COB 6.9 With-profits guides

A

Introduction

1

All insurance companies, and the larger friendly societies, which market with-profits policies in the United Kingdom, are required to make available a guide containing information about the company or society and its with-profits fund. This is because the benefits under such policies depend in part, and sometimes to a considerable extent, on bonus additions which are made by the company or the society from time to time and which cannot be known in advance. It is therefore important that potential policyholders and their advisers should have access to information about the most important factors influencing such bonuses.

2

However, investors are advised that, in comparing a policy marketed by one company or society with other policies, it is unwise to place too much importance on any one factor. An over-all view of all relevant elements will usually give a more realistic comparison: in particular, an examination of the history of a fund over a period of years will usually give a fuller picture than can be obtained from looking at the figures for just one year.

3

[The company/society] is satisfied that this guide fairly presents information as at [date] about the company/society¹and complies with the rules of the Financial Services Authority.

4

[If the firmis producing an appendix to the guide referring to an industrial assurance with-profits fund, thefirm may include an explanation of the difference between ordinary andindustrial assurance business]

Note: 1 - Delete whichever is inapplicable

B

Company information

[Under this heading the firmmust:

a

Describe its own constitution and state where it has its registered office;

b

State whether it is a subsidiary of a United Kingdom company or overseas company and, if so, identify its ultimate holding company;

c

Describe its principal activities which are relevant to its with-profits business;

d

in relation to the fund identified at the beginning of the guide, state whether the firm carries on business outside theUnited Kingdom, and, if so, indicate the importance of that non-United Kingdom business as compared with its total with-profits business.]

C

Factors influencing bonus rates

1

[Under this heading the firm must include an introduction to the following sections of the guide, identifying the main factors which are likely to influence bonus rates of the firm's with-profits business including, in particular:

a

the assets in which the fund is invested;

b

the effect of inflation;

c

the effect of taxation;

d

the effect of surpluses from miscellaneous sources;

e

the expenses of the fund;

f

the effect of any liabilities, such as policy guarantees of the fund.]

2

[Thefirm must relate the factors to each other, so far as is possible, and should indicate that individual factors will be covered in more detail elsewhere in the guide.]

D

Investments

1

[Under this heading thefirm must set out Table 1 which may be modified in accordance with paragraph 3 if the investments include a holding in a collective investment scheme.]

Table 1 - Investments attributable to with-profits business in the United Kingdom

Fixed interest

Property

Equity shares

(i) UK shares²

(ii) non-UK shares³

(iii) unlisted shares⁴

Other investments

100

100

100

100

100

Notes:

2 - This entry refers to shares which areUK listed shares

3 - This entry refers to shares which arelisted other than in the United Kingdom

4 - This entry refers to shares which are not listed

2

[The information in Table 1 must be based upon the financial information relevant to the fund as at the end of the firm's preceding financial year and for the preceding four years or for so many of those four years as there are figures available, with the most recent on the right. Each entry must be shown as a percentage of the total of the investments in the column in which the entry appears. The firmmay show figures for any category of investment referred to in the Table broken down into sub-categories. The assets are to be shown at market value or, if that is not available, the basis of valuation used must be described here.]

3

[The firm may show holdings in collective investment schemes separately from other investments, by including a separate sub-heading for each category of holding in collective investment schemes under a general heading 'Collective investment schemes'. Such holdings must not, in any event, be included under the heading 'Other investments'.]

4

[If 2?% or more of the total of the investments shown in any one column is in one property or in shares in one company, details of that property or shareholding must be given here. This includes holdings in any subsidiary companies of the group to which thefirm may belong.]

5

[The firm must describe its investment strategy with respect to its with-profits fund, and explain any significant differences between the figures for one year and those for another. If derivatives have been used, the Table should reflect the economic exposure of the fund.]

6

[In order to explain the relative importance of underlying investment returns, information on rates of return on the assets attributable to with-profits policies may be included, together with an explanation how these have been taken into account in determining bonus policy.]

E

Solvency margins

1

The solvency of companies and societies transacting with-profits business and other long-term business in the United Kingdom is monitored by the FSA. Values for assets and liabilities for the company's/society's total long-term business are shown below. It is the assets in which the funds of the long-term business are invested which are available to meet the liabilities of that business.

