Phoenix Ireland



‘With Profit Misconceptions’

The way to fair returns

With so many downbeat articles about With Profits policies appearing in the financial press over the last two years, your customers may be coming to you with a number of questions and misconceptions about their With Profits policy and asking if it should still play a core role in their portfolios.

In addition, it may be several years since your customers thought in any detail about their policies. Understandably, they may have lost sight of why they made the decision to invest via the With Profits route in the first place.

All of which explains why we’ve prepared this briefing document. One by one, we identify and address the major misconceptions your customers may have picked up. Then, point-by-point, we give a clear explanation of how we’re working in your customers’ best interest, to preserve value in the fund.

This communication is aimed at intermediaries and investment professionals only.

Abbey Asset Management Overview August 2005

This leaflet has been designed to identify the most common misconceptions your customers may hold, and to help you address these concerns when you advise them.


The non-payment of reversionary (annual) bonuses is evidence that a With Profits fund is weak, and will deliver poor returns to investors

Accurate perception:

We stopped adding regular bonuses in order to ensure all customers are treated fairly

We always aim to pay out the fair asset share to our customers

Our current strategy for giving maximum benefits to customers is to reduce any penalties for early encashment, and to pay terminal bonuses when a customer exits the fund. However, please remember that bonuses cannot be forecast or guaranteed. With the full benefits of any positive fund returns credited to investors, they get the fair value to which they are entitled.

Reinstating annual bonuses at this point would be unhelpful as, without specific guarantees, early encashment would simply mean that the penalty we apply will be higher than it would otherwise have been. In effect, this would take back whatever had been given by way of annual bonus, should this prove not to be justified by the underlying performance.

It is worth remembering that we stopped adding annual bonuses following the prolonged slump in equity markets of 2000-2003. So, while the fund is designed to behave in a manner similar to a balanced managed fund (and where policy benefits are determined by the company, consistent with its Principles and Practices of Financial Management, based on the advice of the With Profits Actuary), the extent of the market fall meant that bonus payments credited to policies had exceeded the actual value created in the fund.

However, this situation has been successfully addressed as communicated to you last year. The fund is currently fully able to meet its liabilities, and has also benefited from good recent returns. However, please remember past performance is not a guide to future performance.

[2] Misconception:

Closed funds offer inherently poor prospects, because management gives up and seeks only to manage out the liabilities

Accurate perception:

In closed or open funds, our first priority is to protect the interests of our With Profits policyholders

Certainly, we believe our With Profits funds currently have sufficient assets to meet the guarantees that are given. This liability is met partly through the asset allocation process, and partly through the purchase of appropriate instruments to hedge the risk (for example, if stock markets or interest rates fall). Meanwhile, our With Profits fund currently has approximately 40% of its investments in equities and other assets, which we expect to give a good long-term return, albeit with some volatility.

From January 2004 to December 2004, the Scottish Provident With Profits Fund returned 11.1% growth before tax and charges. For the half-year from January 2005 up to the end of June 2005, the fund has returned an additional 6.6% growth.

This stronger performance has allowed us to improve conditions for many policyholders including reducing MVRs on early surrender, and increasing or re-introducing terminal bonuses for claims. Our plan is to continue to do this before re-introducing reversionary (annual) bonuses.

However, please remember that past performance is not a guide to future performance. For investments in the With Profits funds, what you get back depends on how much profit the funds make and how we distribute it. You may not get back the full amount of your investment. The value of investments can go down as well up. The rate of future bonuses in the With Profits funds and therefore the rate of growth in the unit price cannot be guaranteed.

Why we aren’t declaring reversionary (annual) bonuses

Should we declare reversionary (annual) bonuses, we would be increasing the guarantees and so the liability of the fund. In time, that would mean less in growth assets such as stocks and shares, and the purchase of more hedge assets. So, in order to safeguard your customers’ returns, we have not declared a reversionary (annual) bonus. Nor will we, in the foreseeable future, on most of our policies. Any investment gains will be allocated to the reduction of any MVRs and increases in terminal bonus.

