With-Profits FAQs February 2018
The Prudential Assurance Company Limited (PAC) With-Profits Fund is one of the largest with-profits fund in the UK.
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 is With-Profits?
A With-Profits Fund is a pooled investment where all policyholders pay money into the fund. And each gets a share in the profits. We pay this to each policyholder in the form of a bonus. All policyholders also share the costs of investment management and other servicing expenses.
This type of fund holds a wide range of higher and lower risk investments, including:
- company shares,
- commercial property,
- bonds, and
which helps to spread investment risk. This means that with-profits can offer a balanced investment opportunity.
In addition, the profits from the fund are 'smoothed' over time. This simply means that we hold back some of the investment returns in good years with the aim of using this to support bonus rates in the years where the investment returns are lower. It offers protection from some of the extreme highs and lows of short term investment volatility but it will not stop the value of your policy reducing if investment returns have been low.
What is smoothing?
Smoothing is the process by which our With-Profits Fund aims to smooth some of the extreme highs and lows of short-term investment performance, in order to provide a more stable return from year to year. We achieve this by holding back some of the investment returns in good years with the aim of using this to support bonus rates in years where investment returns are lower.
What's the future for Prudential With-Profits?
Prudential remains fully committed to With-Profits. We firmly believe it can provide a more stable performance over the medium to long-term.
The Fund consists mainly of with-profits business, but it also contains a significant amount of non-profits business. Further details can be found in our Principles and Practices of Financial Management (PPFM).
The total level of assets backing the With-Profits business in the Fund was £103bn at 31 December 2017.
Why is the size and strength of the Fund important?
The Prudential Assurance Company Limited With-Profits Fund is one of the largest with-profits funds in the UK. The size and strength of our Fund allows us to invest in a very wide range of assets and individual companies
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. In a 90:10 fund your share of the allocated profits is 90% while the shareholders receive the remaining 10%.
What are bonuses?
Bonuses are the way you get your share of the Fund’s profits. Different types of plan receive different bonus rates. There are normally two types of bonus:
We expect to add this during the term of your Plan. We add this daily, monthly or yearly, depending on the type of plan. It’s not guaranteed that a regular bonus will be added each year, but once it’s 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 amount shown on your yearly statement.
When we work out what our regular bonus rates should be, the main thing we think about 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.
This is an additional bonus, which we expect to pay when you take money from your Plan. If the investment return has been low over the life of your Plan, you might not get a final bonus. It’s not guaranteed and it can change. When we set our final bonus rates, we first look at the unsmoothed values of the plans and how we expect investments to perform in the months ahead. The unsmoothed value 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,
- 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?
Prudential Portfolio Management Group are our in-house asset-allocation experts in the UK. They select a wide range of assets to hold in the With-Profits Fund, in line with the Fund's objective. The aim is to maximise long-term investment returns while maintaining the financial security of the Fund.
View the Current Information on the Asset Mix
Where can I find out more about how With-Profits works?
There’s 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 PAC With-Profits Fund is supported by a substantial Inherited Estate which provides the working capital required to support current and future business, and also helps provide greater investment flexibility for the long-term benefit of our customers.
PAC does not consider that policyholders have any expectation of a distribution of the inherited estate.
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 might 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’s 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 low, 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’re invested in.