2

Because the valuations are not all on the same bases and the liabilities are not all of the same kind, the information in the following table should not be used as a means of direct comparison between companies and societies; these figures are more useful as an indicator of trends in the business.

3

[Under this heading the firm should set out Tables 2A and 2B.]

4

[The information in Table 2A must be based upon the financial information relevant to the fund as at the end of thefirm'spreceding financial year and for the preceding four years or for so many of those four years as there are figures available, with the most recent on the right in Table 2B.]

5

[The firm must include a description of the factors influencing the solvency margins, for example the bases of valuations and the effects of the business mix. This description must also explain how those factors affect the margins.]

'A' Admissible assets:

[shareholders funds]⁵

unit-linked

with-profits

remainder

[total]

'B' Liabilities:

unit-linked

with-profits

remainder

[total]

'C' Required minimum margin⁶

Excess of 'A' over 'B' & 'C'

[difference]

Table 2B - Solvency margins

[year] £m

[year] £m

[year] £m

[year] £m

[year] £m

'A' Admissible assets

'B' Liabilities

Excess of A over B

'C' Required minimum margin⁶

Excess of A over (B + C)

Notes:

5 - Delete if inapplicable

6 - This item refers to any margin of solvency the firm is required to maintain by law, including any required by any regulatory authority

F

Bonus and surrender value policy

[Under this heading the firm must set out an explanation of:

a

the basis on which the amount available for distribution to policyholders and shareholders (if any) is to be determined and on the actual level of transfers to shareholders⁷;

b

the nature of each series of bonuses payable in respect of the with-profitspoliciescurrently marketed by thefirm (as at the guide date) and the relative importance of each series by including sufficient information to quantify the relative significance of basic benefits, reversionary bonuses and terminal bonuses;

c

the firm policy for ensuring fairness of treatment at maturity or earlier surrender, so far as possible, between investors holding policies issued at different times, including the firm's approach to terminal bonuses, stating whether it is subject to frequent change and identifying in particular the factors which might lead to any change in the approach;

d

the firm's policy concerning the use of the market value adjustment factors whether at maturity or earlier surrender, the description should detail the circumstances in which they have been imposed and indicate when it would be imposed.]

Note: 7 - The firms must include here the percentage of declared profits to which with-profits policyholders are entitled under the firm's Articles of Association or other constitution

G

Expenses

1

[Under this heading the firm must describe how expenses arise and are charged in relation to with-profits business, and must include an explanation how the level of expenses is affected by the nature of that business and of the assets in which the with-profits fund is invested.]

2

[Under this heading the firm must set out Table 3 giving the required figures in accordance with paragraph 3.]

Table 3

Expenses (including commission)⁸attributable to UK with-profits business

Related to acquisition of business

Maintenance

Other

Total

Note: 8 - Omit references tocommissionif there are no commission payments included in the expenses. In calculating what expenses to attribute to with-profits business, the firm may use approximations as the firm considers appropriate.

3

[The information in Table 3 must be based upon the financial information relevant to the fund as at the end of the firm's preceding financial year and for the preceding four years or for so many of those four years as there are figures available, with the most recent on the right.]

4

[Here the firm must outline the method used to attribute expenses to the with-profits business and indicate the effect of changes in growth and composition of any new business.]

H

Examples of the effect of expenses implicit in Table 3

1

[The firm must here set out Table 4 giving the required figures for the reduction in yield in accordance with paragraphs 2 and 3 below.]

Table 4

Comparative reductions in yields

[year]

A

B

[year]

A

B

[year]

A

B

[year]

A

B

[year]

A

B

Note: 9 - The term to be used is that of the latest bond to be marketed or the terms, if any, when a market value adjustment factor will not be applied, or, if no specific term, 10 years

2

[The information in Table 4 must be based upon the financial information relevant to the fund as at the end of the firm's preceding financial year and for the preceding four years, or for so many of those four years as figures are available, with the most recent at the top.]

3

The reductions in yield shown in this table are consequential on the expenses disclosed in Table 3 above. The figures are given for the last five years¹⁰of the fund preceding the date shown at the beginning of this guide. The reductions in yield shown in row A have been calculated taking into account the actual expenses incurred during the year in question¹¹, whereas those shown in row B, which are for comparison, are averages of the reduction in yield figures used in key features (relating to contracts of the same class) issued by the [company] [society]¹²during the year in question.

