual bonuses are set at such a level that if experience turns out to be in
line with those assumptions, the overall amount of the payout paid in the form of
final bonus will be in line with a target proportion. Under current investment
conditions, the overall target is that 25% of the overall value of payouts, calculated
before any future augmentation provided by a release of the estate, will be in the
form of final bonus. Given the aggregate nature of this target, for an individual
policy, this final bonus buffer may be more or less than 25%. This overall target is
itself subject to review and may be changed. If experience does not turn out to be
in line with the assumptions then the 25% target might not be met.
Annual bonus rates will be adjusted to keep the overall level of projected final
bonus broadly in line with the target. If necessary to remain on target, annual
bonus rates will be reduced to nil, or close to nil. However, some small annual
bonuses may be declared even if the final bonus buffer is below target.
17.5.5 Where the financial position of the fund is weak the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus buffer being above the 25% target.
177.5.6 For pension simple bonus immediate annuities (PG13), current practice is that the
annual bonus will continue to increase at a level of 7% per annum, of the original
annuity amount.
17.5.7 Current practice for Life Cash Bonus policies (PG04 and PG05) is that with effect
from the 1 Jan 2004 declaration, the level of cash bonuses will increase by a small
amount each year.
PLL PPFM Page 390 January 2024
17.5.8 Traditional annual bonus rates are declared in advance and consequently no
interim rates need apply.
17.5.9 Normally the declared annual bonus rate would not be expected to be more than
2% different to that declared in the previous year.
UNITISED WITH-PROFITS POLICIES (PG15 and PG16)
17.5.10 The level of annual bonus is set so as to maintain a buffer for final bonus. The
future claim payouts are estimated using realistic assumptions and the annual
bonuses are set at such a level that if experience turns out to be in line with those
assumptions, the overall amount of the payout paid in the form of final bonus will
be in line with a target proportion. Under current investment conditions, the overall
target is that 25% of the overall value of payouts, calculated before any future
augmentation provided by a release of the estate, will be in the form of final bonus.
Given the aggregate nature of this target, for an individual policy, this final bonus
buffer may be more or less than 25%. This overall target is itself subject to review
and may be changed. If experience does not turn out to be in line with the
assumptions then the 25% target might not be met.
Annual bonus rates will be adjusted to keep the overall level of projected final
bonus broadly in line with the target. If necessary to remain on target, annual
bonus rates will be reduced to nil, or close to nil. However, some small annual
bonuses may be declared even if the final bonus buffer is below target.
17.5.11 Where the financial position of the fund is weak the Board may decide not to
increase the annual bonus, or to keep the annual bonus at nil, or to reduce the
annual bonus despite the final bonus buffer being above the 25% target.
17.5.12 Since annual bonuses for this class of business are declared in arrears, an interim
bonus rate will also be declared at the end of each calendar year. The interim
annual bonus applies to all policyholders that surrender, transfer or retire early
before declaration of the next annual bonus rate.
Interim bonus rates are set with reference to the most recent annual bonuses
declared and any future anticipated direction of these rates and may be higher or
lower than the latest annual bonus rates declared. The annual bonus rate may
however, eventually be set at a level that differs from the interim rate.
17.5.13 Normally the declared annual bonus rate would not be expected to be more than
2% different to that declared in the previous year.
SECURE PENSION PLUS (PG17)
17.5.14 The level of annual bonus rate is currently set equal to the Guaranteed Annual
Bonus Rate, and will remain unchanged from this current level.
PLL PPFM Page 391 January 2024
Principle
17.6
Final Bonus Rates
The aim in setting final bonus rates for maturing policies is to set final payouts at
the target level of 100% of asset shares, subject to smoothing as described in
section 17.7, plus any augmentation provided by a release of the estate.
When setting final bonus rates, payouts will be smoothed and so there will be a
difference between actual and target payouts.
Final bonuses can be reviewed at any time. The frequency of final bonus reviews
will depend on the difference between actual and target payouts, current market
conditions and the financial position of the fund.
Final bonus rates will be reduced, beyond the normal application of smoothing in
circumstances where to do otherwise would be imprudent in the view of the Board
given the financial position of the fund.
A final bonus may also be paid in the event of surrender or transfer. The final
bonus will be based on the final bonus rate for a maturing policy of the same term
but adjusted to target asset share. Surrender values may be reduced when the
Board considers it necessary in the light of the financial position of the fund and
anticipated rates of surrender in order to protect the level of security for the
remaining policyholders.
On the death of a policyholder the payout is generally prescribed in the policy
terms and conditions. Where this includes a discretionary element of final bonus, it
will be set at the same level as for maturing policies of the same term since
inception.
Practices
17.6.1 Final bonuses can be reviewed at any time but, in general, for traditional with-
profits business such reviews will be carried out twice yearly, normally from 1
January and 1 July.
17.6.2 For unitised with-profits business, final bonus rates will normally be reviewed
quarterly.
17.6.3 In certain circumstances, final bonus rates may be reviewed more often. These
circumstances include:
• following large or sustained changes in the value of the underlying
investments,
• if the difference between actual or expected payouts and target payouts is
large,
• if the Board considers it necessary in the light of the financial position of the
fund.
17.6.4 Final bonus rate changes are implemented after the Board has considered a
report by the With-Profits Actuary and subsequently approved the changes.
17.6.5 Final bonus rates and market value reductions for unitised with-profits business
(PG15 and PG16) are implemented on the advice of the With-Profits Actuary,
acting on behalf of the Board with delegated authority.
17.6.6 Bonus rates are not calculated for individual policies but are calculated for notional
policies within the participation pools. This has the effect of smoothing payouts
across different policies within these groups. The calculation of final bonus rates is
PLL PPFM Page 392 January 2024
specific to the type of product and so a separate description is required for each
participation pool.
Life Compound Bonuses
17.6.7 Products covered in this participation pool include:
• Regular premium endowment assurance - PG01
• Regular premium whole-life assurance - PG02
• Regular premium deferred annuities - PG03
17.6.8 For this participation pool, asset shares are calculated for all premium paying
endowment assurances. Investment returns used in the calculation of these asset
shares are unsmoothed.
Regular premium endowment assurance – PG01
17.6.9 Asset shares are compared with payouts for notional maturing policies with a
range of different commencement dates. This demonstrates the amount by which
current payouts will exceed or fall short of the asset shares. This will indicate the
need to review final bonus rates.
17.6.10 The overall aim is that the final bonus rates should be set so that the payouts
equal the target payouts, after allowing for smoothing, see section 17.7.
17.6.11 Final bonus rates are set for the notional policies’ commencement dates, as
above. These rates are used to determine the final bonus rates for all other
commencement dates.
17.6.12 Policies that are paid-up will receive the same final bonus rates as premium
paying policies of the same term.
Regular premium whole-life assurance – PG02
17.6.13 Asset shares are compared with payouts for notional policies from an appropriate
age band with a range of different commencement dates. The age range is
determined by considering when claims might be expected to occur.
17.6.14 Final bonus rates will be set according to the same practices as those used for the
corresponding endowment assurance policies (PG01) described in 17.6.10 and
17.6.11 above.
Regular Premium deferred annuities - PG03
17.6.15 Final bonus rates are set to give returns on premiums consistent with those on
similar regular premium policies in PG01 and PG06, after allowing for the amount
of tax incurred by these old general annuity fund policies.
Life Cash Bonus
17.6.16 Products covered in this participation pool are:
• Regular premium endowment assurance - PG04
• Regular premium whole-life assurance - PG05
17.6.17 Final bonus rates will be set having regard to the annualised yield on premiums on
equivalent policies in product groups PG01.
Pensions Compound Bonus
17.6.18 Products covered in this participation pool are as follows:
• Old-series deferred annuity without guaranteed annuity option - PG06
PLL PPFM Page 393 January 2024
• Old-series deferred annuity with guaranteed annuity option - PG07
• New-series endowments - PG08
• Single premium buyouts (Pension Protector) - PG09
• Annual premium deferred annuities (PC Contracts) - PG10
• Group pensions - PG11
17.6.19 For this participation pool asset shares are calculated for all old-series deferred
annuities (PG06 and PG07).
Old-series deferred annuity without guaranteed annuity option - PG06
17.6.20 Asset shares are compared with payouts for maturing policies over a range of all
possible past terms. This comparison is done for policies with an average premium
size and for single and regular premium payment patterns.
17.6.21 The overall aim is that the final bonus rates should be set so that the actual payout
is equal to the target payout, subject to smoothing, see section 8.7.
17.6.22 Policies of this type have been written on a number of different premium rate
series, and so separate final bonus scales will be declared for each different
premium rate series.
17.6.23 These policies are recurrent single premium and so each premium has its own
final bonus.
17.6.24 Early retiring and transferring policyholders will receive the same rate of final
bonus as policies that have reached their normal retirement date and commenced
at the same time.
Old-series deferred annuity with guaranteed annuity option - PG07
17.6.25 The products in this product group are, in general, identical to the products in
(PG06) except for the addition of the guaranteed annuity option. These policies
are dual-benefit policies with policyholders having the choice of taking either a
cash benefit or an alternative annuity benefit, at certain contractual dates.
17.6.26 When setting final bonuses, the same approach is used as for old-series deferred
annuity without guaranteed annuity option (PG06), described above, but taking
account of a reasonable charge for the guaranteed annuity option.
17.6.27 The practice is to base the charge on the proportions that are expected to take
cash as opposed to annuity benefit.
New-series endowments - PG08
17.6.28 The same method is used for this product group as is used for old-series deferred
annuity without guaranteed annuity option (PG06).
Single premium buyouts (Pension Protector) - PG09
17.6.29 All policies in this product group comprise of the benefits from one single premium
paid at a particular date. A final bonus scale has been devised that depends solely
on the calendar year of the policy’s inception.
17.6.30 Final bonus rates are set to give maturing policies the same investment return as
equivalent PG07 single premiums.
PLL PPFM Page 394 January 2024
Annual premium deferred annuities (PC Contracts) – PG10
17.6.31 Final bonus rates are set such that the yields from these policies are the same as
would be obtained from a policy with the same premium payment pattern in PG07.
17.6.32 Policies that are paid-up will receive the same final bonus rates as premium
paying policies of the same term. Since final bonus is a percentage of sum
assured and existing bonus, the final bonus amount will be reduced accordingly.
Group pensions – PG11
17.6.33 This is a very small product group.
17.6.34 Final bonus rates are set for maturing policies so that returns on premiums are
broadly equal to the equivalent returns on old-series deferred annuities without
GAO (PG06) policies reduced to allow for the additional expenses associated with
the running of these group final-salary schemes.
Pension Simple Bonus
17.6.35 Products covered in this participation pool are:
• Deferred annuities - PG12
• Immediate annuities - PG13
• Group pensions – PG14
17.6.36 For this participation pool, asset shares are calculated for all premium paying
regular premium deferred annuities.
Deferred annuities - PG12
17.6.37 Asset shares are compared with payouts for notional maturing policies over a
range of different past durations.
17.6.38 When performing such a comparison, the value of annuity benefits is converted to
cash using yields on fixed-interest securities and current rates of simple bonus in
payment.
17.6.39 The overall aim is that the final bonus scale should be set so that the actual payout
is equal to the target payout, subject to smoothing see section 17.7.
17.6.40 Final bonus rates are set for the notional policies’ commencement dates, as
above. These rates are used to determine the final bonus rates for all other
commencement dates.
Immediate annuities - PG13
17.6.41 This class of polices comprise annuities in payment resulting from maturing
deferred annuity policies (product PG12). A final bonus for these policies would
have been paid on maturity, as described in the PG12 section above. No
additional entitlement of final bonus will be applicable.
Group pensions – PG14
17.6.42 This is a very small product group that covers just one remaining ‘in-force’ group
scheme and a few remaining ‘paid-up’ group schemes.
17.6.43 Final bonus rates for maturing policies are set by reference to the yields on
equivalent deferred annuities (PG12) policies.
PLL PPFM Page 395 January 2024
Unitised With-Profits
Pensions unitised with-profits - PG15
17.6.44 Asset shares are calculated for all policies in this participation pool split by year of
premium payment. Smoothed asset shares are calculated in a similar manner but
allow for smoothing of underlying investment returns over the average outstanding
term of the business. The smoothed asset share is kept within plus or minus
12.5% of the asset share.
17.6.45 The final bonus amount is defined as the excess of smoothed asset share over the
current unit value.
17.6.46 No additional discretion is used for this product, although final bonus rates are
rounded to the nearest 1%.
17.6.47 Where the amount of final bonus calculated by the formula above is negative, a
market value reduction may be applied. The market value reductions will in
general bring the payout down to smoothed asset share.
17.6.48 Some discretion is applied in the setting of market value reductions. Market value
reductions are more likely to be set when:
• the difference between actual payouts and target payouts is large,
• it is considered necessary (subject to the Board having obtained appropriate
actuarial advice) in the light of the financial position of the fund, or
• if a large number of surrenders or transfers are anticipated.
17.6.49 Market value reductions can be applied at any time, rather than just at the normal
quarterly final bonus declaration dates.
17.6.50 Market value reductions will not be applied on death, at the nominated pension
date, or at age 75.
Life unitised with-profits - PG16
17.6.51 This is a very small product group. Currently, the final bonus rates and market
value reductions for this product group are set to be the same as the pensions
unitised with-profits (PG15) product group.
17.6.52 The benefits from this product group are similar to those in the equivalent
pensions unitised with-profits (PG15) product group; the only major difference
being the effect of tax.
17.6.53 The effect of tax is allowed for in the setting of annual bonus rates
17.6.54 This approach to final bonus would have to be revised if the approach to setting
annual bonus rates were revised.
17.6.55 Market value reductions will not be applied on death, at the chosen market value
reduction free date (where applicable) or for certain regular withdrawals in
accordance with the terms of the policy.
AMP(UK) - Life Compound Bonus
17.6.56 Products covered in this participation pool include:
• Regular premium endowment assurances - PG18
• Regular premium whole-life assurances - PG19
17.6.57 For this participation pool, asset shares are calculated for all premium paying
endowment assurances.
PLL PPFM Page 396 January 2024
Regular premium endowments – PG18
17.6.58 Asset shares are compared with payouts for notional maturing policies with a
range of different commencement dates. This demonstrates the amount by which
current payouts will exceed or fall short of the asset share if bonus rates are
unchanged.
17.6.59 The overall aim is that the final bonus rates should be set so that the payouts
equal the target payouts, after allowing for smoothing see section 17.7.
17.6.60 Final bonus rates are set for the notional policies, as above, with grouping in 5
year bands of years of entry.
17.6.61 Policies that are paid-up will receive the same final bonus rates as premium
paying policies of the same term.
Regular premium whole-life assurances – PG19
17.6.62 Asset shares are compared with payouts for notional policies from an appropriate
age band with a range of different commencement dates. The age range is
determined by considering when claims might be expected to occur.
17.6.63 Final bonus rates will be set according to the same practices as those used for the
corresponding endowment assurance policies (PG18) described in 17.6.59 and
17.6.60 above.
AMP(UK) - Pension Compound Bonus
17.6.64 Products covered in this participation pool include:
• Regular premium pure endowments - PG20
• Regular premium pure endowments with GAR - PG21
For this participation pool, asset shares are calculated for all premium paying
endowment assurances.
Regular premium pure endowments - PG20
17.6.65 Final bonus rates are set using exactly the same methods as for Life Compound
Bonus AMP(UK) Endowments (PG18).
Regular premium pure endowments with GAR - PG21
17.6.66 These policies have an annuity rate guarantee (GAR). The cash benefits are
targeted to asset share. The GAR is applied to the cash proceeds on the terms
set out in the policy conditions to arrive at the amount of guaranteed annuity.
Benefits paid on surrender to products in all product groups except PG15 and PG16.
17.6.67 These paragraphs do not deal with unitised with-profits product groups (PG15 and
PG16). The benefits paid on surrender, transfer and early retirement for these
product groups have been set out above.
17.6.68 The target payout for surrenders, transfers and early retirements is normally the
asset share. Claim values are calculated using a formula designed to meet this
target.
17.6.69 The formula used to achieve the objective above will be based on notional
policies. Approximation or considerations of materiality may be applied in
determining the notional policies used. The operation of this approach means that
PLL PPFM Page 397 January 2024
some payments will be higher or lower than asset shares. However, the formula
will ensure that payouts meet the target ranges in 17.6.72.
17.6.70 A final bonus may be payable on surrender or transfer. The final bonus will be
based on the final bonus rate for a maturing policy of the same term but adjusted
to target asset share.
Benefits paid on death
17.6.71 On the death of a policyholder, the policy terms and conditions will generally
prescribe the payout. Where this includes a discretionary element of final bonus,
final bonus is set at the same level as for maturing policies of the same term from
inception.
Target ranges
17.6.72 Except where payment of a contractual benefit results in a higher amount, and
except where the value cannot reasonably be compared with a calculated asset
share, the target range for policy payments is 80% to 120% of the unsmoothed
asset share. The range applies to both maturity payments and surrender
payments. This range has been determined and will be monitored by reference to
notional with-profits policies of the appropriate classes of business. It is expected
that at least 90% of cases would fall within these target ranges and that the higher
end of this range will reduce over the next few years.
PLL PPFM Page 398 January 2024
Principle
17.7
Smoothing
The actual payout paid to any particular policy may be different to the target
payout because of the fact that with-profits payouts are smoothed.
The nature of with-profits policies means that actual payouts do not immediately
reflect changes in investment returns but are smoothed over time.
The degree of smoothing and the amounts of smoothing costs are not limited by
the financial position of the fund. Furthermore, there is no specific limit on the
amount of smoothing costs that can be incurred by the fund. However, the degree
of smoothing and the amounts of smoothing costs are limited by the financial
position of Phoenix Life Limited.
Other than the impact on the financial position of the fund, past smoothing costs
do not directly affect the smoothing of current payouts. Although there is no
requirement that smoothing be neutral, it is expected, over time, that payouts (with
the exception of deaths) will average 100% of asset shares.
If the Board considers it necessary in the light of the current or expected financial
position of the fund, the normal operation of smoothing may be suspended. In this
situation benefits will be determined in accordance with these principles but only
to the extent that doing so does not further weaken the financial position of the
fund.
Practices
17.7.1 There are a number of types of smoothing that are used that will be referred to
below when describing different product groups.
• Final payout smoothing is achieved by limiting the change in final pay-outs
caused by a change in final bonus rates.
