Bonus Rates Announcement - FAQs February 2009
Who is affected by the With-Profits declaration?
Why have you reduced your bonus rates?
Why has the value of my policy fallen?
What are your thoughts on future bonus rates?
You've talked about smoothing in the past. Have you used the money from good years to boost bonus rates this year?
I have a mortgage endowment with Prudential - what does this year's declaration mean for me?
Who is affected by the With-Profits declaration?
All Prudential customers who have a with-profits element to their policy.
These include:
- Prudence Bond and other investment bonds
- International Prudence Bond
- Prudential Personal Pension
- Scottish Amicable Personal Pension
- Prudential Savings Endowment
- Scottish Amicable Savings Endowment
- Prudential Mortgage Endowment
- Scottish Amicable Mortgage Endowment
- With-Profits Annuities including those Equitable Life with-profits annuitants who transferred to Prudential in December 2007
It should be noted that investments in any of the PruFund funds available across our product range are not impacted by this bonus declaration.
Why have you reduced your bonus rates?
In the context of the large falls in markets and substantial reductions in interest rates it is prudent to reduce annual bonuses to avoid restricting our investment freedom. The level of annual bonuses are still very attractive in an environment where base rates are below 2%. Prudential's actions allow the strong financial position of the Fund to be maintained and protect the long term interests of current and future policyholders.
The changes being made to final bonus rates will ensure that payouts more fairly represent the value of the assets backing with-profits policies, while continuing to provide the benefits of smoothing. This year some of the money held back from the better years, has softened the impact for individual policyholders. We refer to this as smoothing. This is evidenced by the smaller fall in policy values than the With-Profits Fund has suffered as a whole.
The bonus rates added to policies aim to reflect the actual investment returns over the medium to long term.
Why has the value of my policy fallen?
Changes have been made to final bonus rates to ensure that payouts more fairly represent the value of the assets backing with-profits policies, while continuing to provide the benefits of smoothing.
Prudential With-Profits Fund has not been immune from market volatility and over 2008 the investment return on the Fund was -19.7%.
This year some of the money held back from the better years has softened the impact for individual policyholders. This is what we refer to as smoothing. It can be evidenced by the smaller fall in policy values than the With-Profits Fund has suffered as a whole.
The value of your policy will depend on how much you have paid, how long it has been invested, the With-Profits Fund's performance while your money has been invested, tax, charges and smoothing. The value will be set out in your annual statement. As a result of these factors, the change you see in the value of your policy from one annual statement to the next could be more than or less than the fund returns in a particular year.
What are your thoughts on future bonus rates?
Future bonus rates will depend on how well the Fund does in the future. We believe we are still well placed to offer competitive results as we remain one of the strongest UK insurers, have an experienced team managing the Fund's assets, and have the benefit of scale.
You've talked about smoothing in the past. Have you used the money from good years to boost bonus rates this year?
We have. As you may have seen, the Fund has returned -19.7% before tax
(-15.8% net of tax) this year. Generally policy values have not fallen as much. This has only been possible by applying smoothing, using some of the money held back from the better years, protecting against the full fall in the value of the Fund.
I have a mortgage endowment with Prudential - what does this year's declaration mean for me?
Due to the fall in policy values this year some mortgage endowments maturing in 2009, will do so short of their original target. Of the 15,073 Prudential sold policies expected to mature in 2009, 11,048 are expected to meet repayment targets. Of the 37,090 Scottish Amicable sold policies expected to mature in 2009, 16,290 are expected to meet their repayment targets. For policies maturing in future years the ability of an endowment to meet repayment targets will depend on the size of future bonuses.
In accordance with accepted industry guidelines we monitor how many of our endowment customers' policies are not expected to meet their repayment targets. This is shown as 'red, amber, or green', with green being satisfactory and likely to meet repayment targets (although this is not guaranteed), amber indicating a potential shortfall and red showing a shortfall likely: action should be taken.
