COBS 20.1A The with-profits fund1

For the purposes of calculating any with-profits funds surplus and the rules and guidance in COBS 20, including COBS 20.1A.5 R, COBS 20.1A.6 R and COBS 20.2.17C R, a firm must include the following non-exhaustive list as ‘other liabilities’:

1. (1)

   liabilities arising from its regulatory duty to treat customers fairly (where not already included in technical provisions); and

2. (2)

   the value of any prospective future transfers out of the with-profits fund properly attributable to shareholders in accordance with COBS 20.

1. (1)

   Where the firm:

   1. (a)

      identifies particular assets as forming a distinct part of its with-profits fund; and

   2. (b)

      restricts participation in the profits or other experience of that distinct part of the fund to a particular category of with-profits policies;

   then, provided that:

   1. (c)

      such identification and restriction is consistent with the considerations in (3), and

   2. (d)

      the firm treats each affected category of with-profits policyholder fairly, having regard to those considerations;

   each such part constitutes a separate with-profits fund.

2. (2)

   Notwithstanding (1), each different part of its with-profits fund constitutes a separate with-profits fund if that is necessary in order to treat each affected category of with-profits policyholder fairly, having regard to the considerations in (3).

3. (3)

   The considerations referred to in (1) and (2) are the terms of the relevant with-profits policies; the firm's established practice; its PPFM and/or other relevant communications to affected with-profits policyholders, and the terms of any arrangement formally approved by a court of competent jurisdiction, appropriate regulator or previous regulator.

1. (1)

   For a Solvency II firm operating a with-profits fund prior to 1 January 2016:

   1. (a)

      assets in the with-profits fund held in accordance with INSPRU on 31 December 2015 are deemed to be items in a with-profits fund for the purposes of COBS 20 from 1 January 2016, provided that any transfers out of, and any outgoings from, the fund up to 31 December 2015 were made in accordance with, and/or do not as at 31 December 2015, constitute, or continue to constitute, a breach of INSPRU 1.5.21 R and INSPRU 1.5.27 R;

   2. (b)

      any assets transferred out of the fund in breach of INSPRU 1.5.21 R and INSPRU 1.5.27 R are deemed not to have been transferred out of the fund and remain part of the with-profits fund;

   3. (c)

      to the extent that the assets in (b) have also been transferred out of the firm then, before (a) can apply to the firm, the firm must transfer into the with-profits fund assets equal to the value of the assets referred to in (b), and of a similar quality, having regard to the PRA Rulebook: Solvency II Firms: Investments.

2. (2)

   Firms to which (1)(a) applies must, in any event, comply with COBS 20.1A.2 R. Paragraph (1)(a) does not apply to the extent that it would be inconsistent with the operation of COBS 20.1A.2 R where the effect is to require a firm to create or make changes to sub-funds amounting to separate with-profits funds.

A Solvency II firm effecting or carrying out with-profits insurance business must identify the assets relating to all the business written in, or transferred into, each with-profits fund which it is required to hold under COBS 20.1A.5 R or PRA Rulebook: Solvency II firms: With Profits rule 2.1.

A Solvency II firm must ensure that it holds assets in each of its with-profits funds of a value at least sufficient to cover the "with-profits policy liabilities" defined in the PRA Rulebook: Glossary and as required by PRA Rulebook: Solvency II firms: With Profits rule 2.1, and any other liabilities in respect of all of the business written in, or transferred into, that with-profits fund.

A Solvency II firm must maintain separate accounting records for each of its with-profits funds. The accounting records must identify:

1. (1)

   all of the assets of that with-profits fund;

2. (2)

   the best estimate component of technical provisions for the with-profits policies written in, or transferred into, that with-profits fund;

3. (3)

   the best estimate component of technical provisions for the non-profit insurance contracts written in, or transferred into, that with-profits fund;

4. (4)

   any other liabilities of the with-profits fund not covered by (2) or (3), and their value calculated in accordance with PRA Rulebook: Solvency II Firms: Valuation and applicable parts of the Solvency II Regulation (EU) 2015/35 of 10 October 2014.

A Solvency II firm must not transfer assets out of a with-profits fund unless:

1. (1)

   the assets represent any part of a with-profits fund surplus, or represent assets held in accordance with COBS 20.1A.5 R in relation to the part of a distribution that has been made which is properly attributable to shareholders, in accordance with COBS 20; and

2. (2)

   no more than three months have passed since the actuarial investigation determining that surplus.

1. (1)

   A Solvency II firm must use or apply an asset in a with-profits fund only for the purpose of the business in the with-profits fund.

2. (2)

   For the purpose of (1), applying or using an asset includes any obligation (even if only contingent) to apply or use that asset.

A Solvency II firm must not agree to, or allow, any mortgage or charge on the assets in any of its with-profits funds, other than in respect of, and for the purposes of, the business in the with-profits fund.

A firm, other than a non-directive friendly society,2 which is subject to contractual terms providing for payments under a capital instrument included in that insurer's own funds2, must:

1. (1)

   manage any with-profits fund so that discretionary benefits under a with-profits policy are calculated and paid, disregarding, insofar as is necessary for its customers to be treated fairly, any requirements in such contractual terms whether or not they are absolute, contingent or at the discretion of the firm; and

2. (2)

   disclose its intention to manage the with-profits fund on the basis set out in (1) in the firm's PPFM.

A Solvency II firm must ensure that it has adequate arrangements in place for ensuring that transactions affecting the assets of the firm operate fairly between with-profits policyholders and other persons interested in the other assets of the insurer and, where the firm has more than one with-profits fund, those transactions operate fairly between the with-profits policyholders in each of those funds.