• Bonus rates are not calculated for individual policies but are calculated for
notional policies within the participation pools. This has the effect of smoothing
payouts across different policies within these groups.
• Investment returns applied to unitised with-profits products (PG15 and PG16)
are smoothed over the average outstanding term of the business subject to
the constraint that the smoothed asset share does not deviate more than
12.5% from the unsmoothed asset share.
• In the event that the fund makes any changes in the methodology or historic
assumptions used to determine payouts, such changes will be smoothed over
time
17.7.2 In arriving at appropriate final bonus rates for regular premium endowment
assurances (PG01), old series deferred annuity without guaranteed annuity option
(PG06), deferred annuities (PG12), and AMP (UK) regular premium endowments
(PG18), the following factors are taken into account:
• Changes to final bonus rates will be limited, such that the resulting change in
payout for any maturing policy is no more than 7.5% at each six monthly
review,
• Where more than one final bonus change takes place in any one calendar
year, the cumulative effect of such changes may be more than 15%. However,
this is only expected to happen when the difference between actual payouts
and target payouts is large, and/or the Board considers it necessary in the light
of the financial position of the fund,
• Where the difference between actual payout and target payouts is small at the
mid-year review, then payouts may be left unchanged.
PLL PPFM Page 399 January 2024
17.7.3 Except for PG15 and PG16, a formal smoothing account is not recorded and there
is no requirement that total cumulative smoothing costs be neutral over time.
However, it is expected that the normal operation of smoothing will result in
payouts (with the exception of deaths) that average 100% of asset shares. The
degree of smoothing will only be limited by the financial position of the fund.
PLL PPFM Page 400 January 2024
Principle
17.8
Surrender Values
Surrender values may be reduced when the Board considers it necessary in the
light of the financial position of the fund and anticipated rates of surrender in order
to protect the level of security for the remaining policyholders.
Practices
17.8.1 Non-protected exits refer to surrenders, and transfers for pension business.
17.8.2 For surrenders and transfers, the target payout is normally the asset share. The
actual payout will depend on smoothing. Guaranteed benefits can exceed asset
shares, in this instance, the payout will be the guaranteed benefit.
PLL PPFM Page 401 January 2024
Principle
17.9
Investment Strategy
The assets of the fund serve two purposes: to provide asset shares with
investment return and to meet the cost of providing guaranteed benefits and other
liabilities as they fall due.
The Board determines the acceptable level of investment risk taking account of
the need to continue to meet the ongoing solvency requirements. A range of
possible investment strategies are determined that meet this level of risk. The
Board implements a strategy from this range of potential strategies having regard
to the following principles in this section 17.9.
The exposure of each participation pool’s notional allocation of assets to a
particular asset class is set with regard to the following:
• the general levels of exposure to this asset class experienced by
policyholders of other similar with-profits life insurance offices,
• the nature and maturity of the with-profits liabilities within the participation
pool,
• the exclusion of certain asset classes listed below,
• The need to diversify the investments so as to limit exposure to any one asset
class, market sector, currency, interest rate market or counterparty, and
• the need to provide liquid assets so as to pay current claims.
Asset shares will not be invested in derivative instruments other than for the
purpose of efficient portfolio management and/or risk management.
For the balance of total assets in excess of assets notionally allocated to asset
shares the exposure to a particular asset class is set so as to bring the overall
investment risk of the with-profits fund to the acceptable level set by the Board.
Investing these excess assets in this way may enable more investment risk to be
taken by the asset share assets than would otherwise be the case. These excess
assets will be diverse and may be derivatives or non-conventional assets provided
that a market value is readily obtainable. These excess assets will be liquid to the
extent that they are required to meet current claims.
The fund holds no investments that are of sufficient importance to it or any other
group undertaking that such investments would not normally be traded.
The mix of assets of the fund will not be changed with the purpose of reducing any
support provided to the fund, although it may be changed to ensure that Phoenix
Life Limited as a whole can continue to meet regulatory capital requirements.
The mix of assets within the fund backing any policy allocated to the Life With-
Profits Fund prior to 31 March 2012 (the date of implementation of the previous
PLAL 2012 Scheme that has been replaced with the 2023 Scheme) will not be
changed for the purpose of meeting the cost of any guarantees contained within
policies allocated to the Pensions With-Profits Fund prior to the PLAL 2012
Scheme.
Practices
17.9.1 The Board reviews the investment strategy, taking account of a variety of
considerations, including our approach to responsible investment and allowing for
appropriate actuarial advice. The frequency of reviews depends upon the financial
position of the fund and the risk of failing to meet the solvency requirements
allowing for the current mix of assets and liabilities. Where the risk is high,
PLL PPFM Page 402 January 2024
reviews will be more frequent but in any case a review will occur no less frequently
than once per annum.
17.9.2 From 1 July 2007, following a review of investment strategy, the fund can also
invest in a series of specialist funds to give exposure to different asset classes.
The aim of this is to enhance returns whilst reducing the investment risk within the
fund through a reduction in volatility of returns. These specialist funds could
themselves use a range of investment managers to achieve their investment
objectives.
Investment in fixed interest and cash assets may include exposure to swaps to
reduce the risk from interest rate movements.
17.9.3 The management of the assets is undertaken by a number of investment
management companies. The investments are managed in accordance with
mandates that are approved through the Board. The investment management
agreements set out any limits on matters such as, exposure to sectors or
companies that do not align with our approach to responsible investment, for
example Tobacco.
17.9.4 The fund invests asset shares of policies differently according to the participation
pool. The major potential asset classes are as shown in the following table.
participation pool
Shares (
UK
Or
International)
Property
Fixed interest
(Government
Or Corporate
Bonds)
Alternative
assets
Cash or short
term deposits
Private Equity
former-London Life products
Life Compound Bonus
Yes
Yes
Yes
Yes
Yes
Yes
Life Cash Bonus
No
No
Yes
Yes
Yes
No
Life Unitised With-Profits policies
Yes
Yes
Yes
Yes
Yes
Yes
Pensions Compound Bonus
No
No
Yes
Yes
Yes
No
Pensions Simple Bonus
No
No
Yes
Yes
Yes
No
Pensions Unitised With-Profits
Yes
Yes
Yes
Yes
Yes
Yes
post 1997 products
With-Profits Annuity
No
No
Yes
Yes
Yes
No
former-AMP UK products
Life Compound Bonus
No
Yes
Yes
Yes
Yes
No
Pensions Compound Bonus
No
No
Yes
Yes
Yes
No
17.9.5 The fund is able to invest the asset shares of unitised with-profits business in a
range of asset classes because these participation pools are small and it is able to
apply market value reductions to payouts, subject to contractual terms.
17.9.6 Furthermore, for the foreseeable future participation pools will either have actively
managed asset shares or passively managed asset shares. Participation pools
that will have actively managed asset shares are: Life Unitised With-Profits,
Pension Unitised With-Profits, Life Compound Bonus and former AMP UK Life
Compound Bonus. All other participation pools will have passively managed asset
shares.
17.9.7 The minimum credit quality of fixed interest securities, other than emerging market
debt, is A3, as per the Moody’s scale. There may from time to time be a small
PLL PPFM Page 403 January 2024
proportion of the fund invested in lower grade stock. This results from
downgrading by the ratings agencies. These lower grade stocks may either be
liquidated or continued to be held depending on investment conditions at the time
and also based on the investment advice of our investment managers.
17.9.8 The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
17.9.9 Should the management wish to invest in new types of investment, this new asset
will be subject to a risk assessment along with an analysis of the suitability of the
asset relative to the liabilities, to be approved by the Investment Committee and
the Board.
17.9.10 The guideline asset mix ranges for asset shares are:
Former
AMP
traditional
life
business
Former
AMP
traditional
pension
business
Former
London
Life
traditional
life
business
Former
London
Life
traditional
pension
business
Unitised
business
Fixed
interest
and cash
100%
100%
52% to
80%
100%
40% to
60%
Equities
including
private
equity and
alternative
assets
0%
0%
20% to
40%
0%
40% to
50%
Property
0%
0%
0% to 8%
0%
0% to
10%
For policies with an exposure to equity and property, and former AMP traditional
life business, the fixed interest assets may include some corporate bonds. The
fixed interest assets backing other policies do not currently contain any corporate
bonds.
PLL PPFM Page 404 January 2024
Principle
17.10
Business Risks
The fund seeks to avoid taking on new business risks and is managed in such a
way as to minimise existing business risks.
The costs of smoothing with-profits pay-outs from year to year are met firstly from
the surplus assets in the fund and subsequently from assets in the Non-Profit
Fund and Shareholder Fund made available in accordance with the capital policy.
The costs of meeting guaranteed benefits in excess of those reasonably
recoverable from the group of policies that give rise to them are met firstly by the
surplus assets of the fund and subsequently from assets in the Non-Profit Fund
and Shareholder Fund made available in accordance with the capital policy.
Profits or losses on business written outside the fund are not charged to the fund.
Even though the fund’s with-profits policy proceeds do not directly benefit from nor
directly suffer the effects of business risks, the fund’s with-profits investment policy
is affected by the financial position of Phoenix Life Limited. Therefore, the with-
profits policyholder returns are indirectly affected by business risks.
Practices
17.10.1 Particular material risks exist in relation to the following:
• Investments (see section 17.9) producing lower returns than anticipated.
• Annuitant longevity in the fund (see 17.10.5)
• The existence of policy options (see 17.10.6)
• Fixed administration expenses within a fund closed to new business (see
17.10.8)
17.10.2 Other than the returns on investments (see section 17.9), these risks do not
directly affect the returns credited to asset shares but they do affect the overall
financial position of Phoenix Life Limited. The impact of the overall financial
position of Phoenix Life Limited on investment policy is discussed in section 17.9
and on amounts payable is discussed in section 17.4.
17.10.3 The Board sets the acceptable level of investment risk per section 17.9. However,
there is a significant risk that the investments do not perform as expected. This
might result in lower payouts than expected or failure to meet the ongoing
solvency requirements.
17.10.4 Particular investment risks arise from the general levels of interest rates, defaults
on corporate bonds, defaults by other counter-parties for example in relation to
derivatives, property prices and to a much lesser degree the movements in share
prices.
17.10.5 The Actuarial Function Holder makes a prudent assessment of annuitant life
expectancy and advises the Board of appropriate margins to set aside to meet the
cost of payments. If annuitants live longer than expected then these margins may
not be sufficient and the financial position of the fund will worsen.
17.10.6 The Actuarial Function Holder makes a prudent assessment of the proportions of
policyholders that will exercise options within their policies and advises the Board
of appropriate margins to set aside to meet the additional cost of these options. If
policyholder behaviour changes such that more options are exercised than
expected then the financial position of the fund will worsen.
PLL PPFM Page 405 January 2024
17.10.7 Investment management services have been outsourced to the investment
managers and administration services have been outsourced to Phoenix Group
Management Services Limited (PGMS). There is a risk that the investment
managers and / or PGMS fail to provide an adequate service or cease to trade.
Should PGMS be unable to meet any of its obligations to provide services then
Phoenix Life Limited would request that Phoenix Group, as owners of PGMS step
in to restore the position. Should Phoenix Group not do this, then Phoenix Life
Limited would attribute any losses to the Shareholder Fund or Non-Profit Fund,
and the fund would only be affected if the Shareholder Fund or Non-Profit Fund
had insufficient excess assets to bear the losses.
17.10.8 As a closed fund the ability to spread fixed costs reduces as the value of the fund
declines. There is a risk that the fund is unable to reduce its fixed costs in line with
the decrease in fund over time. This could result in reduced payouts to
policyholders through increased charges to asset shares.
PLL PPFM Page 406 January 2024
Principle
17.11
Expenses and Charges
Under the terms of the 2023 Scheme expenses representing the actual level of
expenses attributed to the policies are deducted from asset shares.
A reasonable charge will be made to policies in PG07, PG09 and PG10 for the
cost of providing guaranteed annuity benefits.
The fund is treated as a notional mutual life assurance business for the purpose of
determining the tax to be charged to it. In particular, neither asset shares nor the
fund bear the cost of shareholder taxes.
Practices
17.11.1 Phoenix Group Holdings, the ultimate parent of Phoenix Life Limited, owns
subsidiaries that provide services to the fund.
17.11.2 Henderson Global Investors Ltd and Standard Life provide investment
management services to the fund. Phoenix Group Management Services Limited
provides administration services directly and with the assistance of its third party
suppliers. Such arrangements are subject to periodic review by the Board.
17.11.3 Under the 2023 Scheme the basis for charging administration expenses reflects
the actual charges made by the service company for administration of the policies
in the fund.
PLL PPFM Page 407 January 2024
Principle
17.12
Estate Management
On implementation of the 2023 Scheme the value of the fund’s estate was zero.
The estate may:
(a) be used to smooth short term investment returns and shall accordingly be
credited or debited with the difference between payouts (excluding any increase
due to payment of guaranteed benefits) and asset shares;
(b) be debited with the cost of providing guarantees; and
(c) be debited or credited with the difference between amounts allocated or
charged to asset share and the amounts allocated or charged to the fund in
accordance with 17.4 (excluding amounts allocated or charged to any capital
support provided for the fund).
The fund relies on support provided under the terms of the capital policy. Any
capital support provided by Phoenix Life Limited to the fund shall be repayable to
the Shareholders' Fund or the Non-Profit Fund (as the case may be) before any
amount is credited to the estate
Practices
17.12.1 Providing that it is possible to do so whilst still treating policyholders fairly, it is
intended to manage the fund so that it covers its own liabilities and capital
requirements using solely the resources of the fund and minimises the need for
support under the capital policy.
17.12.2 Subject to 17.9, the exercise of discretion in respect of with-profits policies will be
managed with the aim that the support provided to the fund will be repaid to the
extent that is possible whilst still meeting the aims described in section 5. In
determining benefits under with-profits policies, the With-Profits Committee will
disregard any liability to repay such support back to the Non-Profit Fund or
Shareholder Fund to the extent that this is necessary to treat customers fairly (that
is in accordance with these Principles and Practices).
PLL PPFM Page 408 January 2024
Principle
17.13
New Business
The fund will only accept new business where:
(a) it is contractually obliged to do so, or where there is an established practice of
accepting new business from the existing customers;
(b) it is agreed by the Board and the With-Profits Committee that the policy is
more conveniently written in the fund than in any other sub-fund in Phoenix Life
Limited; and
(c) it is agreed by the Board, having taken appropriate actuarial advice and having
regard to policyholder reasonable expectations, to accept inwards reassurance.
The fund would cease to accept non-contractual new business if the financial
position of the fund became such that the Board considers it imprudent to continue
doing so.
Practices
17.13.1 The fund only writes new business in the circumstances set out in 17.13.
PLL PPFM Page 409 January 2024
Principle
17.14
Equity Between the Fund and Shareholders
Services may be provided by the shareholders to the fund but terms for such
services will be on commercial terms which are considered to be consistent with
the risks of providing those services, or considered to be consistent with terms
which would be available for such services on an arm’s length commercial basis.
As laid down in the 2023 Scheme, shareholders do not receive any share of the
cost of bonuses distributed to policyholders. Any change would require the
agreement of the Board and would be subject to approval by the High Court.
Practices
17.14.1 The following services are provided to the fund:
• product provision (annuity products by the Non-Profit Fund); and
• administration services by PGMS.
17.14.2 Shareholders will only provide services to the fund on commercial terms, if there is
an adequate return for the risks involved in providing the services. The profit
margin for shareholders is acceptable to the fund if:
• the cost for the fund is consistent with the terms available from other providers;
or
• the profit margin is consistent with the risks borne and there are reasonably
foreseeable circumstances in which the shareholder could make a loss.
17.14.3 The allocation of profits between policyholders and shareholders is laid down in
the 2023 Scheme which states that 100% of the surplus being distributed from the
fund is allocated to policyholders.
PLL PPFM Page 410 January 2024
18. Principles and Practices – National Provident Life With-Profits Fund
The Principles and Practices given in sections 18.4 to 18.13, together with the Guiding
Principles and Practices; form the Principles and Practices of Financial Management for the
National Provident Life With-Profits Fund. Sections 18.1 to 18.3 give background information
specific to the National Provident Life With-Profits Fund. Subsequently in this section the use
of the term ‘the fund’ generally means the National Provident Life With-Profits Fund.
18.1 Fund History
18.1.1 The National Provident Life With-Profits Fund comprises all of the business that
transferred to Phoenix Life Limited under the 2023 Scheme from the National
Provident Life With-Profits Fund of Phoenix Life Assurance Limited.
18.1.2 Originally this business was written by the National Provident Institution (NPI)
before being transferred into National Provident Life Limited on 1 January 2000
when NPI was demutualised. NPI Limited was established at the same time to
write new business.
18.1.3 National Provident Life Limited did not write new business other than increments,
the exercise of options under in-force policies and new members to existing group
schemes. Prior to 31 March 2012 most of these were reassured to NPI Limited,
together with all unit-linked business (other than Unilink policies). With effect from
31 March 2012, all business in NPI Limited and these reassurance arrangements
transferred to Phoenix Life Limited. Under the 2023 Scheme the reassurance
arrangements continue with the Phoenix Life Limited Non-Profit Fund.
18.1.4 From 2007 to 2019 charges were taken from asset shares of traditional life, UWP
and PSA business to meet guarantee costs. The charges were 2% each year until
2015 and 0.5% each year between 2016 and 2019.
PLL PPFM Page 411 January 2024
18.2 Types of Business
18.2.1 The fund comprises traditional and unitised with-profits business and non-profit
business mainly in the form of unit-linked pensions. The unit-linked liabilities for
policies in the fund are reassured to the Non-Profit Fund in Phoenix Life Limited.
18.2.2 The with-profits business in the fund is split into 5 different classes for the
purposes of allocating annual bonuses and final bonuses as appropriate. The
classes are:
• Traditional Life with-profits business
• Unitised with-profits business (UWP)
• Deposit Administration business (DA)
• Profit Sharing Account business (PSA)
• Capital Account business (CA)
Portfolio Bonds are not covered by these classes, and the approach for them is
dealt with in 18.2.3.
18.2.3 Portfolio Bonds
Portfolio Bonds are single premium bonds written in the second half of 1999.
There are options for unit linked and unitised with-profits investment under the
bond and policyholders may switch between the two. The unitised with-profits
investment is reinsured, on original terms to the Pearl With-Profits Fund.