It is also worth pointing out that significant portions of the business are currently receiving terminal bonuses.

Please note terminal bonuses are not guaranteed. They are sensitive to market conditions and can be varied or withdrawn without notice.

Commitment to positive management

We are investing high quality resources in the way we manage the asset allocation, the fund construction, and the control of risks. Our clear commitment is shown in the way we have outsourced the day-to-day management of assets to carefully selected specialists from around the world, while retaining full accountability for those assets.

Furthermore, the quality of our work is subject to independent oversight. The fund returns are monitored both by the life company, and by two Abbey With Profits committees to ensure professional and impartial governance.

With Profits and individual investment strategies

On a more general point, it is true that we now no longer regard With Profits funds as a universal solution for customers looking to invest over the long term. This is primarily because we accept that the fund’s asset mix may not suit all customers throughout the time they hold the investment. Of course, many of you now provide detailed asset allocation advice to customers. Depending on the individual situation, that advice may be to retain the With Profits investment, or to consider an alternative.

[3] Misconception:

Funds with hedged guarantees offer no upside for investors, whether or not they personally hold guarantees

Accurate perception:

The fund can grow with little risk from the hedging instrument

The value of each customer’s policy is our estimate of the value of the asset share it contains. In this way, a With Profits fund should be considered as very similar to a balanced investment fund.

Also, while we have arranged hedging instruments to protect the fund from adverse moves in the market, it is important to note that these are held outside the asset share, as totally discrete investment vehicles.

[4] Misconception:

MVRs profit shareholders, not customers…

Accurate perception:

MVRs ensure fairness to all customers and do not profit shareholders

In certain situations, and where guarantees do not apply, we currently apply a Market Value Reduction (MVR). This might be the case when asset values are deflated, or there is an unusually high outflow of investors. This is necessary because the amount paid out to a customer represents his or her fair share of the fund, and that incorporates the MVR adjustment. (Any difference – which would be small – would be a profit or loss to the fund, and not to the shareholder.) Without an MVR, we would be paying a disproportionate amount to policyholders who leave, at the expense of those who stay.

There is no denying that we, along with many others, failed to anticipate that the equity downturn would prove to be so severe, both in length and depth. However, the fund is now well positioned; and we are crediting the full benefits of any positive returns to policyholders. In addition, as discussed above, we have incorporated effective strategies to protect the fund from any future market collapse.

MVRs are quite different from Early Surrender Penalties, which are charges levied by and paid to the provider. Early Surrender Penalties are there to help the insurance company recoup initial costs for setting up the policy - principally including initial commissions paid to intermediaries - when customers choose to cash in during the early years.

[5] Misconception:

Investors should cash in as soon as they can, or certainly as soon as any early surrender penalties expire

Accurate perception:

Our view is that customers should seek independent financial advice to identify the investment alternatives best suited to their individual needs

Scottish Provident is not in a position to give investment advice to policyholders and, as you are aware of your customers’ financial situation and requirements we will refer them to you for professional advice as required.

In general, a With Profits fund is like a balanced managed fund that may contain guarantees Investors with guarantees could give up valuable benefits should they cash in their policies early. In addition, the cost of exiting the With Profit policy - both in terms of charges and tax and reinvesting into a new fund would need to be considered. Please remember that if the customer cashes in their policy early they may get back less than they paid in.

Where investors do not have these guarantees, the fund offers a low to medium-risk diversified portfolio, designed to provide prospects of long-term returns in excess of those available from cash and fixed interest assets, but without excessive risk. In addition, the fund’s day-to-day asset management is carried out by carefully selected third party specialists.



Scottish Mutual International Limited is regulated by the Central Bank of Ireland.
Phoenix Life Limited is authorised and regulated by the Financial Services Authority in the United Kingdom .