4

The reductions in yield have been calculated on the assumption of a monthly premium of £60.00¹³ or a single premium of £10,000¹³. In addition, an allowance for tax has been made in calculating the figures for endowment assurance and with-profits bonds¹⁴.

5

[The firm must, in relation to the figures disclosed under this heading:

a

explain any disparity between the two reductions in yield; and

b

describe any allowance for tax which has been made in calculating the reduction in yields.]

6

[Thefirm may show reductions in yield for other classes of contract in Table 4 if endowment assurance or personal pensions are not representative of the firm's with-profits business, but, if the with-profits business to which the guide refers includes both endowment assurance and personal pensions, reductions in yield for contracts of both those classes must be shown. Figures may be shown only for contracts marketed by the firm during the year in which the guide date falls.]

Notes:

10 - In the case of a fund for which there are fewer than five years' figures available, the firm must make appropriate alteration

11 - The firm must make these calculations in accordance with theprojection rules. If there is any discontinuity due to a change in the calculation method, this should be explained in a note to the Table

12 - Delete whichever is inapplicable

13 - If the firm does not write business at this rate, substitute another figure which is not unrepresentative of the firm's with-profits business. In respect of industrial branch endowments, the figure is £4 per week

14 - This sentence may be omitted if the fund to which the guide relates is part of the firm's tax-exempt business

J

Other factors

[Under this heading the firm must describe any other factors not dealt with under any of the preceding headings of the guide which the firm regards as relevant to its with-profits business, commenting on the importance of the different factors.]¹⁵

Note: 15 -Firms are to include here a description of the effect of the surpluses from miscellaneous sources or strains from other liabilities on the with-profits business

K

Policy proceeds

1

[Under this heading the firm must set out the following table, giving the required figures for the contracts in relation to which the reductions in yield were shown under section H, showing, subject to paragraph 5 below, the net return to the policyholder for contracts maturing in the year in which the guide date falls and providing the necessary breakdown.]

2

Table 5 shows the rates of investment return per annum implicit inpolicy proceeds payable at maturity or retirement at age 60 for a male life (based on a monthly premium of £60.00¹³).

3

[Firms are encouraged to indicate how the net return to policyholders is split between the return on assets and allocations from miscellaneous sources. It would also be helpful to indicate the likely future potential for allocations from miscellaneous sources.]

Table 5 - Examples of results achieved by with-profits policies

Endowment assurances¹⁷

Net return to policyholder

After meeting the following items which are estimated to be:

Effect of mortality risks

Effect of expenses

Personal pensions (at vesting)¹⁷

Net return to policyholder

After meeting the following items which are estimated to be:

Effect of mortality risks

Effect of expenses

Term [ ] yrs¹⁸%

With-profits bonds¹⁷

Net return to policyholder

After meeting the following items which are expected to be:

Effect of mortality risks

Effect of expenses

ISA with-profits bonds¹⁷

Net return to policyholder

After meeting the following items which are expected to be

Effect of mortality risks

Effect of expenses

Notes:

16 - Enter here the financial year to which the figures relate

17 - Substitute a different class of contract if necessary

18 - The figures should show the return to the customer. The term must be as in Table 4, or if no experience for that term, the longest term for which figures are available

3

[Under this heading the firm must include a warning that information about past performance is not necessarily a guide to future performance.]

4

[Under this heading the firm must explain the relative significance of the figures shown in Table 5 and of the treatment of tax in the investment returns.]

5

[In any case where the firm is unable to show a net return in accordance with paragraph 1 above, the firm may instead use current terms and a credited interest rate of the relevant rate of return as specified inCOB 6.6.33 (Projections), making such modifications to the table as may be necessary.]

L

Conclusion

1

[Under this heading the firm may provide a summary of the guide.]

2

Much of the format and content of this guide are prescribed. However, there are other factors, such as surrender values, underwriting requirements and the quality and standard of service, which are not dealt with in this guide but which you may consider relevant to the selection of a policy or contract. If you would like more information, [company/society] will be pleased to assist.