Chapter 15 ‘Principles and Practices – Pearl With-Profits Fund’ gives most of the
appropriate information in respect of Portfolio Bond business where it is classed as
reinsured business. In addition, please note particular issues in respect of
business risks (18.10), expenses and charges (18.11) and the estate (18.12) affect
these policies.
National Provident Life With-Profits Fund
Traditional
Life business
Unitised
business
Deposit
Admin
Business
Capital
Account
Business
Profit Sharing
Account
Business
PLL PPFM Page 412 January 2024
18.2.4 Traditional Life with-profits business
This product group includes traditional whole of life and endowment contracts. It
also includes Flexible Mortgage Plans and Low Cost Mortgage Plans which are a
combination of With-Profits Endowment Assurance and Non-Profit Term
Assurance.
Benefits are payable on maturity, early termination or claim event (e.g. death or
retirement). On maturity or claim event, the guaranteed benefits plus final
bonuses are payable, except where contractual terms provide for alternative
benefits. Annual bonuses may be declared each year, and once declared cannot
be taken away. Final bonuses are not guaranteed and can be changed at any
time. On early termination, a different approach to determining benefits payable is
followed and is described in more detail in 18.8.
Groups of policies that have similar characteristics and features receive the same
annual bonus rates and the same final bonus rates. These groups are known as
bonus series.
Simple bonuses apply to those policies issued before 1 January 1976. The bonus
amount is calculated as a percentage of sum assured.
Compound bonuses apply to those policies issued on or after 1 January 1976.
The bonus amount is calculated as a percentage of sum assured and attaching
bonuses.
Separate annual bonus and final bonus scales are declared for Whole of Life and
Endowment Business.
18.2.5 Unitised with-profits business (UWP)
Premiums paid by policyholders are allocated investment units at the date of the
premium payment. There is no guarantee what those units may be worth at a
future date, other than where the policy conditions guarantee a benefit level for
certain claim types. Benefits are payable on maturity, early termination or claim
event (e.g. death and retirement).
The contracts under which UWP is available include:
• With-Profits Bond
• Personal Pension Plan (both individual and group)
• Flexible Income Plan
• Group Money Purchase
• Group Investment Account
• Free-Standing Additional Voluntary Contribution
• Phased Retirement Account
Annual bonuses are declared in the form of additional units or by an increase in
the unit price, or a combination of both.
A final bonus may also be added to the policy when a claim is paid. This will be
determined for each policy individually. The amount of this bonus will vary and will
depend on premiums invested, the dates the investments were made and how
much the assets of the fund have grown by since those dates compared to the
amount of bonus units already declared. On early termination, a different
approach to determining benefits payable is followed and is described in more
detail in 18.8.
Separate annual bonus and final bonus scales are declared for the following
classes:
PLL PPFM Page 413 January 2024
• Life single premium business
• Pensions single premium business
• Pensions regular premium business
Note
• Life Series 1 has a minimum guaranteed future annual bonus rate of 3.00%
p.a.
• Life Series 2 to 7 are classed as 0GB (zero guaranteed annual bonus)
business, a subset of the UWP business for which the minimum guaranteed
future annual bonus rate is zero.
• Pension Series 1 ordinary (or accumulation) units have a minimum guaranteed
future annual bonus rate of 4.00% p.a.
• Pensions Series 2 and 3 are classed as 0GB business.
18.2.6 Deposit Admin Business (DA)
This type of business is a form of with-profits pensions where all the return is given
through the annual bonus rate. There are no final bonuses or MVRs on DA
business.
DA contracts include:
• Capital Pension Plan
• Visible Growth Fund and
• Cash Accumulation Plans
18.2.7 Capital Account Business (CA)
This is similar to DA business but each investment into the Account purchases
units, to which annual bonuses are added either through additional units or by an
increase in unit price. The underlying investment strategy is the same though, and
CA and DA business normally share the same bonus rates. However on transfers,
switches or early retirements, an MVR may apply to CA business, with the rates of
MVR varying by date of investment into CA (please see 18.8). There is no final
bonus.
CA contracts include:
• Personal Pension Plan (both individual and group)
• Flexible Income Plan
• Group Money Purchase
• Group Investment Account
• Free Standing Additional Voluntary Contribution
• Phased Retirement Account
• Executive Pension Plan
• Pension Transfer Plan
18.2.8 Profit Sharing Account (PSA)
This is a form of with-profits business under Executive Pension Plan and Pension
Transfer Plan that is a hybrid between traditional and unitised with-profits
business. The contracts are priced and look like a unit linked investment. Each
investment buys either units in a unit linked fund or units in CA or, under PSA, a
fixed benefit payable from normal retirement date. Bonuses are added to the fixed
benefit(s), thus making it similar to traditional with-profits business.
PLL PPFM Page 414 January 2024
18.3 Capital Support to the National Provident Life With-Profits Fund
18.3.1 The cost of the policy guarantees for which the fund is liable has become
significant over the years since National Provident Life Limited was established.
As a result the financial position of the fund is such that it is expected that the
estate will not be sufficient to meet this cost and the fund must rely on capital
support and also has made charges to asset shares.
18.3.2 The capital policy is described in section 3.2.
In certain circumstances, the shareholders will loan money to this fund.
The practices relating to receipt of support are detailed in sections 3.3 and 5.2.
PLL PPFM Page 415 January 2024
Principle
18.4
Amounts Payable Under a With-Profits Policy
In accordance with the 2023 Scheme, the total payout on with-profits policies is
based on asset shares, subject to smoothing (see section 18.7), plus for eligible
with-profits policyholders, a share of any distributable free estate of the fund. The
total payout on with-profits policies is, however, not less than the value of the
guaranteed benefits.
Payouts are set with the intention that all policyholders will be treated fairly and of
distributing equitably all the assets of the fund including all future surpluses, to the
extent these are not needed to meet the future cost of guarantees, but excluding
any capital support provided to the fund in accordance with the 2023 Scheme.
Asset share techniques are used as a guide to determining payouts on all
significant lines of business. For traditional Life, PSA and UWP business, the
asset share techniques provide a guide to the levels of final bonus and, for UWP
business, the level of Market Value Reduction (MVR) that may apply.
Asset share techniques are also used as a guide to determining payouts on DA
and CA business, primarily to determine the annual bonus rate, but also as a guide
to the level of MVR that may apply to CA business.
The Board may decide that the investment return for any identified group of
policies may be determined from the returns on assets notionally hypothecated to
that group of policies (whether or not the fund holds those hypothecated assets),
rather than the return on the actual assets backing the with-profits business as a
whole. Any hypothecation will be subject to the principle that it will only be
considered if it preserves the fair treatment of policyholders overall.
Approximations are only used where it is made necessary by, for example,
insufficient data or systems constraints.
Significant changes to the methods and data used to determine payouts require
the approval of the With-Profits Committee. Changes to historical data are only
likely to be made if they are found to be incorrect.
Practices
Asset Share Methodology
18.4.1 Payouts are determined using the results of the asset share calculations, subject
to smoothing practices in respect of the fund, which have regard to the smoothing
practices operated by National Provident Life Limited, with a minimum payout of
the value of the guaranteed benefits.
18.4.2 The asset share is broadly the accumulation of past premiums allowing for
investment return, tax, expenses, cost of mortality, (where appropriate) the cost of
capital and other charges (see below).
The following table describes the elements credited or charged to asset shares for
specimen policies.
PLL PPFM Page 416 January 2024
Element
Traditional
Life With-
Profits
Unitised
With-Profits
Deposit
Administrat
ion(DA)
Capital
Account
(CA)
Profit
Sharing
Account
(PSA)
(a)
Premiums
Premiums
paid under
the policy
Note(a)
Note(a)
Note(a)
Note(a)
(b)
Investment return
Note (b)
Note (b)
Note (b)
Note (b)
Note (b)
(c)
Investment
expenses
Note (c)
Note (c)
Note (c)
Note (c)
Note (c)
(d)
Initial expenses
Note (d)
Note(a)
Not Charged
Note(a)
Note(a)
(e)
Renewal expenses
Note (d)
Note (d)
Note (d)
Note (d)
Note (d)
(f)
Other expenses
Note (f)
Note (f)
Note (f)
Note (f)
Note(f)
(g)
Tax on investment
return
Note (g)
Note (g)
Not Charged
Not Charged
Not charged
(h)
Tax relief on
expenses
Note (g)
Note (g)
Not Charged
Not Charged
Not Charged
(i)
Mortality &
morbidity costs
Note (i)
Not charged
Not charged
Not charged
Not charged
(j)
Early terminations
Not charged
Not charged
Not charged
Not charged
Not charged
(k)
Paid-up policies
Not charged
Not charged
Not charged
Not charged
Not charged
(l)
Partial and regular
withdrawals
Not
Applicable
Not
Applicable
Not
Applicable
Not
Applicable
Not
Applicable
(m)
Surrenders at
protected dates
Not
Applicable
Not
Applicable
Not
Applicable
Not
Applicable
Not
Applicable
(n)
Annuity payments
Not
applicable
Not
applicable
Not
applicable
Not
applicable
Not
applicable
(o)
Charges for the
cost of guarantees
or smoothing
Note(o)
Note(o)
Note(o)
Note(o)
Note(o)
(p)
Charges for the
cost of capital
Not charged
Not charged
Not charged
Not charged
Not charged
(q)
Distributions to
shareholders
Not charged
Note (q)
Not charged
Note (q)
Not charged
Note (q)
Not charged
Note (q)
Not charged
Note (q)
(r)
Tax on
distributions to
shareholders
Not charged
Note (q)
Not charged
Note (q)
Not charged
Note (q)
Not charged
Note (q)
Not charged
Note (q)
(s)
Profit and losses
from other
business
Not
applicable
Not
applicable
Not
applicable
Not
applicable
Not
applicable
(t)
Estate distribution
or charge
Note (t)
Note (t)
Note (t)
Note(t)
Note(t)
(u)
Exceptional items
Not
applicable
Not
applicable
Not
applicable
Not
applicable
Not
applicable
Notes
(a) Premiums
For DA business the premiums used in asset share calculations are premiums
paid less expenses charged to the policy.
For PSA, UWP and CA, the premiums used in asset share calculations is the
amount invested after initial charges.
PLL PPFM Page 417 January 2024
(b) Investment return
The investment return allocated to asset shares is determined from the return on
the assets notionally backing that business as described in 18.9.9. The
investment return for determining asset shares is then increased or decreased as
appropriate by the adjustment in respect of past smoothing costs in accordance
with note (o) below and 18.7.2.
(c) Investment expenses
The investment management expenses used in asset share calculations for
traditional life business are based since 1 January 2000 on the charges payable
under the service agreement with its investment managers. For years prior to
2000, investment management expenses are based on the results of internal
expense apportionment investigations
For UWP, PSA, DA and CA business an annual management charge is deducted
partly in lieu of a charge for investment services.
(d) Expenses
Traditional life business expenses include initial commission payable under
National Provident Life With-Profits Fund’s normal terms.
For UWP, PSA, DA and CA business the initial charges are deducted to cover
initial expenses.
The maintenance expenses used in asset share calculations for traditional life
business are based since 1 January 2000 on the charges payable under the
service agreement with Phoenix Group Management Services Limited but, since
14 December 2006, the then current level of expenses are inflated at the fixed rate
of 4.07% per annum. For years prior to 2000, maintenance expenses are based
on the results of internal expense apportionment investigations
For UWP, PSA, DA and CA business, expenses are not directly attributable to
asset shares and charges in the form of an annual management charge are taken
instead.
(f) Other Expenses
For all business, a charge to cover some or all of the non-policy costs is made.
(g) Tax on investment return
For Life business, an appropriate allowance for tax on the investment returns and
tax relief on expenses is made.
For Pensions business, no tax is currently brought into the asset share calculation
since no tax is currently payable on the investment return allocated to asset
shares, nor is there any tax relief on any of the expenses brought into the asset
share calculations.
The amount of tax chargeable to life policies in the asset share calculations is
intended to be a reasonable approximation to that actually payable by the
company in respect of its with-profits business. A notional amount of tax is
determined as if the fund had constituted the whole long-term fund of a separate
mutual life assurance company. Any difference between this notional amount of
tax and that taken into account in the calculation of asset shares is treated as non-
policy costs. Any difference between the tax actually payable and the notional
amount is payable by or to the shareholder.
PLL PPFM Page 418 January 2024
(i) Mortality and morbidity costs
For traditional life business, charges are made to asset shares for meeting the
cost of mortality and other risks under individual policies.
The mortality rates used for traditional life asset shares are based on the fund’s
most recent experience.
(o) Charges for the cost of guarantees or smoothing
Smoothing adjustments are determined for, and shared among, traditional life,
UWP and CA business. Smoothing adjustments are described in 18.7.1.
A charge to asset shares to cover guarantee costs was made in each year from
2007 to 2019 inclusive, with a total charge of 20% taken over that period. No
charge was taken in 2020 and no future charges will be taken.
(q) Distributions to shareholders
Shareholders are not entitled to any surplus arising in the fund.
(t) Estate distribution or charge
If a distributable estate did arise, this would be used to augment the benefits
payable under policies in the fund.
18.4.3 For traditional life policies, payouts are based on asset shares calculated for a
sample policy commencing in each previous final bonus period and becoming
payable in the current calendar year. For PSA, UWP, and CA business, payouts
are based on a sample investment in each previous final bonus period and
becoming payable in the current year. Consequently, for UWP, PSA or CA
business, a regular premium policy may have numerous rates of final bonus
and/or MVR applicable in the calculation of the amount payable reflecting the
investments made in different final bonus periods, and a single premium policy will
have a separate rate of final bonus or MVR in respect of each single premium
paid.
18.4.4 Asset shares are calculated as at the mid-point of the period over which they
apply. Estimates of investment returns are used where the actual investment
return is not known at the date of calculation. The actual rates of investment
returns (determined in accordance with 18.4.2(b)) are used in any subsequent
calculation of asset shares once the actual investment returns have been
determined.
18.4.5 The methodology used to determine payouts is documented by papers submitted
to, and approved by, the With-Profits Committee Investment returns, expenses
and charges are documented by internal memoranda.
18.4.6 The investment return for any class of business is determined from the return on
assets notionally backing that business as described in 18.9.9 below. The
investment return for traditional life, PSA, UWP and CA business, less an
appropriate allowance for tax in respect of life business, is then increased /
reduced by the charge in respect of past smoothing costs in accordance with
18.7.2 below.
18.4.7 For certain mortgage endowment policies, the NPI Promise applies which will
mean an extra amount is payable at maturity if the payout falls below the amount
of mortgage the policy was originally targeted to repay, subject to certain
conditions being met. The cost of this Promise forms part of the non-policy costs.
PLL PPFM Page 419 January 2024
18.4.8 Except where payment of a contractual benefit results in a higher amount, and
except where the amount cannot be reasonably compared with a calculated asset
share, the target ranges for policy claim payouts are 80% to 120% of unsmoothed
asset share in respect of UWP, traditional life, PSA and CA business.
These ranges apply to both maturity payments and surrender payments for these
classes of business. It is expected that at least 90% of cases would fall within
these target ranges.
18.4.9 These ranges have been determined and will be monitored by reference to
specimen with-profits policies of the appropriate classes of business.
18.4.10 For some minor lines of business, the results of the major line of business most
similar to the minor line may be used as a guide to setting payouts.
PLL PPFM Page 420 January 2024
Principle
18.5
Annual Bonus Rates
Annual bonus rates are set by the With-Profits Committee and in doing so they
disregard the existence of any capital support provided to the fund under the
terms of the capital policy.
Due to the financial position of the fund, the strategy is to keep any increase in
guaranteed benefits to a minimum by declaring as little annual bonus as possible.
For traditional life business, it is therefore expected that there will be no annual
bonus declared for the foreseeable future. For UWP business, it is similarly
expected that there will be no annual bonus declared for the foreseeable future,
except where the policy terms and conditions provide for a minimum rate.
For DA and CA business the annual bonus rate reflects the current investment
return on the assets notionally backing this business plus or minus a smoothing
adjustment.
To protect the financial position of the fund it may be deemed necessary to
change the interim annual bonus rate for DA and CA business at any time, and to
reduce the interim annual bonus rate, possibly to zero, and to declare at the year-
end a rate different from the interim rate.
As the fund is closed to new business, it is not expected that any new series of
bonus rates will be necessary.
Practices
18.5.1 Annual bonus rates and interim annual bonus rates for the following year are normally
declared annually at 31 December, but interim annual bonus rates may be changed
at any time.
18.5.2 Annual bonus rates on DA and CA business would not normally be expected to
change by more than 1.5% per annum, but may change by more, in particular if the
With-Profits Committee deems it necessary to protect the financial position of the
fund.
18.5.3 For DA and CA business the interim annual bonus rate is set at the start of each
calendar year at a level consistent with the expected return on the underlying assets
minus the annual management charge, plus or minus an adjustment designed to
bring the nominal value of the business more closely into line with the asset shares.
In normal circumstances, the rate of annual bonus declared at the year-end would be
the same as this interim rate.
PLL PPFM Page 421 January 2024
Principle
18.6
Final Bonus Rates
The With-Profits Committee sets final bonus rates with the intention of distributing
equitably all the assets of the fund including all future surplus arising in the fund,
to the extent this is not needed to meet the cost of guarantees, but excluding any
capital support provided to the fund
For maturities and retirements under traditional life, PSA and UWP business, and
deaths and transfers under PSA and UWP business, final bonuses are normally
set so that the total payout is targeted on asset share, subject to smoothing (see
section 18.7 below), plus any distribution of the estate. The policyholder will
receive not less than the value of the guaranteed benefits under the relevant
policy.
No final bonus is normally payable on DA and CA business.
Practices
18.6.1 Final bonuses are normally reviewed and set every six months such that the final
payout targets 100% of unsmoothed asset share over time subject to guarantees,
smoothing and the requirement to protect the financial position of the fund.
However, final bonuses may be changed without notice at any time that the
company determines. Such an interim change would normally either be because
economic conditions have changed leading to a larger than expected gap between
the levels of payouts and the underlying asset shares, or if deemed necessary to
protect the financial position of the fund.
18.6.2 For each class of policy, final bonus rates and MVRs, if applicable, would normally
be the same for each final bonus period whatever the cause of claim (e.g.
retirement, death, transfer, switch), except where the policy conditions guarantee a
benefit higher than that based on asset share for certain claim types. For UWP
and CA business, MVRs do not apply on some claims (e.g. deaths, some
retirements) as specified in the policy conditions.
