How we manage the with-profits fund

Introduction

The Financial Services Authority requires us to publish and maintain the principles and practices we use in operating the Society. This document, known as the “Principles and Practices of Financial Management” (PPFM), is available on request to any member.

We are also required to publish this easier to read version of the document called the “Consumer Friendly Principles and Practices of Financial Management” (CFPPFM). This must be sent to all members and potential members, either when they request information about one of our products or start a new plan.

The CFPPFM covers the same ground as the PPFM but puts the information into more day-to-day language in an abbreviated form.

What is a with-profits investment?

With-profits investment is a method of providing a saver with access to a fund, where their money is pooled with others and all customers share in the investment return. A bonus may be added to their contract, which once added cannot be taken away.

How does the with-profits fund work?

The premiums we collect from with-profits members are pooled together into our with-profits fund. The fund is invested in a mix of equities, commercial property, UK government bonds, corporate bonds and cash. By spreading the investment between the various investments the Society is not solely dependent on one market. For instance if the value of the stockmarket were to go down but other investments go up then the effect would be that one cancels out the other.

The Society aims to be fair to all its members and to uphold the promises made to them when they took out their plan. However, any payments made to customers by way of an annual or final bonus must reflect the way in which the value of the with-profits fund has performed throughout the period of investment.

The Society aims to avoid large changes in the amounts paid on comparable plans from year to year. This is known as “smoothing” and is designed to protect investors from some of the sudden movements in the stockmarket. In practice, smoothing means that we hold back some of the high investment returns from the good years and use them to boost with-profits payments in years when returns are lower.

What are bonuses?

Each year we will send you a bonus statement telling you what bonuses have been added to your plan. There are two types of bonus.

Annual bonus – most members receive an annual bonus with their with-profits plans. These are also known as reversionary bonuses. They may vary depending on the type of contract you have and once added cannot be taken away (provided that the contract is held to the end of its term and any premiums due are paid). The Board sets these in October each year after receiving the advice of a professional adviser (the “with-profits actuary”) who considers investment performance, current interest rates and the Society’s financial strength.

Final bonus – when a plan is paid out we will often add a terminal or final bonus. This will vary according to the type of contract you have. Final bonuses are not guaranteed and are not known until the time of payment. Again these are set in October for the following year but may be varied at any time if necessary.

How do you work out what the final bonus should be?

The final bonus is intended to ensure that payments to members are broadly equivalent to the premiums paid in, accumulated to allow for:

• our expenses or charges
• the investment return, allowing for smoothing, and
• any allowance for taxation or the cost of providing death benefits, where applicable.

Although the Society has very low administration charges, they have a greater effect on the return to members for plans of short duration.

Someone investing in one of our 5-year plans will have their type of plan biased towards short term fixed interest government bonds. Alternatively, someone who invests with the Society for a longer period will have their type of plan linked mainly to longer-term investments, in particular equities.

Overall, it is the intention of the Society to pay out the money made by its investments on their premiums back to its members. To the extent that the Society has more assets than it needs to pay these members at a particular moment in time these assets or “estate” will be carried forward to protect members against large drops in returns in the future and in particular to smooth their benefits as described above. It is also used to support the guaranteed benefits, that is, the sum assured under the contract and annual bonuses already added to it.

Additionally this greater financial strength enables the Society to make investments with a slightly higher risk in an effort to seek higher returns for our members. We will always review these and will not take any unnecessary risks with the potential benefits of members.

How do you invest my money?

The Society has an investment strategy that is regularly agreed by the Board. There are risks but we aim to keep these as low as possible and investment managers are restricted in how they can invest our funds. We maintain a mixed investment portfolio in order to maintain stability of returns, but we also have sufficient depth to our finances to allow for some of our assets to be invested in higher risk investments such as equities where returns may be greater.

Risks to the business are regularly assessed and adjustments made as necessary.

If I surrender my plan what will I get back?

All surrender values remain subject to the discretion of the Society and are not generally guaranteed.

You will normally receive a return of the premiums you have paid but within the first three years of a savings plan we make a small deduction.

For savings plans that have been running for at least 5 years, you will also receive the benefit of any bonuses that have been added. You may also receive a final bonus.

Investment plans will normally receive the full benefit of any annual bonuses. For investment plans that have been running for at least three years you may also receive a final bonus. Investment plans include both lump sums and variable contributions which are treated as lump sums for each year they are paid (ISA and With Profit Plan).

The Society does not currently apply a market value reduction (MVR) to its contracts but reserves the right to do so if there was a sudden or prolonged drop in the value of the stockmarket affecting the assets of the Society under investment. There is a guarantee that there will be no MVR on the tenth and subsequent anniversary of investment plans.

What are your charges for?

The Society aims to keep any administration charges as low as possible and these are reviewed on an annual basis. Charges are applied to all members of the Society through their plans and include those members who do not invest in the with-profits fund.

They also cover any new business costs in attracting new customers to the Society. However, the Society does not pay commission to anyone.

How can I find out more information?

If you would like to see a full copy of our Principles and Practices of Financial Management (PPFM) or you would like to speak to someone about anything in this booklet then please give us a call on 01689 891454 or Metphone 28192.