With-Profits FAQs
February 2012
The frequently asked questions below give high level information about investments in With-Profits through our savings and investments, pensions and annuity products. As the terms of our products vary, please see your product literature for the full details relevant for your product.
What does a 'With-Profits' Plan mean?
What is smoothing?
What's the future for Prudential With-Profits?
Why is the size and strength of the Fund important?
Where do profits from the With-Profits Fund go?
What are bonuses?
Why is the final bonus figure different depending on the year the plan started?
How are Fund assets managed and where has Prudential been investing my money?
Where can I find out more about how With-Profits works?
I've heard about the inherited estate, how does it benefit me?
What is a Market Value Reduction (MVR), and when do you apply it?
What does a 'With-Profits' Plan mean?
It is a plan that shares in the profits of the With-Profits Fund, by the addition of bonuses (please see What are bonuses? for further details). It aims to grow the money invested in your plan over the medium to long-term and should normally be considered for at least 10 years. Money from all plan holders is combined and invested in the With-Profits Fund, which has a broad mix of investment types generally referred to as assets.
What is smoothing?
Smoothing is the process by which our With-Profits Fund aims to smooth the peaks and troughs of investment performance in order to provide a more stable return. We achieve this by holding back some of the investment returns in good years with the aim of using this to boost bonus rates in the years where investment return has not been so good.
What's the future for Prudential With-Profits?
Prudential remains fully committed to With-Profits. We firmly believe it can deliver strong performance over the medium to long-term.
Our With-Profits Fund is one of the largest and financially strongest in the UK and has funds under management of around £64.2bn as at 31 December 2011. Our overriding priority has always been to maintain the long-term financial security of the Fund to deliver strong performance for our planholders.
Why is the size and strength of the Fund important?
This size and strength gives our Fund Managers the flexibility and freedom to vary the mix of assets held in the Fund to accommodate changing economic conditions. This means they have greater choice and flexibility in the investments markets we use, and in the range of individual stocks, shares and other assets that we can buy for the fund and allows them to more confidently aim to maximise the potential for long-term growth. In addition, our strength allows us to meet any guarantees, such as death benefits or maturity values.
It underpins our investment strategy which is to seek to secure on behalf of our policyholders the highest combination of income and growth in capital value while maintaining the security of the fund.
Where do profits from the With-Profits Fund go?
The majority of our contracts invest in a With-Profits fund that shares the profits between customers and shareholders. Your share of the allocated profits is 90% while the shareholders receive the remaining 10%.
What are bonuses?
Bonuses are the way you receive your share of the profits of the Fund. Different types of plan receive different bonus rates. There are normally two types of bonus:
Regular bonus
We add this every year during the term of your plan. Some plans add bonus daily; others add bonus monthly or yearly. It is not guaranteed that a regular bonus will be added each year, but once it is added to your plan, it cannot be removed. If you take money from your plan other than when a guarantee applies, you may receive less than the payout amount shown on your yearly statement.
When we decide the rates of regular bonus, the main thing we consider is the return we expect our investments to earn in the future. We hold back some of this return with the aim of paying a proportion of the proceeds as final bonus.
Final bonus
This is an additional bonus, which we pay when you take money from your plan. If the investment return has been low over the lifetime of your plan, a final bonus may not be paid. Final bonus may vary and is not guaranteed.
Final bonus rates are set after first considering the unsmoothed values of plans and how we expect investments to perform in the following months. The final bonus depends on a number of factors such as: how much has been invested, how long it has been invested, the Fund's performance while the money was invested, our charges and costs, any applicable taxation, guarantees, any profits and losses arising in the Fund from other business risks, payments made to our shareholders - normally our shareholders receive 10% of any profits allocated and plan holders receive 90%.
Instead of simply sharing out what the Fund makes - or loses - each year, we use a process known as smoothing in order to arrive at the final bonus rates we declare.
Why is the final bonus figure different depending on the year the plan started?
A final bonus may be paid when you take money from your plan. Final bonus rates are set after considering the unsmoothed value of plans and then applying smoothing. Rather than work out the value of each individual plan, we generally combine all similar plans (that is plans issued in a year which have the same bonus rate) into a single representative plan.
The size of the unsmoothed value of the representative plan and the impact of smoothing means that final bonus can vary depending on a number of factors including how long the plan has been operating for and the investment returns of the Fund, during the lifetime of that plan. (Please also see What are bonuses? for further details of the factors affecting final bonus rates.)
So, if the regular bonuses added during the life of your plan do not represent what we believe to be a fair return, we aim to add a final bonus to increase the final value of your plan. We expect to review final bonuses on at least an annual basis, and because they are regularly reviewed the size of any potential bonus can vary.
Final bonuses are not guaranteed. If the investment return has been low over the lifetime of your plan, a final bonus may not be paid.
How are Fund assets managed and where has Prudential been investing my money?
A large and experienced team of professionals, the Portfolio Management Group (PMG), manages the With-Profits Fund. The strategy followed by PMG is designed to deliver strong performance over the medium to long term, while maintaining the financial security of the Fund. It does this by investing in equities, property, fixed interest and other assets. Remember past performance is not a reliable indicator of future performance.
View the Current Information on the Asset Mix
Where can I find out more about how With-Profits works?
There is more information on pru.co.uk in our Customer Friendly Principles and Practices of Financial Management documents.
I've heard about the inherited estate, how does it benefit me?
The inherited estate refers to a part of the With-Profits Fund. It is essentially an amount of money over and above the amount we need to meet our commitments to our existing planholders. It has built up over many years from a number of sources, including shareholders' money, and provides working capital to support current and future business.
The inherited estate benefits you by protecting With-Profits plans, giving more security against future risks and uncertainties. It also enables smoothing of investment returns and allows the Fund greater flexibility by giving its investment managers more scope to invest in a range of assets, including ones with higher risk but also higher expected returns.
What is a Market Value Reduction (MVR), and when do you apply it?
If you have a Unitised With-Profits Plan and take money out of the Prudential With-Profits Fund, we may adjust the value of your plan if the value of the underlying assets is less than the value of your plan including all bonuses. This adjustment is known as a Market Value Reduction (MVR). It is designed to protect investors who are not taking their money out and its application means that you get a return based on the earnings of the With-Profits Fund over the period your payments have been invested.
We apply the MVR to your plan's value including regular and final bonuses. Please read "Your With-Profits Plan - a guide to how we manage the Fund" for more information on bonuses. An MVR will reduce the amount payable on full or partial withdrawals and if investment returns have been very poor, you may get back less than you have invested in your plan. We guarantee not to apply an MVR on any payments made due to death and in other circumstances depending on the terms of your product. Please see your product literature for details, including whether an MVR may apply to the product you are invested in.