18.6.3 For UWP business, for each final bonus period, either an MVR or a final bonus will
apply. There will not be both at the same time.
PLL PPFM Page 422 January 2024
Principle
18.7
Smoothing
Payouts are usually smoothed so as to avoid excessive differences in payouts on
similar policies over short periods of time.
It is intended that smoothing will be cost neutral over time. If necessary, payouts
will be amended to help ensure that the cost of smoothing does tend towards
zero, and any outstanding smoothing account balances can reasonably be
expected to be reduced to zero within a limited period.
Phoenix Life Limited may change the way payouts are smoothed at any time or
may cease to smooth payouts if the With-Profits Committee deems it necessary to
protect the financial position of the fund. In such circumstances, it may also adopt
a different approach to smoothing by claim type.
Practices
18.7.1 For business where final bonus changes are normally made twice a year,
smoothing is applied to maturity or retirement values by limiting the change in final
bonus rates. Normally the change in final bonus rates for a specimen policy will
be limited so that the increase or reduction in total maturity or retirement payout
compared to a position where bonus rates are not changed is not more than 7.5%
at each six monthly review.
18.7.2 For traditional business, surrender value bases are normally reviewed twice a
year, and smoothing is applied by limiting the change in immediate surrender
value for policies. Normally the surrender value for specimen model policies will
not change by more than 10% at each six monthly review. Surrender values may
change in between reviews because in many cases the surrender values are
calculated using formulae that depend on factors such as term remaining which
change over time.
18.7.3 However, if it is necessary to enable the fund to continue to meet the objectives
set out in the guiding principles in section 5 sometimes larger changes are made
in final bonus rates and surrender values.
If there has been a significant change in premium rates then larger changes than
those described above may be made so that final bonus rates and surrender
bases remain consistent with the premium rates on which the business was
generally written. Where premium rates were revised with the intention of
changing payouts, then smoothing will not be applied, so that the change in
payouts intended by the premium rate changes does occur.
Also where there have been significant changes in methodologies and practices,
the impact may not be managed within the normal smoothing rules.
18.7.4 A smoothing account is maintained to which the difference between the payouts
(excluding any increase due to payment of guaranteed benefits) and the asset
shares is credited (if positive) or debited (if negative). This smoothing account will
be reduced (increased) towards zero by reducing (increasing) the investment
return credited to asset shares and crediting (debiting) the smoothing account with
the resultant change in asset shares. The smoothing account is accumulated
each year at the same rate of return as earned on the assets backing the estate.
18.7.5 The reductions (increases) in investment return each year are generally calculated
to cover one half of the then current smoothing account balance but a higher
PLL PPFM Page 423 January 2024
fraction may be used if the With-Profits Committee deems it necessary to protect
the financial position of the fund.
18.7.6 For traditional life, PSA and UWP business, payouts are normally determined
using asset shares under which the investment return credited is only calculated
approximately during the course of the year (by use of the appropriate indices) and
is updated after the end of each year to reflect the actual performance earned.
This applies to all generations of policyholders.
PLL PPFM Page 424 January 2024
Principle
18.8
Surrender Values
Surrender values will be set with reference to the policy’s asset share, they may
be subject to smoothing, and may vary considerably in line with movement in
asset shares. Surrender values as determined will be subject to guaranteed
minimums, where provided by the contract terms.
MVRs for UWP and CA business are based on asset shares (and, for UWP, result
from the same calculation methods as final bonuses), and thus reflect changes in
underlying asset values.
The basis for surrender values of traditional life business is reviewed from time to
time so that surrender values remain broadly consistent with the targeted level of
payouts.
Practices
18.8.1 Except where payment of a contractual benefit results in a higher amount, and
except where the amount cannot be reasonably compared with a calculated asset
share, the target ranges for policy claim payouts are 80% to 120% of unsmoothed
asset share in respect of UWP, traditional life, PSA and CA business.
9.8.2 The range applies to both maturity payments and surrender payments for these
classes of business. It is expected that at least 90% of cases would fall within
these target ranges.
18.8.3 For traditional life business, the surrender basis approximates on average to asset
share, so the amount payable on any particular policy may be more or less than
the amount targeted.
18.8.4 For With-Profits Endowment Assurance and With-Profits Whole Life Assurance
policies, there is no separate scale of final bonus for surrenders, but the surrender
value includes a proportion of the final bonus that would be payable were the
policy then maturing.
18.8.5 MVRs for UWP are calculated in the same way as rates of final bonus and
rounded similarly. This is generally to the nearest 0.1%. MVRs for CA business
are calculated using asset shares determined as described above for UWP
business.
18.8.6 MVRs do not apply to payments by way of regular income payments under
policies such as With-Profits Bonds and Flexible Income Plans. Any resulting
costs in excess of asset shares form part of the guarantee costs.
18.8.7 For With-Profits Endowment Assurance and With-Profits Whole Life Assurance
policies, the surrender basis is intended to pay on average the same percentage
of asset shares as for maturity claims. The same scale of final bonus applies to
surrender as to maturity claims, but only a proportion depending on sex, age
attained and outstanding term is included in the surrender value.
PLL PPFM Page 425 January 2024
Principle
18.9
Investment Strategy
The investment strategy for all the assets in the fund takes into account the
liabilities of the fund under its policies and other liabilities. The primary
requirement is to maintain the financial position of the fund at a level agreed by
the Board and protect existing guaranteed benefits. The need to meet, as far as
possible, policyholders’ reasonable expectations on levels of payouts in excess of
guaranteed benefits is secondary to this.
Derivatives may be used to implement investment policy ahead of physical sales
and purchases of assets. Derivatives are also used to match certain policy
liabilities or to provide protection against increases in policy liabilities.
The maximum counterparty risk is that agreed with the investment manager from
time to time, as authorised by the Investment Committee.
The investment policy in respect of any assets provided as capital support to the
fund in accordance with the capital policy is determined by the Board.
The investment policy for assets in the fund shall be set on the basis that no
support will be provided to the fund other than such support as is provided in
accordance with the capital policy.
Practices
18.9.1 The investment strategy for the fund is reviewed formally at least once a year
taking account of a variety of considerations, including our approach to
responsible investment. The With-Profits Committee sets the investment strategy
for the fund, excluding those assets provided as capital support under the capital
policy, and approves the investment mandate. The Board sets the investment
strategy for the assets provided as capital support under the capital policy.
18.9.2 The investment mandate sets out any limits on matters such as:
• The types of investment that may be held.
• The maximum amount that can be invested in any single currency.
• The maximum amount that can be invested in any single asset class /
investment sector / country.
• The maximum extent to which the manager might hold assets which are
different to the benchmark (guideline) portfolio in order to enhance returns
(these include restrictions in terms of credit quality, term / duration and
amounts of individual holdings).
• The minimum credit rating quality of assets (as specified by the main
rating agencies such as Standard & Poor’s and Moody’s).
• The maximum amount of gearing within the fund (that is, the maximum
amount of borrowing the fund may undertake to invest in new assets).
• Exposure to sectors or companies that do not align with our approach to
responsible investment, for example Tobacco.
PLL PPFM Page 426 January 2024
18.9.3 The investments are selected to provide a reasonably close match to the liabilities
on a realistic basis, but also having regard to the financial position of the fund.
18.9.4 For non-governmental fixed interest investments (other than bonds held as part of
the property portfolio), the minimum acceptable credit rating at the date of
purchase is A-. If the credit rating subsequently falls below this level, the holding
would, subject to the investment managers’ advice, normally be sold.
18.9.5 The fund may lend its assets in return for a fee, subject to receipt of appropriate
collateral as security. Any stock lending is subject to documented agreements
between the fund, its investment managers and its lending agents. The
Investment Committee advises the Board on the terms under which stock lending
takes place and oversees the operation of stock lending arrangements to ensure
that they are in accordance with the agreements.
Asset Mix
18.9.6 The assets within the fund are separated into different asset pools. This
separation may be either physical (where the investment managers run a
separately identifiable asset pool) or notional (where rather than holding separate
assets, we internally apportion the returns within the fund as if separate asset
pools were held).
Asset Shares
18.9.7 One set of assets is held backing all asset shares, but there is some
hypothecation of returns to:
• DA and CA business
• 0GB business
• Other with-profits business
The overall asset mix of the fund is the result of combining the assets in each of
the underlying asset pools.
18.9.8 The guideline asset mix range for asset shares is:
DA and
CA Business
0GB
Business
O Other With-
Profits
Business
Fixed Fixed Interest and cash
70 - 80%
45 - 55%
100%
Equities and Properties
20 - 30%
45 - 55%
0%
18.9.9 From time to time the actual asset mix will be different from the above percentages
due, for example, to market movements, and active management decisions taken
by the investment managers or the Investment Committee. The asset mix may
also be altered in circumstances where there is an unacceptably high risk that
regulatory capital requirements may be breached, that guarantees may not be
met, or that it will not be possible to apply the stated smoothing policy.
PLL PPFM Page 427 January 2024
18.9.10 The equity shares will be held in a mix of UK and overseas companies, the
majority of which are listed and traded on the major stock exchanges. The equity
shares may also include a proportion of private equity investments which are less
liquid and may take longer to sell, should the fund wish to
18.9.11 Any property investments may be in both UK and overseas properties, and may be
held directly, or through specialist funds.
18.9.12 The fixed interest assets backing asset shares may include derivative contracts
aimed to alter the effective term of some of the physical assets.
18.9.13 The investments may be direct or via collective investment schemes such as unit
trusts or derivatives.
Liabilities for Policy Options and Guarantees
18.9.14 The assets comprising the estate are mostly required to cover reserves that are
necessary over and above the asset share to ensure that guaranteed benefits can
be met, and are invested to match those liabilities. They are invested in fixed
interest securities, short term deposits and alternative assets. They may also be
invested in derivatives, and take a short position if this will result in the value of the
assets changing more in line with changes in the cost of guarantees. Selection
and management of the alternative assets will be subject to particularly detailed
and continuous assessment in order to minimise adverse investment effects.
Liabilities for Non-profit policies and other liabilities
18.9.15 Assets backing the liabilities for non-profit policies are invested in fixed interest
securities chosen to broadly match the duration and amount of the liabilities.
18.9.16 The With-Profits Committee and Board has to approve any new or novel form of
investment in the fund, that does not form part of the capital support provided in
accordance with the capital policy. The Board has to approve any new or novel
form of investment for the capital support provided in accordance with the capital
policy.
Not normally traded assets
18.9.17 The fund does not hold any assets which are not normally traded
PLL PPFM Page 428 January 2024
Principle
18.10
Business Risks
The fund is closed to new business other than increments or new members to
group schemes or policies coming into force as a result of options contained in
existing policies. Most increments to existing policies or new members to group
schemes written on or after 1 January 2000 are reassured to Phoenix Life Limited
on terms which prevent strain arising in the fund. There is therefore very limited
risk to the fund from acquiring new business.
Annuities in payment arising as a result of policies vesting, including those policies
with Guaranteed Annuity Options, are set up in the Non-Profit Fund.
The fund has a number of reassurance arrangements in force with companies
both inside and outside the Phoenix group of companies. There is a business risk
that any of the reassurers could fail and the reassurance become worth less than
expected, resulting in the fund having to meet more policy payments than
expected.
The fund actively seeks to avoid taking on new risks and is managed in such a
way as to minimise the existing risks. The Phoenix group of companies has
comprehensive processes at managerial and Board level for identifying, reporting,
monitoring and managing risks.
The costs of servicing any financing arrangements that the fund has in force could
form part of the non-policy costs.
Any compensation costs arising from mis-selling of policies allocated to the fund
shall be met by the Non-Profit Fund or the Shareholders' Fund.
Practices
18.10.1 It is not expected that the fund will take on any further business risks. The more
significant business risks are outlined below.
18.10.2 Any profit or loss of any amount arising from business risk would form part of the
non-policy costs.
18.10.3 Investment management services have been outsourced to the investment
managers and administration services have been outsourced to Phoenix Group
Management Services Limited (PGMS). There is a risk that the investment
managers and / or PGMS fail to provide an adequate service or cease to trade.
Should PGMS be unable to meet any of its obligations to provide services then
Phoenix Life Limited would request that Phoenix Group, as owners of PGMS step
in to restore the position. Should Phoenix Group not do this, then Phoenix Life
Limited would attribute any losses to the Shareholder Fund or Non-Profit Fund,
and the fund would only be affected if the Shareholder Fund or Non-Profit Fund
had insufficient excess assets to bear the losses.
18.10.4 There is a risk that the charges for investment management fees and
administration fees could vary. This could result in reduced payouts to
policyholders.
18.10.5 Many of the in-force policies contain options for new policies, options over the date
when benefits are payable, and the format of the benefits. There is therefore a
risk that the options could be exercised in a way that increases guarantee costs.
There is also a risk that many policies will surrender or transfer away, reducing the
expected value of future profits on those policies to the estate and potentially
reducing the fund at a rate that may give rise to liquidity issues. There is also a
PLL PPFM Page 429 January 2024
risk that policies with valuable guarantees lapse at a lower rate than expected,
thus increasing guarantee costs. These risks are monitored so that action may be
taken, where appropriate and practical, to minimise the risk to the fund.
18.10.6 There is a risk that the level of outgoings from the fund exceeded the income at a
time when the sale of assets was not practical. This could mean that the fund
would be unable to meet its payments to policyholders as they fall due.
18.10.7 The investment in fixed interest securities carries a risk of default by the issuers of
those assets.
18.10.8 There is a risk that mortality of assured lives increases substantially resulting in
more payments of death benefits than expected.
18.10.9 There are currently no financing arrangements giving rise to non-policy costs.
In addition for the Portfolio Bond:
18.10.10 The Portfolio Bond business is exposed to certain business risks of the Pearl With-
Profits Fund. However, as Portfolio Bond business is not normally exposed to the
profits or losses arising from the Pearl With-Profits Fund’s direct written business,
it is mainly the investment-related business risks (and the risks to the Pearl With-
Profits Fund’s solvency position) that are relevant for Portfolio bonds.
18.10.11 In the event that the fund were to become insolvent, Portfolio Bond policyholders
would share in any reduction in policy payouts along with other policyholders of
the fund – the reassurance to the Pearl With-Profits fund is an asset of the fund,
and is not directly attributable to the Portfolio Bond policyholders.
PLL PPFM Page 430 January 2024
Principle
18.11
Expenses and Charges
Portfolio Bonds
Portfolio Bond per policy expenses charged by PGMS for policy administration
were agreed with PGMS at the date of introduction of Portfolio Bonds and were
subsequently increased each year.
Portfolio Bond expenses are not directly applied to policies – policies are subject
to charges as set out in product terms, and the equivalent of an annual
management charge is deducted from asset shares. Those charges are expected
to at least cover the total costs, including commission, of all aspects of
administering the business. The equivalent annual management charges are
inclusive of the investment management fees.
It is not expected that the equivalent annual management charge would change
unless:
(a) The policy administration expenses and/or investment management fees
increased to the extent that they were greater than the amount of income
generated by the policy charges, including the annual management charges, less
the normal commission payable.
(b) The policies became unprofitable for any other reason.
Any such change would not be applied retrospectively.
All direct costs of investment are borne by the Pearl With-Profits Fund and act to
reduce the investment return.
All other business
Under the terms of the 2023 Scheme, subject to applicable laws and regulations
from time to time (including any regulations made by the regulators regarding the
allocation of costs and charges to with-profits funds):
(a) the per policy administration expenses attributable to the fund were determined
from the level set out in that Scheme increased each year by RPI plus 1%. The
Board may (and shall, where so requested by the With-Profits Committee) review
and amend the amount and application of the per policy expenses subject to the
approval of the With-Profits Committee, having obtained appropriate actuarial
advice. Increases to the per policy expenses and charges for investment
management are determined by the Board, subject to the approval of the With-
Profits Committee.
(b) investment management fees attributable to the fund are determined by the
Board subject to the approval of the With-Profits Committee.
The charges and expenses attributable to the fund, other than the per policy
administration and investment expenses, form part of the non-policy costs.
For traditional life business, asset shares allow for the expenses of administration,
plus the commission payable under the fund’s normal terms. The investment
return credited to traditional life business is reduced by the investment
management fee. For DA, UWP, PSA and CA business, asset shares are debited
with charges in the form of an annual management charge which includes the
investment management fee.
It is not expected that the levels of annual management charge made for DA,
UWP, PSA and CA business will change unless:
• The policy administration expenses and / or investment management fees
increased significantly, particularly if they increased to the extent that they
were greater than the amount of income generated by the annual
management charges; or
PLL PPFM Page 431 January 2024
• The estate was exhausted.
Any such change would only be prospective.
All direct costs of investment are borne by the fund and act to reduce the
investment return.
Practices
18.11.1 Any apportionment of charges and expenses between with-profits and other
business is normally only in respect of policies which are invested partially in with-
profits and partially in non-profit and/or unit linked investments. Any such
apportionment will normally be made on the basis of the value of the policy held in
those investments or the amounts of premium to be invested in the various funds.
18.11.2 The outsourcing agreements with Phoenix Group Management Services Limited
currently apply a charging arrangement whereby per policy expenses rise each
year by RPI plus 1%. The agreements may be terminated at any time by them
subject to one year’s notice or by Phoenix Life Limited, subject to three months’
notice. The agreements may also be terminated in the event of either party
becoming insolvent or wound up. Similar arrangements apply to agreements with
the investment managers, although the time periods may vary.
18.11.3 The current level of annual management charge applicable to asset shares for DA,
UWP, and CA business is generally 1.0% per annum, but charges applicable to
some policies are different. For PSA business, the annual management charge is
currently 0.85% per annum. Higher charges apply to initial units. The difference
between the charges made to asset shares for DA, UWP, PSA and CA business
and the expenses charged to the company by its investment managers and
Phoenix Group Management Services Limited are dealt with as non-policy costs.
18.11.4 For Portfolio Bonds, the per policy expenses charged by PGMS for policy
administration are increased each year at RPI plus 1%. Investment management
fees are agreed by the Board with its investment managers from time to time.
18.11.5 For Portfolio Bonds, any apportionment of charges and expenses between with-
profits and other business is normally only in respect of policies which are invested
partially in with-profits and partially in unit linked investments. Any such
apportionment will normally be made on the basis of funds held.
PLL PPFM Page 432 January 2024
Principle
18.12
Estate Management
As a consequence of NPI’s demutualisation, the distributable estate is to be
applied solely and exclusively in the provision of benefits to the eligible with-profits
policyholders. The distributable estate is to be distributed to the eligible with-
profits policyholders in an equitable manner, subject to the distribution being
prudent and with the intention that all of the distributable estate will be distributed.
It is unlikely there will be any distributable estate for the foreseeable future.
The estate may be used to meet any losses incurred by the company as a result
of business risk, to provide a buffer against adverse experience, to pay for the NPI
Promise, to meet guarantee costs as they arise and to meet any other costs
necessary to ensure that payouts meet the reasonable expectations of
policyholders.
Portfolio Bond policyholders have no rights to share in the distributable estate of
either the fund or the Pearl With-Profits Fund.
Practices
18.12.1 There is no distribution of the estate at present nor is there likely to be for the
foreseeable future since it is likely that all of it will be needed to meet future
guarantee costs and other costs for which it is liable.
PLL PPFM Page 433 January 2024
Principle
18.13
New Business
The fund only accepts new business in the form of increments to existing policies,
new policies arising out of rights under existing policies, and new members to
existing group schemes. Most incremental business is reassured to the Pearl
With-Profits Fund on terms which prevent strain arising in the fund.
Practices
18.13.1 The amount of new business being accepted is minimal. The only incremental
business accepted which is not reassured to Pearl With-Profits Fund is
investments in PSA under Executive Pension Plans.
PLL PPFM Page 434 January 2024
Principle
18.14
Equity Between the Fund and Shareholders
The terms of the 2023 Scheme are such that the fund continues to operate as if it
were a mutual company and the eligible with-profits policyholders remain entitled
to 100% of the profits and losses arising on the business in the fund. Any
changes to these terms of the 2023 Scheme would require the approval of the
High Court.
Practices
18.14.1 The terms of the reassurance of incremental business provide for all profits or
losses arising on that business to emerge in the Pearl With-Profits Fund, and not
in this fund. There are no shareholder profit transfers from the fund.
18.14.2 Subject to certain minimum requirements being satisfied regarding the financial
position of the fund, the capital support provided under the capital policy is
repayable to the Non-Profit Fund and the Shareholder Fund as appropriate.
PLL PPFM Page 435 January 2024
19 With-Profits Governance Arrangements
19.1 The Board is the governing body of Phoenix Life Limited with the final authority in
decision making, subject to certain responsibilities in respect of the SPI With-
Profits Fund and the National Provident Life With-Profits fund being the
responsibility of the With-Profits Committee.
The Board may consist of executive and non-executive directors. The various
funds of Phoenix Life Limited are the direct responsibility of the Board, subject to
certain responsibilities in respect of the SPI With-Profits Fund and the National
Provident Life With-Profits fund being the responsibility of the With-Profits
Committee.
The Board is responsible for managing the with-profits business, including
investment and bonus policy for the with-profits funds, other than the SPI With-
Profits Fund and National Provident Life With-Profits Fund. The With-Profits
Committee is responsible for setting investment and bonus policy for the SPI With-
Profits Fund and National Provident Life With-Profits Fund.
19.2 Phoenix Life Limited has established a With-Profits Committee which has a
majority of non-executive members. The committee normally meets around six
times a year. The committee’s role includes:
• reviewing bonus recommendations;
• reviewing ongoing compliance with the Principles and Practices of Financial
Management; and
• considering issues that may have an impact on treating customers fairly.
The key powers attributable to the former Scottish Provident Limited SPI Fund
Supervisory Committee were assumed by the With-Profits Committee under the
2009 Scheme and remain under the 2023 Scheme.
The With-Profits Committee shall consist of a majority of non-executive members,
at least one of whom shall be an Independent Member as detailed in the 2023
Scheme. The Independent Member must be a non-executive member, who is not
a director of any member or prospective member of the Phoenix Group and is an
actuary. The committee will be chaired by a non-executive member.
19.3 The Board produces a report (or separate reports for each of the with-profits
funds) addressed to with-profits policyholders each year within six months of the
financial year end. This report covers compliance with the Principles and
Practices of Financial Management and significant issues where discretion has
been exercised, in particular where such issues relate to the competing or
conflicting interests of policyholders and shareholders. Policyholders will normally
be advised of the report as part of their regular bonus mailing. The report is
available on the www.phoenixlife.co.uk internet site and is available to
policyholders on request.
19.4 Phoenix Life Limited has appointed a With-Profits Actuary for each of its with-
profits funds. The With-Profits Actuary provides advice to Phoenix Life Limited on
the implications of certain matters for with-profits policyholders. The With-Profits
Actuary for each fund produces a report each year for the Board on key aspects of
the discretion exercised in respect of that fund (including the application of the
Principles and Practices of Financial Management). The With-Profits Actuary of
the SAL Fund has additional responsibilities relating to the 2009 PALAL Scheme.
19.5 Phoenix Life Assurance Europe (PLAE) Board is entitled to make representation to
the Phoenix Life Limited With-Profits Actuary, the Phoenix Life Limited With-Profits
Committee, the Phoenix Life Limited Board and the CEO of Phoenix Life Limited
on matters affecting the reinsured policies and to receive an explanation of the
PLL PPFM Page 436 January 2024
basis for decisions which affect holders of such reinsured policies, and Phoenix
Life Limited shall have regard to all such representations when making its
decisions.
PLL PPFM Page 437 January 2024
Appendix 1 Glossary
Glossary of Terms
2005 Scheme
The Scheme in 2005 under which policies formerly written in the long-
term business funds of Phoenix Assurance Limited, Bradford Insurance
Limited and Swiss Life (UK) PLC were transferred to Phoenix Life
Limited on 31 December 2005. See appendix 2.
2006 Scheme
The Scheme in 2006 under which policies formerly written in the long-
term business funds of Alba Life Limited, Britannic Assurance plc,
Britannic Retirement Solutions Limited, Britannic Unit Linked Assurance
Limited, Century Life plc and Phoenix Life & Pensions Limited were
transferred to Phoenix Life Limited on 31 December 2006. See
appendix 2.
2009 PALAL Scheme
The Scheme of arrangement under Part 26 of the Companies Act 2006
for Phoenix & London Assurance Limited which became effective on 31
December 2009. Under its terms, certain with-profits pension policies
gave up their option to convert their maturity value into an annuity on
guaranteed rates in exchange for an immediate increase to their value
and a change to the underlying investment practices. See section 14.1
2009 Scheme
The Scheme under which policies formerly written in the long-term
business funds of Scottish Provident Limited and Scottish Mutual
Assurance Limited were transferred to Phoenix Life Limited on 6
February 2009. See appendix 2.
2011 Scheme
The Scheme under which policies formerly written in the long-term
business fund of Phoenix & London Assurance Limited were transferred
to Phoenix Life Limited on 14 February 2011. See appendix 2.
2012 Scheme
The Scheme under which policies formerly written in the long-term
business fund of NPI Limited were transferred to Phoenix Life Limited on
31 March 2012. See appendix 2.
2022 Scheme
The Scheme under which Irish business formerly written within the 90%
With-Profits Fund, the Alba With-Profits Fund, the Phoenix With-Profits
Fund and the SPI With-Profits Fund was transferred from Phoenix Life
Limited to Phoenix Life Assurance Europe dac on 1 January 2023. See
appendix 2.
2023 Scheme
The Scheme under which policies formerly written in the long term
business funds of Phoenix Life Assurance Limited, Standard Life
Assurance Limited and Standard Life Pension Fund Limited were
transferred to Phoenix Life Limited on 27 October 2023. See section 3.2
Allocated business
With-profits business in the Pearl With-Profits Fund which was allocated
from the NPI With-Profits Fund under the 2023 Scheme and the liability
for certain unitised with-profits investments known as Portfolio Bonds
transferred by an interfund agreement from the National Provident Life
With-Profits Fund.
Alternative assets
Investments that are typically made with the aim of enhancing returns
whilst reducing overall investment risk and fluctuations in overall returns.
Before investing in new types of investment the Board will obtain the
advice of the Chief Actuary and the investment managers on the
benefits and risks of the proposition. This would include an analysis of
the nature and proportion of future outcomes in which the instrument
would prove materially disadvantageous relative to more traditional
PLL PPFM Page 438 January 2024
investments. If the instrument is to be held in material amounts in
respect of with-profits policies, the Board will also seek the opinion of the
With-Profits Actuary and the With-Profits Committee.
Annual Bonus
A bonus which may be added to a with-profits policy which increases the
guaranteed benefits. Once added, annual bonuses cannot be taken
away. Sometimes referred to as a regular or a reversionary bonus and
interest additions.
Asset Share
Retrospective accumulation of premiums paid at the rates of investment
return earned, after allowing for charges, such as expenses, mortality
costs, guarantee costs, tax and other charges. It is described more fully
in section 4.3.
Board
The governing body of Phoenix Life Limited with the final authority in
decision making. It may consist of executive and non-executive
directors. The various funds of Phoenix Life Limited are the direct
responsibility of the Board. In practice the Board may delegate some of
its day to day decision making capabilities to nominated individuals,
although the Board will still remain responsible for those decisions.
Bonds Not Eligible
for Final Bonus
With-profits bonds in the Phoenix With-Profits Fund under which it has
never been the intention or practice to add a final bonus. They were
issued mainly between 1991 and 1996. This class does not include
other with-profits bonds for which, although no final bonus is presently
payable, may be eligible for it in the future.
Buffer Reserve
An amount of assets in the Britannic Industrial Branch Fund and the
Britannic With-Profits Fund that may be used to support their liabilities in
accordance with the 2023 Scheme . See appendix A2.7.
Capital event
Phoenix Life Limited being unduly exposed to a risk of being unable to
meet its SCR, or its capital needs (as determined in accordance with
regulatory requirements to be adequate, both as to amount and quality,
to ensure that there is no significant risk that its liabilities cannot be met
as they fall due).
Capital Support
Arrangements
Specifically for the Alba With-Profits Fund, this refers to the way the fund
is to be managed in line with its Capital Support Agreement as described
in section 8.3.
Chief Actuary
The actuary who provides guidance to the Board on actuarial matters.
Controlled Funding
Arrangements
With-profits business held under a grouped basis where the funding of
benefits is controlled by periodic actuarial review and is the responsibility
of the trustees to the arrangement.
Credit Spread
The excess of the yield on a fixed-interest security not issued by the UK
government over the yield on a fixed-interest security of the same term
issued by the UK Government (may be negative).
Deposit
Administration
Business
With-profits business under which policy benefits are determined by
holding premiums paid in a monetary account to which interest additions
are made based on a declared rate of return subject to the act of
smoothing.
PLL PPFM Page 439 January 2024
Deposit Back
Where the company makes a large payment to a counterparty to provide
it with future benefits (such as under a reinsurance policy), some of the
premium is returned to the company to hold on behalf of the
counterparty, releasing it only as the benefits are delivered.
Distributable estate
The amount of estate if any, considered by the Board to be available
from time to time to enhance the benefits payable to with-profits policies
which have an interest in the estate.
Estate
The estimated realistic value of the assets less the estimated realistic
value of the liabilities. It is calculated using realistic assumptions and
generally accepted methodologies on a basis determined by the Board.
Final Bonus
A bonus which may be payable when a with-profits policy becomes a
claim such as on death or maturity, and paid in addition to the
guaranteed benefits and any interim bonus.
Final Uplift
A form of bonus which provides an uplift to payouts for fully participating
deposit administration policies to allow for any distributable estate from
the fund.
Fully Participating
Business
With-profits business in the Alba With-Profits Fund where bonuses are
determined with respect to both the application on investment return,
smoothing and all the profits and losses arising in the Alba With-Profits
Fund. See also Investment Smoothing business.
Interim Bonus
A bonus which may be payable when a with-profits policy becomes a
claim. It is paid in addition to the guaranteed benefits, allowing for the
accrual of annual bonus since the previous annual bonus declaration.
Investment
Committee
A sub-committee of the Board set up to review and consider investment
related matters.
Investment Managers
The firm or persons appointed from time to time to manage the
investments of a fund.
Investment
Smoothing Business
With-profits business in the Alba With-Profits Fund where bonuses are
determined with respect to the application of investment returns and
smoothing only. Policies within this group do not share in the profits and
losses of the Alba With-Profits Fund apart from those arising on
investments. See also Fully Participating business.
Long Position
Where an investor purchases investments in excess of those which it
strictly needs; often using the proceeds of a short position in a different
type of investment to give a combined effect which may be suitable for
matching liabilities for policy guarantees.
Long-Term Business
Fund
In the context of Phoenix Life Limited, this consists of the Non-Profit
Fund, the 90% With-Profits Fund, the 100% With-Profits Fund, the Alba
With-Profits Fund, the Britannic With-Profits Fund, the Britannic
Industrial Branch Fund, the Phoenix With-Profits Fund, the Scottish
Mutual With-Profits Fund, the SPI With-Profits Fund, the SAL With-
Profits Fund, the Pearl With-Profits Fund, the SERP Fund, the London
Life With-Profits Fund, the National Provident Life With-Profits Fund, the
Heritage With-Profits Fund, the UK Smoothed Managed With-Profits
Fund, the German With-Profits Fund and the German Smoothed
Managed With-Profits Fund.
PLL PPFM Page 440 January 2024
Marked to Market /
Marking to Market
Where the value of an exposure to a counterparty (such as a derivative
contract) increases, this is a mechanism whereby the counterparty
deposits with the company an amount to cover the increase in value.
Market Consistent
A value placed on a guarantee or policyholder option on a with-profits
policy by identifying an asset (such as a financial option) for which a
price is available from financial markets and which exactly or closely
resembles the guarantee or policyholder option. The price of the asset
is then used as a proxy for the value of the guarantee or policyholder
option.
Market Value
Reduction (MVR)
A percentage reduction to the value of units on a unitised policy which
applies on encashment except in certain circumstances specified in the
policy document. Sometimes referred to as a market value adjuster.
Also applies to smoothed return and deposit administration business.
Matching Adjustment
Fund
The fund of that name maintained in the Phoenix Non-Profit Fund for the
purpose of calculating the matching adjustment in accordance with
Regulation 42 of the Solvency 2 Regulations 2015.
Mathematical
Reserves
The value of guaranteed sums assured and existing annual bonus, less
the value of future annual premiums, calculated in accordance with the
rules of section 1.2 of the PRA Prudential Sourcebook for Insurers.
Maturity (Date)
• for a traditional endowment policy, the date on which the sum
assured and bonuses will be paid;
• for a traditional pensions policy, the selected retirement age;
• for a unitised pension policy, the period around the selected
retirement age during which the value of units may be used to provide
retirement benefits without the application of a market value reduction
or with the application of a restricted market value reduction; or
• for a unitised endowment or bond, the date on which the value of
units will or can be taken in full without the application of a market
value reduction or with the application of a restricted market value
reduction.
Non-Protected Exits
Claims occurring at other than a protected date. Policy benefits to be
paid are not generally guaranteed. These are typically surrenders or
withdrawals, other than at a guarantee date, transfers for pensions
business and early retirements. Also refers to policies becoming paid
up.
Not normally traded
(assets)
Strategic assets that would not normally be traded because of their
strategic importance to the fund / company (per Section 20.3 of the
Conduct of Business Sourcebook which forms part of the Handbook
issued by the Financial Conduct Authority (FCA)). Examples of such
assets might include properties occupied by the company, or
investments in subsidiary companies.
Own funds
Own funds comprise of basic own funds and ancillary own funds.
Basic own funds comprise of excess assets over liabilities and
subordinated liabilities.
Ancillary own funds consist of items other than basic own funds which
can be called up to avoid losses.
Payer Swaptions
Swaptions in which the underlying swap is to pay a fixed rate and
receive a variable rate.
PLL PPFM Page 441 January 2024
Payout
The total amount paid in the event of a claim including bonuses, both
annual bonuses and final bonuses and any market value reduction
(where applied).
Payout Ratio
The amount paid in the event of a claim (policy payout) as a percentage
of the asset share.
PLAL 2012 Scheme
The Scheme in 2012 under which policies formerly written in the long-
term business funds of London Life Limited were transferred to Phoenix
Life Assurance Limited on 30 September 2012. See appendix 2.
PLAL 2015 Scheme
The Scheme in 2015 under which policies formerly written in the long
term business fund of National Provident Life Limited were transferred to
Phoenix Life Assurance Limited on 30 March 2015. See appendix 2.
PPF (Policies)
Unit-linked pensions policies in the Phoenix With-Profits Fund which
may invest in full or in part in the with-profits ‘Profit Plus Fund’. Any
references to these policies in this document are relevant only to the
extent that they are invested in that fund.
Private Equity
These are equity securities in operating companies that are not publicly
traded on a stock exchange, commonly involving the investment of
capital in a company or fund by institutional investors where the
investment strategy includes leveraged buyouts, venture capital, growth
capital, distressed investments, balance sheet restructures, acquisitions
finance, carve-outs and mezzanine capital.
Protected Date
A date (sometimes called a guarantee date) on which policy benefits are
either guaranteed to be paid without any reductions, or some other
minimum amount applies. Such dates are described in the terms and
conditions of each policy, and may include death, maturity, surrender or
withdrawal at a guarantee date or retirement at selected retirement age.
For traditional with-profits business, the claim value paid at a protected
date will normally be the sum assured together with any annual, interim
and final bonus.
Receiver Swaptions
An option to enter into an interest rate swap of a specified term, at a
specified date, in which the underlying swap is to receive a fixed rate
and pay a variable rate.
Responsible
investment
Our practice of incorporating Environmental, Social and Governance
(ESG) factors into investment decisions.
Regulator
From April 2013 we are regulated by both the Prudential Regulation
Authority (PRA) and the Financial Conduct Authority (FCA). Prior to this
we were regulated by the Financial Services Authority (FSA).
References in this document to our regulator, and the rules set by our
regulator, refer to the PRA or FCA as appropriate.
Scheme capital
policy
The company’s capital policy (under which the company intends to hold
amounts of capital in excess of liabilities) as set out in Schedule 1 of the
2023 Scheme (as amended or adjusted from time to time in accordance
with the terms of the 2023 Scheme).
Shareholder Fund
This fund is not part of the long-term business fund of Phoenix Life
Limited and consists of assets owned by the shareholders of Phoenix
Life Limited. Phoenix Life Limited is ultimately owned by Phoenix Group
Holdings.
PLL PPFM Page 442 January 2024
Short Position
Where shares or other assets are sold which the investor does not own
(but has, for example, borrowed).
Smoothed Return
(Business)
With-profits business in the Britannic With-Profits Fund where bonuses
are determined with respect to the application of a smoothed investment
return.
Smoothed Growth Fund and Smoothed Income Fund business in the
Scottish Mutual With-Profits Fund which are collectively known as the
smoothed investment funds.
Smoothing
Process applied to reduce the volatility of payouts for with-profits
business. Typically, but not restricted to, the smoothing of the effects of
volatile investment returns.
Solvency capital
requirement
A solvency capital requirement is the amount of funds that European
Union insurance companies are required to hold.
Surrender Values
This includes all non-protected exits where premiums cease or the policy
is surrendered except on protected dates.
Swaps
Contracts to exchange fixed interest rates for variable interest rates for
specified periods or vice versa.
Swaptions
Contracts giving the holder the option but not the obligation to enter into
swaps at future dates.
Term Remaining
The term remaining on a policy to its maturity date. Also refers to term
remaining on fixed interest investments to their redemption date.
Threshold amount
The amount of with-profits assets necessary to meet a with-profits fund’s
regulatory and capital policy.
Traditional (With-
Profits) Policy
A with-profits policy under which guaranteed policy benefits are fixed
when the policies are taken out in return for payment of either a single
premium or annual premiums over the term of the policies. The
guaranteed policy benefits are typically expressed as a sum assured or
an annuity. Bonuses may be added. Sometimes referred to as a
conventional (with-profits) policy. See section 4.2.
Unitised (With-
Profits) Policy
A with-profits policy under which each premium purchases a number of
‘units’ and either:
• the price of the units increases daily at the daily equivalent of the
current annual bonus rate (but subject to any rounding in the unit
prices); or
• the price remains constant and annual bonuses purchase additional
units.
On encashment, the value of the units at the then price is paid (possibly
subject to a market value reduction or, in the case of PPF policies, to a
surrender charge). See section 4.2.
Volatility
A measure of the past or expected future rate of change in asset prices.
It is an important parameter in the pricing of financial options and in the
market-consistent valuation of liabilities.
With-Profits Actuary
An actuary who is appointed by the Board and who under PRA rules is
required to provide advice to Phoenix Life Limited on the implications of
certain matters for with-profits policyholders. There may be more than
one such actuary, each of whom advises on one or more of the with-
PLL PPFM Page 443 January 2024
profits funds. References to With-Profits Actuary in a particular section
refer to the actuary who performs the function for that particular fund.
With-profits asset
value
The value of the assets held in a with-profits fund (including support) and
valued in accordance with the with-profits regulatory requirements.
With-Profits
Committee
Phoenix Life Limited has established a With-Profits Committee which
comprises a majority of non-executive members. The chairman of the
committee is a non-executive member. The Chief Executive of Phoenix
Life Limited also attends. The committee normally meets around six
times a year. The committee’s role includes:
• reviewing bonus recommendations;
• reviewing ongoing compliance with the Principles and Practices of
Financial Management; and
• considering issues that may have an impact on treating customers
fairly.
For the SPI With-Profits Fund and National Provident Life With-Profits
Fund the With-Profits Committee has the additional responsibility to set
bonus and investment policy.
At least one member must be totally independent and they must be an
actuary as detailed in the 2023 Scheme.
With-Profits Funds
In the context of this PPFM for Phoenix Life Limited, these consist of the
90% With-Profits Fund, the 100% With-Profits Fund, the Alba With-
Profits Fund, the Britannic With-Profits Fund, the Britannic Industrial
Branch Fund, the Phoenix With-Profits Fund, the Scottish Mutual With-
Profits Fund, the SPI With-Profits Fund, the SAL With-Profits Fund, the
Pearl With-Profits Fund, the SERP Fund, the London Life With-Profits
Fund and the National Provident Life With-Profits Fund.
Separate documents are maintained for the Principles and Practices of
Financial Management for the with-profits funds that were previously
part of Standard Life Assurance Limited.
With-profits policy
liabilities
Liabilities calculated in accordance with 3.2 of the Surplus Funds section
of the PRA Rulebook but including future policy-related liabilities in
Paragraphs 1 to 6 of the definition of future policy-related liabilities in the
Glossary of the PRA Rulebook.
The future policy-related liabilities cover planned and future deductions
for cost of contractual guarantees, financial options and smoothing,
planned deductions for life and other benefits, and future liabilities to
repay financing costs.
PLL PPFM Page 444 January 2024
Abbreviations Used
ACI
Allianz Cornhill Insurance plc
Alba
Alba Life Limited
AVC
Additional Voluntary Contribution
BA
Britannic Assurance plc
BLA
Britannia Life Assurance
BLL
Britannia Life Limited
Bradford
Bradford Insurance Company Limited
Britannic
Britannic Assurance (where used in sections 9 and 10)
BRV
Bonus Reserve Valuation
BULA
Britannic Unit Linked Assurance Limited
Century
Century Life plc
CPI
Consumer Price Inflation
FS
FS Assurance
FCA
Financial Conduct Authority
IB
Industrial Branch
LAS
Life Association of Scotland Limited
LTICR
Long-Term Insurance Capital Requirement
MVR
Market Value Reduction
NAE
National Average Earnings
NEL
National Employers Life Assurance Company and associated
companies
OB
Ordinary Branch
OEICS
Open ended investment companies
PAL
Phoenix Assurance Limited
PALAL
Phoenix & London Assurance Limited
PGMS
Phoenix Group Management Services Limited
PLAE
Phoenix Life Assurance Europe dac
PLAL
Phoenix Life Assurance Limited
PLL
Phoenix Life Limited
PLP
Phoenix Life & Pensions Limited
PPFM
Principles and Practices of Financial Management
PPL
PRA
Phoenix Pensions Limited
Prudential Regulation Authority
Prosperity
Prosperity Life Assurance
RHL
Royal Heritage Life Assurance Limited
RLI
Royal Life Insurance Limited
RPI
Retail Prices Index
RPIX
Retail Prices Index excluding Mortgage Interest Payments
RSALI
Royal & Sun Alliance Linked Insurances Limited
RSALP
Royal & Sun Alliance Life and Pensions Limited
SCR
Solvency Capital Requirement
Sentinel
Sentinel Life
SMI
Scottish Mutual International
SMA
Scottish Mutual Assurance Limited
SONIA
Sterling Overnight Index Average
SPL
Scottish Provident Limited
Swiss Life
Swiss Life (UK) PLC
WPBR
With-Profits Benefit Reserve
PLL PPFM Page 445 January 2024
Appendix 2 Historic Information
Phoenix Life Limited traces its history back to Lloyds Life Assurance Limited, which was
founded in 1971 and was purchased by Royal Insurance in 1985. It was subsequently
renamed Royal Heritage Life Assurance Limited (RHL).
The Royal Insurance Group merged with the Sun Alliance and London Insurance Group in
1996, and in 1998 the business of the following companies was transferred into Royal
Heritage Life Assurance Limited:
• Royal Life (Unit Linked Assurances) Limited
• Royal Life (Unit Linked Pension Funds) Limited
• Sun Alliance Linked Insurance Limited
• Sun Alliance Pensions Limited
• Property Growth Assurance Company Limited
At the same time Royal Heritage Life Assurance Limited was renamed Royal & Sun Alliance
Linked Insurances Limited (RSALI). As part of the transfers in 1998, the with-profits policies,
which existed in Royal Heritage Life Assurance Limited at the time, were converted to non-
profit policies and became entitled to the addition of specified additional benefits at specified
dates.
Royal & Sun Alliance Linked Insurances Limited closed to new business in 2002, although it
has continued to issue policies under options on existing policies, including the acceptance of
new members to existing pension arrangements and the issue of immediate annuities in
respect of vesting pensions.
On 29 December 2005, Royal & Sun Alliance Limited Insurances Limited was renamed
Phoenix Life Limited.
Phoenix Life Limited is now part of Phoenix Group.
2005 Scheme
A2.1 Under the 2005 Scheme, business from the following companies was transferred
into Phoenix Life Limited on 31 December 2005:
• Phoenix Assurance Limited (PAL)
• Bradford Insurance Company Limited (Bradford)
• Swiss Life (UK) PLC (Swiss Life)
A2.2 Two new funds were established within Phoenix Life Limited alongside the then
existing Non-Profit Fund, namely the 90% Fund and the 100% Fund.
A2.3 All of the with-profits policies from the Swiss Life OB Fund (apart from the with-
profits element of Libra Personal Pension Plans and similar policies) and from the
Swiss Life IB fund were transferred to the 90% Fund. Former with-profits policies
which became non-profit on becoming paid up in the Swiss Life OB Fund and the
Swiss Life IB Fund were also transferred to the 90% Fund. All of the with-profits
policies from PAL, Bradford and the Swiss Life With Profit Fund were transferred
into the 100% Fund. Swiss Life Libra Personal Pension Plans and similar policies
were transferred to the Non-Profit Fund but any investment in Pension With-Profits
Fund units was then internally reassured to the 100% Fund.
2006 Scheme
A2.4 Under the 2006 Scheme, business from the following companies was transferred
into Phoenix Life Limited on 31 December 2006:
PLL PPFM Page 446 January 2024
• Alba Life Limited (Alba)
• Britannic Assurance plc (BA)
• Britannic Retirement Solutions Limited
• Britannic Unit Linked Assurance Limited (BULA)
• Century Life plc (Century)
• Phoenix Life & Pensions Limited (PLP)
A2.5 Four new with-profits funds were created and the 90% Fund was re-named the
90% With-Profits Fund and the 100% Fund was re-named the 100% With-Profits
Fund. This resulted in the following seven funds in Phoenix Life Limited:
• the 90% With-Profits Fund;
• the 100% With-Profits Fund;
• the Alba With-Profits Fund;
• the Britannic With-Profits Fund;
• the Britannic Industrial Branch Fund;
• the Phoenix With-Profits Fund; and
• the Non-Profit Fund.
A2.6 All of the policies from the Ordinary Long Term Fund of Alba Life were transferred
to the Alba With-Profits Fund. All of the policies from the Industrial Branch Fund of
Britannic Assurance were transferred to the Britannic Industrial Branch Fund. All
of the policies from the Ordinary Branch With Profits Fund of Britannic Assurance
and the with-profits policies from Century were transferred to the Britannic With-
Profits Fund. All of the policies from the With Profits Fund of Britannic Unit Linked
Assurance were transferred to the 90% With-Profits Fund. All of the policies from
the Phoenix Life & Pensions long-term fund were transferred to the Phoenix With-
Profits Fund. Other long-term business from the companies listed in 1 above was
transferred to the Non-Profit Fund.
A2.7 Under the 2006 Scheme, memorandum accounts were set up in the Britannic
With-Profits Fund and Britannic Industrial Branch Fund, called the WP Buffer
Reserve Account and the IB Buffer Reserve Account, collectively known as the
Buffer Reserve. The Buffer Reserve will be available to support the Britannic
With-Profits Fund and Britannic Industrial Branch Fund. This replicates the
mechanics that existed in Britannic Assurance prior to the 2006 Scheme. More
details of how the Buffer Reserve works are given in sections 9 and 10.
2009 Scheme
A2.8 Under the 2009 Scheme, business from the following companies was transferred
into Phoenix Life Limited on 6 February 2009:
• Scottish Mutual Assurance Limited (SMA)
• Scottish Provident Limited (SPL)
A2.9 Two new funds were established within Phoenix Life Limited alongside the then
existing six with-profits funds giving:
• the 90% With-Profits Fund;
• the 100% With-Profits Fund;
• the Alba With-Profits Fund;
• the Britannic With-Profits Fund;
• the Britannic Industrial Branch Fund;
• the Phoenix With-Profits Fund;
• the Scottish Mutual With-Profits Fund;
• the SPI With-Profits Fund; and
• the Non-Profit Fund.
PLL PPFM Page 447 January 2024
A2.10 Policies in the Scottish Mutual Assurance Limited With Profits Sub-Fund were
transferred into the Scottish Mutual With-Profits Fund. The other long-term
business remaining in Scottish Mutual Assurance Limited following the transfer of
the Pegasus and Self Assurance protection business to the Royal London Mutual
Insurance Society Limited was transferred into the Non-Profit Fund. Under the
powers of the 2009 Scheme the Non-Profit Fund reassured the former Scottish
Mutual Assurance Limited Smoothed Investment Fund business to the Scottish
Mutual With-Profits Fund.
Policies in the Scottish Provident Limited SPI Fund were transferred into the SPI
With-Profits Fund. The with-profits policies originally held within the Special Fund
within Scottish Provident Limited were converted into non-profit policies and
transferred into the SPI With-Profits Fund as part of the 2009 Scheme. The other
long-term business remaining in Scottish Provident Limited following the transfer
of the Self Assured protection business to the Royal London Mutual Insurance
Society Limited was transferred into the Non-Profit Fund.
The key powers attributable to the SPI Fund Supervisory Committee were
assumed by the With-Profits Committee under the 2009 Scheme. For the SPI
With-Profits Fund only, the With-Profits Committee has the additional responsibility
for setting the investment and bonus policy. The With-Profits Committee shall
consist of a majority of Independent With-Profits Committee Members, at least one
of whom shall be an Independent Member as detailed in the 2009 Scheme.
A2.11 Any investments in Pension With-Profits Fund units for former Swiss Life Libra
Personal Pensions Plans were internally reassured to the 90% With-Profits Fund.
These policies are part of the Non-Profit Fund and previously any investment in
Pension With-Profits Fund units was internally reassured to the 100% With-Profits
Fund, as described in paragraph A2.3.
A2.12 As part of the 2009 Scheme, the £200m of subordinated loan notes (debt) that
was previously issued by Scottish Mutual Assurance Limited was transferred to
the Shareholder Fund.
2011 Scheme
A2.13 Under the 2011 Scheme, business from Phoenix & London Assurance Limited
was transferred into Phoenix Life Limited on 14 February 2011.
A2.14 A new fund was established within Phoenix Life Limited alongside the then
existing eight with-profits funds giving:
• the 90% With-Profits Fund;
• the 100% With-Profits Fund;
• the Alba With-Profits Fund;
• the Britannic With-Profits Fund;
• the Britannic Industrial Branch Fund;
• the Phoenix With-Profits Fund;
• the Scottish Mutual With-Profits Fund;
• the SPI With-Profits Fund
• the SAL With-Profits Fund; and
• the Non-Profit Fund.
A2.15 Policies in the Phoenix & London Assurance Limited long-term fund were
transferred into the SAL With-Profits Fund.
PLL PPFM Page 448 January 2024
2012 Scheme
A2.16 Under the 2012 Scheme, business from NPI Limited was transferred into Phoenix
Life Limited on 31 March 2012.
A2.17 A new fund was established within Phoenix Life Limited alongside the then
existing nine with-profits funds giving:
• the 90% With-Profits Fund;
• the 100% With-Profits Fund;
• the Alba With-Profits Fund;
• the Britannic With-Profits Fund;
• the Britannic Industrial Branch Fund;
• the Phoenix With-Profits Fund;
• the Scottish Mutual With-Profits Fund;
• the SPI With-Profits Fund
• the SAL With-Profits Fund;
• the NPI With-Profits Fund; and
• the Non-Profit Fund.
A2.18 With-profits benefits in respect of policies in the NPI Limited long-term fund were
transferred into the NPI With-Profits Fund.
Scheme 2022
A2.19 The 2022 Scheme transferred the Irish business in the following funds to Phoenix
Life Assurance Europe dac (PLAE):
• the 90% With-Profits Fund;
• the Phoenix With-Profits Fund;
• the Alba With-Profits Fund; and
• the SPI With-Profits Fund.
This business was reinsured back to Phoenix Life Limited and associated security
given. Benefits for these policies are linked to participation in the relevant with-
profits funds within Phoenix Life Limited. The Phoenix Life Limited Principles and
Practices of Financial Management continue to apply for the transferred
policyholders as the funds are reassured back to Phoenix Life Limited in order to
ensure continuity of treatment.
Scheme 2023
A2.20 Under the 2023 Scheme business from the following companies was transferred
into Phoenix Life Limited on 27 October 2023:
• Phoenix Life Assurance Limited (PLAL)
• Standard Life Assurance Limited (SLAL)
• Standard Life Pension Fund Limited (SLPF)
A2.21 Also as part of the 2023 Scheme the business in the NPI With-Profits Fund which
was previously reassured into the PLAL Pearl With-Profits Fund was transferred
into the PLL Pearl With-Profits Fund.
A2.22 Eight new funds were established within Phoenix Life Limited alongside the then
existing nine with-profits funds giving:
• the 90% With-Profits Fund;
• the 100% With-Profits Fund;
• the Alba With-Profits Fund;
• the Britannic With-Profits Fund;
PLL PPFM Page 449 January 2024
• the Britannic Industrial Branch Fund;
• the Phoenix With-Profits Fund;
• the Scottish Mutual With-Profits Fund;
• the SPI With-Profits Fund
• the SAL With-Profits Fund;
• the Pearl With-Profits Fund;
• the SERP Fund;
• the London Life With-Profits Fund;
• the National Provident Life With-Profits Fund;
• the Heritage With-Profits Fund;
• the UK Smoothed Managed With-Profits Fund;
• the German With-Profits Fund;
• the German Smoothed Managed With-Profits Fund; and
• the Non-Profit Fund.
A2.23 Policies in the Phoenix Life Assurance Limited Pearl With-Profits Fund and the
with-profits benefits in the Phoenix Life Limited NPI With-Profits Fund transferred
into the Pearl With-Profits Fund. Policies in the Phoenix Life Assurance SERP
Fund transferred into the SERP Fund. Policies in the Phoenix Life Assurance
Limited London Life Fund transferred into the London Life With-Profits Fund and
policies in the Phoenix Life Assurance Limited National Provident Life With-Profits
Fund transferred into the National Provident Life With-Profits Fund.
A2.24 Policies in the Standard Life Assurance Limited Heritage With-Profits Fund
transferred into the Heritage With-Profits Fund. Policies in the Standard Life
Assurance Limited UK Smoothed With-Profits Fund transferred into the UK
Smoothed With-Profits Fund. Policies in the Standard Life Assurance Limited
German With-Profits Fund transferred into the German With-Profits Fund and
policies from the Standard Life Assurance Limited German Smoothed With-Profits
Fund transferred into the German Smoothed With-Profits Fund.
Separate documents are maintained for the Principles and Practices of Financial
Management for the with-profits funds that were previously part of Standard Life
Assurance Limited. These are the:
• the Heritage With-Profits Fund;
• the UK Smoothed With-Profits Fund;
• the German With-Profits Fund; and
• the German Smoothed With-Profits Fund.
This also applies to participating European business which transferred to Standard
Life International (SLIntl) and was reinsured back to Standard Life Assurance
Limited.
PLAL 2012 Scheme
A2.25 Under the PLAL 2012 Scheme, business from London Life Limited was transferred
into Phoenix Life Assurance Limited on 30 September 2012.
A2.26 A new with-profits fund was established within Phoenix Life Assurance Limited
alongside the then existing two with-profits funds to receive the former London Life
with-profits business and the two non-profit funds were merged to form the Non-
Profit Fund. In addition, the 90:10 Fund was renamed the Pearl With-Profits Fund.
This meant that the long-term fund of Phoenix Life Assurance Limited comprised
of:
• the Pearl With-Profits Fund;
• the SERP Fund;
• the London Life With-Profits Fund and
• the Non-Profit Fund
PLL PPFM Page 450 January 2024
A2.27 All of the policies from the Pearl 90:10 Fund remained in that fund which was then
renamed the Pearl With-Profits Fund. All of the policies from the Pearl SERP
Fund remained in that fund which was then renamed the SERP Fund. All of the
policies from the London Life with-profits sub-funds (Life With-Profits Fund and
Pension With-Profits Fund) transferred to the London Life With-Profits Fund.
PLAL 2015 Scheme
A2.28 Under the PLAL 2015 Scheme, business from National Provident Life Limited was
transferred into Phoenix Life Assurance Limited. All policies, other than annuities
in payment, were transferred into a new with-profits fund, the National Provident
Life With-Profits Fund. As a result, the long-term fund of Phoenix Life Assurance
Limited comprises of
• the Pearl With-Profits Fund;
• the SERP Fund;
• the London Life With-Profits Fund;
• the National Provident Life With-Profits Fund and
• the Non-Profit Fund
Other events
A2.29 In 2007, Phoenix Life Limited set up Phoenix Pensions Limited (PPL) as a wholly
owned subsidiary. PPL is an asset of the Shareholder Fund of Phoenix Life
Limited. Risks under immediate annuity policies were transferred to PPL. The
risks in PPL were subsequently recaptured in 2011.
A2.30 In 2008, the Phoenix Life Limited Non-Profit Fund acquired Scottish Mutual
International (SMI) but subsequently sold SMI in 2015
A2.31 At the end of 2008, Phoenix & London Assurance Limited (PALAL) recaptured the
group unitised with-profits pensions business which it had previously reassured to
the 100% With-Profits Fund.
A2.32 In 2010, the Phoenix Life Limited Shareholder Fund acquired NPI Limited (NPIL).
All the business in NPIL was subsequently transferred into PLL under the 2012
Scheme.
A2.33 Under the 2012 Scheme the immediate annuity business reassured from National
Provident Life Limited to NPIL was transferred into the Phoenix Life Limited Non-
Profit Fund.
PLL PPFM Page 451 January 2024
Appendix 3 History of Principles and Practices of Financial Management for
Phoenix Life Limited since 1 January 2007
The first version of the Principles and Practices of Financial Management for Phoenix Life
Limited following the funds merger under the 2006 Scheme was applicable from 1 January
2007.
For historical information before 1 January 2007 refer to the Principles and Practices of
Financial Management of the previous companies.
1. The Principles and Practices of Financial Management have been republished to
reflect changes in Phoenix Life Limited's circumstances and the business
environment.
1.1 The Principles and Practices of Financial Management was republished in May
2007. The main changes to the practices were due to:
• The capital policy in the background section was revised following the FSA
PS06/14 rule changes.
• The Alba With-Profits Fund former Crusader With-Profits Performance Fund
and With-Profits Pension Fund business being accepted under an inter-fund
arrangement with the Non-Profit Fund.
• The clarification of the Alba With-Profits traditional business surrender
practices.
• Other minor amendments.
1.2 The Principles and Practices of Financial Management was republished in October
2007. The main changes to the practices were due to:
• The capital policy in the background section was revised to reflect the changes
due to Phoenix Pensions Limited which is wholly owned by the Shareholder
Fund.
• The asset share practices were updated to reflect the latest estate distributions
for the former Swiss Life, former Britannic Unit Linked Assurance, former
Phoenix Assurance Limited and former Britannic Assurance Industrial Branch
business.
• Update the Phoenix With-Profits Fund equity-backing ratio.
• Other minor amendments.
1.3 The Principles and Practices of Financial Management was republished in January
2008. The main changes to the practices were due to:
• Revision of estate distribution practices and latest estate distributions.
• Revised smoothing practices.
• Revised traditional business surrender value targets.
• Final bonus reviews normally being twice a year generally 1 January and 1
July.
• Revised cost of bonus for determining shareholder transfers.
• Revised parameters in the Phoenix With-Profits investment strategy.
• Revised Britannic With-Profits Fund and Britannic Industrial Branch Fund initial
expenses charged to traditional business asset shares.
• Britannic With-Profits Fund and Britannic Industrial Branch Fund pension
scheme longevity costs to be charged to the Buffer Reserve.
• Update for 2008 values and asset mixes.
• Other minor amendments.
PLL PPFM Page 452 January 2024
1.4 The Principles and Practices of Financial Management was republished in July
2008. The main changes to the practices were due to:
• Pearl Group Limited acquired Resolution plc.
• Updated asset mixes.
• Updated estate distributions.
• Clarified retainer charges in the Britannic With-Profits and Britannic Industrial
Branch Fund.
• Clarified treatment of former Bradford policies in the 100% With-Profits Fund.
• Updated priorities for using the estate in the Britannic With-Profits and Britannic
Industrial Branch Fund.
• Revised traditional with-profits surrender value target proportion of asset share
for Alba With-Profits Fund.
• Clarified the asset share treatment of former Crusader With-Profits
Performance Fund and With-Profits Pension Fund in the Alba With-Profits
Fund.
• Other minor amendments.
1.5 The Principles and Practices of Financial Management was republished in
February 2009.
The main changes were:
• To incorporate the 2009 Scheme.
• The addition of the Scottish Mutual With-Profits Fund and the SPI With-Profits
Fund and the associated transfer of business from Scottish Mutual Assurance
Limited and Scottish Provident Limited.
• To reflect the transfer of the former Swiss Life Pension With-Profits Fund
business from the 100% With-Profits Fund to the 90% With-Profits Fund.
• To reflect the recapture by Phoenix & London Assurance Limited of the unitised
with-profits group pension business which it had previously reassured to the
100% With-Profits Fund.
The other main changes to the practices were due to:
• Updated asset mixes, estate distributions and year end values
• Update for Resolution Asset Management becoming Ignis Asset Management.
• Update for how smoothing had applied for the January 2009 final bonus review
and to provide further clarification.
• Update on the investment return variances that would lead to an additional
bonus review.
• Update on the target proportion range for final bonuses for the Phoenix With-
Profits Fund.
• The change in structure of the Pearl Group Management Services charges for
unitised business in the Britannic With-Profits Fund.
• Other minor amendments.
1.6 The Principles and Practices of Financial Management was republished in July
2009. The main changes to the practices were due to:
• Updated asset mixes and estate distributions.
• Updates for how smoothing has applied for the July 2009 final bonus review.
• Clarification of the surrender value practices for traditional with-profits pension
policies in the Scottish Mutual With-Profits Fund.
• Revision of the surrender practices for the Scottish Mutual With-Profits Fund
traditional with-profits life policies so that the surrender value target proportion
of asset share over the last 10 years to run trends into 100% at maturity.
• Revision of the surrender practices for the SPI With-Profits Fund traditional
with-profits policies so that the surrender value target proportion of asset share
over the last 10 years to run trends into 100% at maturity.
PLL PPFM Page 453 January 2024
• Revised traditional with-profits surrender value target proportion of asset share
for Alba With-Profits Fund.
• Final 2008 year end capital / loan support positions for the Alba With-Profits
Fund.
• Revisions to the structure of the PGMS charges for unitised business in the
Britannic With-Profits Fund.
• Clarification of final bonus calculations with respect to the use of an assumed
year of retirement for some unitised with-profits pensions business in the
Phoenix With-Profits Fund.
• Clarified the asset share treatment of former Crusader controlled funding
arrangements in the Alba With-Profits Fund.
• Other minor amendments.
1.7 The Principles and Practices of Financial Management was republished in January
2010. The main changes to the practices were due to:
• Updated asset mixes and estate distributions.
• Updates for the interim October 2009 final bonus review and how smoothing
was applied at that review.
• Updates for how smoothing has applied for the January 2010 final bonus
review.
• Investment strategy changes, including:
• Hedge for guarantee costs and equity backing ratio in the 90% With-Profits
Fund;
• Hedge for guarantee costs in the Alba With-Profits Fund;
• Hedge for guarantee costs in the Britannic With-Profits Fund;
• The estates of the Scottish Mutual With-Profits Fund and the SPI With-
Profits Fund are now invested in gilts rather than in line with the same asset
mix as asset shares; and
• Differential equity backing ratio in the Scottish Mutual With-Profits Fund and
SPI With-Profits Fund planned for 2010.
• 2009 half year capital / loan support positions for the Alba With-Profits Fund
• The Phoenix With-Profits Fund Profit Plus Fund final bonus structure changes
• Other minor amendments.
1.8 The Principles and Practices of Financial Management was republished in July
2010. The main changes to the practices were due to:
• Updated asset mixes and estate distributions.
• Updates for how smoothing has applied for the July 2010 final bonus review.
• Investment strategy changes, including:
• Progress on the implementation of the differential equity backing ratio and
associated changes in the Scottish Mutual With-Profits Fund and the SPI
With-Profits Fund;
• Relaxation of the corporate bond criteria;
• Final 2009 year end capital / loan support positions for the Alba With-Profits
Fund.
• The Britannic With-Profits Fund and Britannic Industrial Branch Fund estate
distribution from the Buffer Reserve.
• Clarification of Scottish Mutual With-Profits Fund and SPI With-Profits Fund
traditional with-profits surrender value calculations with respect to the use of
an underpin based on discounting the guaranteed benefits.
• Clarification of the use of smoothing in calculation SPI With-Profits Fund
traditional with-profits final bonuses for single premium business.
• Removal of references to Hansard business in the Britannic With-Profits Fund
as this has all now run-off.
• Other minor amendments.
PLL PPFM Page 454 January 2024
1.9 The Principles and Practices of Financial Management was republished in
February 2011. The main changes were:
• To incorporate the 2011 Scheme.
• The addition of the SAL With-Profits Fund and the associated transfer of
business from Phoenix & London Assurance Limited.
The other main changes to the practices were due to:
• Investment strategy and asset mix changes:
• Progress on the implementation of the differential equity backing ratio and
associated changes in the Scottish Mutual With-Profits Fund and the SPI
With-Profits Fund.
• Progress on the 2009 PALAL Scheme policies’ equity backing ratio.
• Latest estate distributions, guarantee charges, expenses and 2010 / 2011
asset mixes.
• Finalisation of the 2009 PALAL Scheme.
• Vesting annuities to be transferred to Phoenix Life Limited Non-Profit Fund
from 2011 for Alba With-Profits Fund, Phoenix With-Profits Fund and SAL
With-Profits Fund.
• 2010 year end capital / loan support positions.
1.10 The Principles and Practices of Financial Management was republished in July
2011. The main changes to the practices were due to:
• Revised estate distribution strategy.
• Removing some of the variable data relating to asset mixes, guarantee
charges and estate distributions.
• Vesting annuities are now transferred to the Phoenix Life Limited Non-Profit
Fund for Alba With-profits Fund, Phoenix With-Profits Fund and SAL With-
Profits Fund.
• The recapture of Phoenix Pensions Limited (PPL) business into the Phoenix
Life Limited Non-Profit Fund.
• Other minor amendments.
1.11 The Principles and Practices of Financial Management was republished in March
2012. The main changes were:
• To incorporate the 2012 Scheme.
• The addition of the NPI With-Profits Fund and the associated transfer of
business from NPI Limited.
The other main changes to the practices were due to:
• Harmonising practices across the funds for annual bonus rates, smoothing
and surrender deductions.
• Clarifying that, for some funds, the range of assets that may be held include
emerging market equity and debt, private equity and alternative assets such
as hedge funds.
• Other minor amendments.
1.12 The Principles and Practices of Financial Management was republished in July
2012. The main changes were:
• Introducing the new relationship with HSBC for investment administration
services.
PLL PPFM Page 455 January 2024
The main changes to practices were:
• Clarifying that appropriate profits may be made by shareholders from the intra
group arrangements and services provided by group companies.
• Clarification of the business backed by the asset pools in the Alba With-Profits
Fund.
• To allow for the sale of 1 Wythall Green Way from the Britannic With-Profits
Fund and the associated loan from the Britannic With-Profits Fund to PGMS.
• The asset share practices were updated for the 90% With-Profits Fund to
reflect that expected profits from the proportion of ex Swiss IB policies not
expected to claim are recycled into the asset shares of ex Swiss IB and ex
Swiss OB life policies as miscellaneous surplus.
• Updates for how smoothing has applied for the ex Swiss IB and ex Swiss OB
life policies in the 90% With-Profits Fund for the July 2012 final bonus review.
• Revised wording for the special bonus for Scottish Mutual With-Profits Fund.
• Clarification of the long-term corporate bond proportion used to determine
profits or losses arising from fixed interest investments backing the non-profit
business in the SAL With-Profits Fund.
• Other minor amendments.
1.13 The Principles and Practices of Financial Management was republished in January
2013. The main changes were:
• Renaming Pearl Assurance Limited as Phoenix Life Assurance Limited.
The main changes to practices were:
• Harmonising practices across the funds for target payout ranges.
• Smoothing practice update for SAL With-Profits Fund to reflect that changes in
payouts resulting from changes in guarantee charges are not smoothed.
• Updates for the asset share and charges and expenses practices for the 90%
With-Profits Fund to better reflect the charges applied to ex-Swiss unitised
pension with-profits policies.
• Updates to the investment practices for Scottish Mutual With-Profits Fund and
SPI With-Profits Fund to better reflect the wider forms of investment.
• Other minor amendments.
1.14 The Principles and Practices of Financial Management was republished in July
2013. The main changes were:
• Updating references to the Financial Services Authority (FSA) to reflect that
the FSA has become two regulatory authorities, the Financial Conduct
Authority (FCA) and the Prudential Regulation Authority (PRA).
The main changes to practices were:
• Updating the investment strategy practices for the 90% With-Profits Fund and
the 100% With-Profits Fund to reflect the allocations to emerging market debt,
private equity, property and hedge funds.
• Updating the surrender value practices for the Britannic With-Profits Fund and
the Britannic Industrial Branch Fund to clarify the calculations for whole life
business.
• Updating the investment strategy practices for the Britannic With-Profits Fund
and the Britannic Industrial Branch Fund to be consistent with other funds.
PLL PPFM Page 456 January 2024
• Updating the estate management practices for the Britannic With-Profits Fund
and the Britannic Industrial Branch Fund to reflect the revised methodology
regarding treatment of the Buffer Reserve.
• Updating the final bonus practices for the Britannic With-Profits Fund,
Britannic Industrial Branch Fund and the Scottish Mutual With-Profits Fund to
reflect the standardised approach to final bonuses.
• Other minor amendments.
1.15 The Principles and Practices of Financial Management was republished in
September 2013. The main changes were:
• Updating the capital policy.
The main changes to practices were:
• Clarifying that charging of project costs and one off costs to asset shares for
the Alba With-Profits Fund will only occur following approval by the Board.
1.16 The Principles and Practices of Financial Management was republished in January
2014. The main changes were:
• Updating the significant arrangement section 3.12 to reflect the latest
outsourced service provider arrangements.
The main changes to practices were:
• Updating the asset share practices for the 90% With-Profits Fund, 100% With-
Profits Fund, Phoenix With-Profits Fund and the SAL With-Profits Fund to
reflect the standardised approach to final bonuses.
• Updating the final bonus practices for the Alba With-Profits Fund and the
Scottish Mutual With-Profits Fund to reflect the standardised approach to final
bonuses.
• Updating the smoothing practices for the Britannic With-Profits Fund and
Britannic Industrial Branch Fund to reflect the standardised approach to final
bonuses.
• Updating the investment practices for the SAL With-Profits Fund to reflect the
allocations to emerging market debt, private equity, property and hedge funds.
• Updating the expenses and charges practices for Alba With-Profits Fund to
reflect the expectation of changes to the services agreement for corporate
pensions business.
• Updating the surrender value practices for Alba With-Profits Fund as we now
target 100% of asset share for traditional with-profits surrenders.
• Updating the business risks practices for all funds to reflect the outsourced
service provider risks.
• The asset share practices were updated for the 90% With-Profits Fund to
reflect that expected losses as well as profits from the proportion of ex Swiss
IB policies not expected to claim are recycled into the asset shares of ex
Swiss IB and ex Swiss OB life policies.
1.17 The Principles and Practices of Financial Management was republished in July
2014. The main changes were:
• Updating the main intra group arrangement section 3.11 to reflect the latest
investment manager arrangements.
• Updating the other significant arrangement section 3.12 to reflect the latest
outsourced service provider arrangements.
• Updating the Glossary of terms to reflect the latest composition of the With-
Profits Committee.
PLL PPFM Page 457 January 2024
The main changes to practices were:
• Updating the investment strategy practices to reflect the role of the
Investment Committee.
• Updating the investment strategy practices for the Alba With-Profits Fund to
reflect the latest property asset mixes.
• Clarifying in the asset share practices for the 90% With-Profits Fund that the
former Britannic Unit Linked Assurance policies’ investments include
overseas equities.
• Other minor amendments
1.18 The Principles and Practices of Financial Management was republished in January
2015. The main changes were:
• Updating the main intra group arrangements section 3.11 and section 3.12
other significant arrangements to reflect the sale of Ignis to Standard Life.
• Updating the company background section to reflect the Britannic With-Profits
Fund and the Britannic Industrial Branch Fund no longer having exposure to
the Britannic Pension Fund.
The main changes to practices were:
• Updating the business risks practices for the Alba With-Profits Fund, Britannic
With-Profits Fund and Britannic Industrial Branch Fund, and the estate
practices for the Britannic With-Profits Fund and the Britannic Industrial
Branch Fund to reflect the funds no longer having exposure to the Britannic
Pension Fund.
• Updating the capital support to the fund section, the amounts payable under
a with-profits policy practices, annual bonus practices, final bonus practices
and business risks practices for the Alba With-Profits Fund to reflect the
simplification of the operation of the Alba With-Profits Fund
• Updating the other significant arrangements section and the expenses and
charges practices for the Alba With-Profits Fund to reflect the replacement
management services agreement with Diligenta from Capita Employee
Benefits
• Updating the references to Ignis in the investment strategy practices,
business risks practices, expenses and charges practices and the equity
between the fund and shareholders practices. Also the company background
section and the fair treatment guiding principles.
• Updates in expenses and charges practices for 90% With-Profits Fund, Alba
With-Profits Fund, Britannic With-Profits Fund and Britannic Industrial Branch
Fund for administration agreement with PGMS with an end 2014 expiry.
• Updating the investment strategy practices for the Britannic Industrial Branch
Fund (matched Fund) to make them consistent with the Britannic With-Profits
Fund
• Updating the final bonus practices for the SAL With-Profits Fund unitised
with-profits pensions business reinsured into the Phoenix With-Profits Fund.
• Updating the amounts payable under a with-profits policy and surrender value
practices for the SAL With-Profits Fund, including some reordering of
paragraphs.
• Including in the investment strategy practices for all funds an explanation of
stock lending.
• Other minor amendments
PLL PPFM Page 458 January 2024
1.19 The Principles and Practices of Financial Management was republished in July
2015. The main changes were:
• Updating the background to the principles and practices section 2 to reflect
that a single With-Profits Actuary report is prepared for all of the with-profits
funds in the company.
The main changes to practices were:
• Updating practices for the Scottish Mutual With-Profits Fund, SPI With-Profits
Fund and SAL With-Profits Fund to replace references to ‘FCA’ with ‘the
regulator’.
• Removing obsolete information from the investment strategy practices for the
90% With-Profits Fund, 100% With-Profits Fund, Britannic With-Profits Fund,
Britannic Industrial Branch Fund and the SAL With-Profits Fund.
• Updating the amounts payable under a with-profits policy practices for the
• Britannic With-Profits Fund and Britannic Industrial Branch Fund to
reflect that surrender profits and losses accumulate in the estate.
• Scottish Mutual With-Profits Fund as no traditional pension
endowment policies remain in the fund.
• Phoenix With-Profits Fund to explain the return on fixed interest
securities for unitised with-profits pension solution policies.
• Phoenix With-Profits Fund and the SAL With-Profits Fund to explain
the timing approximations for investment returns in asset shares.
• SPI With-Profits Fund to reflect the declaration dates for annual
bonuses for traditional with-profits business.
• Updating the annual bonus practices for the Phoenix With-Profits Fund to
reflect when annual bonuses change.
• Updating the investment strategy practices for:
• Britannic With-Profits Fund and Britannic Industrial Branch Fund as
policyholders no longer receive asset mix information in their annual
statement.
• SPI With-Profits Fund to explain the hedging arrangements.
• Updating the smoothing practices for the Phoenix With-Profits Fund as no
allowance is made for withdrawals in the standard bonus model.
• Updating the SAL With-Profits Fund estate management practices as the
fund no longer relies on a loan from the Non-Profit Fund.
• Updating the annual bonus rates for the Scottish Mutual With-Profits Fund to
distinguish between group deferred annuity and group cash business, and
with-profits annuity business.
1.20 The Principles and Practices of Financial Management was republished in January
2016. The main changes were:
• Updating the Group Structure section 3.1 to allow for the sale of Scottish
Mutual International (SMI).
• Updating the Capital Policy section 3.8 as a result of Solvency II. The section
has been split into Capital Policy section 3.8 and a new Capital Support
section 3.9. And also updating the Capital Support to the Fund sections for all
funds.
As a result of Solvency II changes to the principles and practices wording were
required in the following practices:
• the legal requirement practices section 5.1 and basic fund concepts practices
section 5.2 in the guiding principles.
• the business risk practices for the 90% With-Profits Fund, 100% With-Profits
Fund, Phoenix With-Profits Fund and the SAL With-Profits Fund.
PLL PPFM Page 459 January 2024
• the investment strategy practices for the Scottish Mutual With-Profits Fund and
SPI With-Profits Fund.
• Updating the amounts payable under a with-profits policy practices for the
90% With-Profits Fund, 100% With-Profits Fund and Phoenix With-Profits
Fund.
• Updating the amounts payable under a with-profits policy principle, the annual
bonus practices and the estate management practices for the Alba With-
Profits Fund.
• Updating the equity between the fund and the shareholder principle for the
100% With-Profits Fund.
To reflect the impact of Solvency II on the cost of bonuses there were changes
required to the equity between the fund and the shareholders practices for the
90% With-Profits Fund, Alba With-Profits Fund, Britannic with-Profits Fund,
Britannic Industrial Branch Fund, Phoenix With-Profits Fund, Scottish Mutual With-
Profits Fund, SPI With-Profits Fund and the SAL With-Profits Fund.
To reflect the investment changes made in anticipation of Solvency II there were
changes to the amounts payable under a with-profits policy practices in the SAL
With-Profits Fund and the investment strategy practices in the Alba With-Profits
Fund and the Scottish Mutual With-Profits Fund.
There were also the following changes to practices:
• Updating the amounts payable under a with-profits policy practices for the
Phoenix With-Profits Fund and SAL With-Profits Fund as part of the cost of
guarantees calculation is now redundant.
• Updating the final bonus practices for the Britannic With-Profits Fund, Britannic
Industrial Branch Fund, Scottish Mutual With-Profits Fund and the SPI With-
Profits Fund to allow for the longer lead time in advance of declarations.
• Updating the investment strategy practices for the Britannic With-Profits Fund,
Britannic Industrial Branch Fund, Scottish Mutual With-Profits Fund and the
SPI With-Profits Fund as there is no longer an annual review
of
assets by the With-Profits Committee.
• Updating the annual bonus practices for all funds except the NPI With-Profits
Fund which is wholly reassured to the PLAL Pearl With-Profits Fund) to reflect
the position for weak funds.
• Updating the investment strategy practices for the Britannic With-Profits Fund
and Britannic Industrial Branch Fund to more accurately reflect the investment
strategy in the matched fund.
• Other minor amendments.
1.21 The Principles and Practices of Financial Management was republished in July
2016. The main changes were:
• Updating the Capital Policy section 3.8 to reflect the new regulatory
terminology post Solvency II.
• Updating the Basic Fund Concepts Principle section 5.2 to make explicit the
protections for the with-profits funds in relation to the default or termination of
the agreement with PGMS to provide management services to the with-profits
funds.
As a result of the new management services agreement with PGMS and to
introduce standard wording across all the funds there are updates to the expenses
and charges practices for several funds, and also to the business risks practices
for the Britannic With-Profits Fund and the Britannic Industrial Branch Fund.
PLL PPFM Page 460 January 2024
As a result of introducing a separate final bonus scale for whole of life policies in
the Britannic With-Profits Fund and also in the Britannic Industrial Branch Fund
there were changes to the amounts payable under a with-profits policy practices
and the final bonus practices for these funds.
There were also the following changes to practices:
• Updating the amounts payable under a with-profits policy practices for the
90% With-Profits Fund, 100% With-Profits Fund, Phoenix With-Profits Fund
and the SAL With-Profits Fund to clarify the approximations in investment
return used in asset share calculations.
• Updating the annual bonus practices for all funds, except NPI With-Profits
Fund, to clarify the maximum expected change in annual bonus.
• Updating the final bonus practices for former BULA policies in the 90% With-
Profits Fund.
• Updating the final bonus practices for former Swiss Life policies in the 100%
With-Profits Fund.
• Updating the investment strategy practices for the Alba With-Profits Fund,
Phoenix With-Profits Fund and SAL With-Profits Fund to include the strategy
for investments backing the estate.
• Updating the smoothing practices for smoothed return business in the
Britannic With-Profits Fund.
• Updating the surrender value practices for the treatment of surrender profits or
losses in asset shares for the Britannic With-Profits Fund and Britannic
Industrial Branch Fund.
• Updating the amounts payable under a with-profits policy for the Scottish
Mutual With-Profits Fund.
• Updating the final bonus practices for the Scottish Mutual With-Profits Fund to
allow for the different guaranteed benefits for different pension types.
• Updating the surrender value practices for the Scottish Mutual With-Profits
Fund to reflect that traditional life and pension policies are treated similarly.
• Updating the amounts payable under a with-profits policy practices for the SPI
With-Profits Fund.
• Removing out of date information from the amounts payable under a with-
profits policy practices for the Phoenix With-Profits Fund and the SAL With-
Profits Fund and the surrender value practices for the SPI With-Profits Fund.
• Simplifying the guarantee charges section in the amounts payable under a
with-profits policy practices for the SAL With-Profits Fund.
1.22 The Principles and Practices of Financial Management was republished in January
2017. The main changes were:
• Updating the Capital Support section 3.9 following feedback from our
regulators.
There were also the following changes to practices:
• Updating the investment strategy practices for the Alba With-Profits Fund as a
result of introducing equities into the fund.
• Updating the amounts payable under a with-profits policy practices for the
90% With-Profits Fund and the Phoenix With-Profits Fund as the part of the
cost of guarantees calculation is now redundant.
• Updating the amounts payable under a with-profits policy practices for the SAL
With-Profits Fund as a result of distributing estate from the fund.
• Updating the investment strategy practices for the Phoenix With-Profits Fund
and the SAL With-Profits fund.
PLL PPFM Page 461 January 2024
1.23 The Principles and Practices of Financial Management was republished in July
2017. The main changes were:
• Improving clarity and presentation in the Alba With-Profits Fund Annual bonus
rates and Estate management principles.
There were also the following changes to practices:
• Updating the Smoothing and Investment strategy practices for the Britannic
With-Profits Fund.
• Updating the Estate management practices for the Scottish Mutual With-
Profits Fund and the SAL With-Profits Fund.
• Updating the Amounts payable under a with-profits policy practices for the SPI
With-Profits fund.
1.24 The Principles and Practices of Financial Management was republished in January
2018. There were the following changes:
• The capital policy section has been updated to reflect the latest solvency
capital requirement percentages and additional liquidity amount.
There were also the following changes to practices:
• A minor clarification to the practices for the Basic Fund Concept guiding
principle.
• Updating the SAL With-Profits Fund Amounts payable under a with-profits
policy practices as past guarantee charges are being refunded.
• An update to the Final bonus rates practices for Alba With-Profits Fund and to
the Amounts payable under a with-profits policy practices for SPI With-Profits
Fund for with-profits deferred annuities.
1.25 The Principles and Practices of Financial Management was republished in July
2018. There were the following changes to practices:
• Updating the Investment strategy practices for 90% With-Profits Fund, 100%
With-Profits Fund, Alba With-Profits Fund, Britannic Industrial Branch Fund,
Britannic With-Profits Fund and SPI With-Profits Fund.
• Updating the Amounts payable under a with-profits policy practices for
Scottish Mutual With-Profits Fund to clarify the position for the clawback of
conditional estate.
1.26 The Principles and Practices of Financial Management was republished in January
2019. There were the following changes:
• The capital policy section has been updated to reflect the latest solvency
capital requirement percentages and additional liquidity amount.
There were also the following changes to practices:
• Removing out of date smoothing practices for 90% With-Profits Fund.
• Updating the investment strategy practices for Phoenix With-Profits Fund and
SAL With-Profits Fund to reflect that asset mixes for specimen policies are
calculated by reference to the average mix for the underlying policies that the
specimen represents and simplify the wording for the investments backing
guaranteed annuity options.
PLL PPFM Page 462 January 2024
1.27 The Principles and Practices of Financial Management was republished in July
2019. There were the following changes:
• The Main inter fund agreements – risk transfer arrangements section 3.10 was
updated as the Alba With-Profits Fund no longer transfers risk to the Britannic
With-Profits Fund.
• The glossary definition of Board was updated.
There were also the following changes to practices:
• Updating the expenses and charges practices for SPI With-Profits Fund to
clarify that the expenses charged are subject to the 2009 Scheme rules.
• Updating the expenses and charges practices for Scottish Mutual With-Profits
Fund and SPI With-Profits Fund for unitised with-profits policies.
• Updating the Phoenix With-Profits Fund investment strategy practices
• Updating the SAL With-Profits Fund expenses and charges practices
• Updating the Alba With-Profits Fund smoothing, investment strategy and
estate management practices as the position of the fund has improved.
1.28 The Principles and Practices of Financial Management was republished in January
2020. There were the following changes:
• The capital policy section 3.8 has been updated to reflect the latest solvency
capital requirement percentages and additional liquidity amount.
• The asset share methodology section 4.3 was updated to clarify mortality
charges.
There were also the following changes to practices:
• Updating the investment practices for Britannic With-Profits Fund and Alba
With-Profits Fund.
• Updating the Amounts payable under a with-profits policy and the Estate
management practices for the 90%, 100%, Alba, Britannic, Britannic Industrial
Branch, Phoenix and SAL with-profits funds to better reflect management
actions.
• Also the Phoenix, Scottish Mutual and SPI with-profits funds’ amounts payable
under a with-profits policy practices to better reflect management actions.
• Updating the amounts payable under a with-profits policy practices for the
Britannic, Britannic Industrial Branch, Scottish Mutual, SPI and SAL with-
profits funds for mortality charges.
• For Phoenix With-Profits Fund amounts payable under a with-profits policy
and the final bonus practices were updates as most of the remaining policies
are now whole of life.
There was also a change to the Capital support to the fund section for Alba With-
Profits Fund again to better reflect management actions.
1.29 The Principles and Practices of Financial Management was republished in January
2021. There were the following changes:
• The capital policy section 3.8 has been updated to reflect the latest solvency
capital requirement percentages.
• The other significant arrangements section 3.12 has been updated to reflect
the use of collective investment structures.
There were also the following changes to practices:
• Updating the investment strategy practices for all of the with-profits funds
distributing estate to better reflect how the assets backing the estate are
invested.
PLL PPFM Page 463 January 2024
• Also updating the investment strategy practices for Britannic With-Profits Fund
and Britannic Industrial Branch Fund to remove out of date wording.
• Updating the final bonus practices for Britannic Industrial Branch Fund,
Scottish Mutual With-Profits Fund and SPI With-Profits Fund to better reflect
the final bonus projection calculations.
1.30 The Principles and Practices of Financial Management was republished in January
2022. There were the following changes:
• The capital policy section 3.8 has been updated to reflect the latest solvency
capital requirement percentages.
• Replacing references to LIBOR with SONIA as a result of the discontinuance
of LIBOR at the end of 2021.
• Simplifying references to outsource service providers.
There were also the following changes to practices:
• Updating the investment strategy practices for all the with-profits funds to
reflect our commitment to responsible investment.
• Updating the investment strategy practices for 90% With-Profits Fund, 100%
With-Profits Fund, Phoenix With-Profits Fund and SAL With-Profits Fund to
explain how the emerging market debt returns are allocated.
• Updating practices for the Alba With-Profits Fund to reflect that eligible deposit
administration business is now receiving a ‘final uplift’ due to estate
distribution.
• Updating the annual bonus practices for PLL Britannic With-Profits Fund to
reflect the increases to annual bonuses for ex Prosperity policies.
1.31 The Principles and Practices of Financial Management was republished in January
2023. There were the following changes:
• To incorporate the 2022 Scheme.
• The introduction of the reassurance arrangement with Phoenix Life Assurance
Europe dac (PLAE) after the Irish business in the funds was transferred to
PLAE.
There were also the following changes:
• The capital policy section 3.8 has been updated to reflect the latest solvency
capital requirement percentages.
• A new guiding practice has been introduced in section 5.2 to reflect that the
Board may choose to limit the expenses allocated to asset shares where this
is appropriate.
There were also the following changes to practices:
• Updating the amounts payable under a with-profits policy practices for the
Alba With-Profits Fund to reflect that the Board may choose to limit the
expenses allocated to asset shares where this is appropriate.
• Updating the investment strategy practices for Alba With-Profits Fund as the
property proportion has been reduced whilst maintaining the overall growth ….
• Updating the amounts payable under a with-profits policy practices for the
Britannic With-Profits Fund and the Britannic Industrial Branch Fund to clarify
that there are separate final bonus scales for fully paid whole of life policies.
• For the PLL Scottish Mutual With-Profits Fund there is an update to the
amounts payable under a with-profits policy practices to reflect a new process
developed for setting bonus rates on particular group pensions.
PLL PPFM Page 464 January 2024
1.32 The Principles and Practices of Financial Management was republished in October
2023. The main changes were:
• To incorporate the 2023 Scheme.
1.33 The Principles and Practices of Financial Management was republished in January
2024. The main changes were:
To update references to the management services company throughout the PPFM
to Phoenix Group Management Services Limited.
In line with notifications we made to policyholders in 2023 there were also the
following changes to Principles:
• For the Alba With-Profits Fund, the Amounts payable under a with-profits
policy and the Investment strategy Principles, were updated as the fund no
longer relies on support from the shareholders.
• For the Phoenix With-Profits Fund, the Estate management Principle was
updated to remove references to non-profit annuities that have transferred out
of the fund; and
• For the SAL With-Profits Fund, the Estate management Principle was updated
to remove references to non-profit annuities that have transferred out of the
fund.
There were also the following changes to practices:
• Removing inaccurate wording from the Business risks practices for the 90%
With-Profits Fund, the 100% With-Profits Fund, the Phoenix With-Profits Fund,
the SAL With-Profits Fund and the SERP Fund;
• Updating the Amounts payable under a with-profits policy practices,
Smoothing practices and the Surrender value practices to better explain how
surrender values are calculated for the Alba With-Profits Fund;
• Updating the Surrender value practices for the Alba With-Profits Fund to
reflect that market value reductions are not automatically taken for some
classes of business.
• Updating the Investment Strategy practices for the 90% With-Profits Fund,
100% With-Profits Fund, SERP Fund and National Provident Life With-Profits
Fund to improve the wording about non normally traded assets.
Phoenix Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct
Authority and the Prudential Regulation Authority. Phoenix Life Limited is registered in England No. 1016269 and
have their registered office at: 1 Wythall Green Way, Wythall, Birmingham, B47 6WG.
