26 Feb 2002

Prudential adds £2.8 billion in bonuses to with-profits policies

Highlights of the announcement:

  • Prudential customers to have total bonuses of £2.8 billion added to their with-profits policies;
  • Regular (annual) bonus rates of 4 per cent for Prudence Bond and 4.5 per cent for personal pensions;
  • Annual return of 9.1 per cent on a typical ten-year Prudence Bond maturing in 2002 (see notes to editors), well ahead of both inflation and deposit based returns;
  • Prudential is committed to greater transparency in the operation of with-profits.

This year's bonus figures

Prudential announced today that bonuses of £2.8 billion will be added to policies in its main UK with-profits fund, providing returns on policies maturing in 2002 that are significantly ahead of both inflation and deposit-based returns.

Prudence Bond and personal pensions

Regular (annual) bonus rates of 4 per cent for Prudence Bond and 4.5 per cent for personal pensions are 0.5 per cent lower than last year, to reflect the lower long-term investment returns that can be expected in future in an environment of low inflation and low interest rates.

What this means for customers

Including final bonuses, the returns on a typical ten-year policy maturing in 2002 are 9.1 per cent per annum for a £10,000 single premium Prudence Bond (see notes to editors) and 7.7 per cent per annum for a £200 per month regular premium personal pension.

The return on a typical 25-year £50 per month regular premium savings plan will be 11.5 per cent per annum compared with an average inflation rate of 4.2 per cent and a net average return from building societies of 5.1 per cent (see notes to editors) per annum over the same period.

Prudential comment

Commenting on the bonus declaration, David Belsham, Prudential Assurance Company's Appointed Actuary, said:

"Our policyholders continue to benefit from good real rates of return, and the smoothing associated with Prudential's with-profits policies. The AAA strength of the company's with-profits fund has enabled Prudential to provide smooth returns on with-profits policies in 2001 that are significantly ahead of both the underlying investment return of minus 3.5 per cent earned on the with-profits fund and the FTSE 100 index which fell by more than 16 per cent in the year."

Prudential's financial strength

Financial strength is an important issue for customers, who want to be assured that their money is safe. Prudential's long-term fund is rated AAA by Standard and Poor's, the highest rating possible. Our customers benefited from this financial strength following the turmoil in markets during 2001, particularly following the events of 11 September, when Prudential:

  • maintained its bonuses;
  • was not forced to sell equities;
  • maintained its normal Market Value Reduction (MVR) policy, and did not introduce blanket MVRs.

Endorsing transparency

Prudential is committed to greater transparency in the management of with-profits funds, and has already been accredited under the ABI's Raising Standards initiative.

ENDS

Media Enquiries:

James Murray
UK Press Office
Tel: 020 7334 6363
Mobile: 07810 181757

Notes to Editors:-

  1. The Prudence Bond return is based on 101 per cent allocation, 5 per cent bid/offer spread, invested for ten years to 1 May 2002.
  2. Building Society returns are based on accounts available for a deposit of £2,500. Data sourced from S&P Micropal. Past performance is not necessarily a guide to future performance.
  3. Bonus Tables: sample claim values are shown below, with figures for 2000 in brackets.

    Contract Term
    (yrs)
    Premium Claim Value Effective rate of return p.a.
    Savings* 10 £50 per month

    (total £6,000)
    £8,188 (£9,096)
    6.1% (8.0%)
    25 £50 per month

    (total £15,000)
    £78,302 (£88,976) 11.5% (12.3%)
    Personal Pension 10 £200 per month

    (£24,000)
    £35,640 (£38,968)
    7.7% (9.4%)
    20 £200 per month

    (£48,000)
    £168,096 (£190,941) 11.3% (12.3%)

    *Based on a policy taken out by a male aged twenty-nine (industry standard example)

  4. With-profits continue to grow while stock markets fall: For the two sample savings policies, the claim values represent increases of 1 per cent and 5 per cent respectively over the policy values a year earlier, after allowing for the premiums paid during the year. Customers have therefore seen an increase in the value of their with-profits savings in spite of the fall in stock markets in 2001.
  5. With-profits continue to grow while stock markets fall: For the two sample savings policies, the claim values represent increases of 1 per cent and 5 per cent respectively over the policy values a year earlier, after allowing for the premiums paid during the year. Customers have therefore seen an increase in the value of their with-profits savings in spite of the fall in stock markets in 2001.
  6. The total value of bonuses declared for 2001 is £2,790 million for the PAC main fund and a further £690 million for the closed Scottish Amicable Fund.
  7. Attached with this announcement is a with-profits factsheet.

This statement may contain certain "forward-looking statements" with respect to certain of Prudential's plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Prudential's control including among other things, UK domestic and global economic and business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which Prudential and its affiliates operate. As a result, Prudential's actual future financial condition, performance and results may differ materially from the plans, goals, and expectations set forth in Prudential's forward-looking statements.

WITH PROFITS FACTSHEET

  1. Bonus Policy
    Prudential’s bonus policy is set out in detail in its With-Profits Guide (available on request from Prudential). The main aims of the company’s bonus policy are:
    To give each with-profits policyholder a return on the premiums which he or she has paid that reflects the earnings of the underlying investments, whilst smoothing out the peaks and troughs of investment performance; and
    To ensure that with-profits policyholders receive a fair share of the profits, (as decided by the Directors of PAC on the advice of the Appointed Actuary), distributed from the with-profits fund by way of bonus additions to their policies.
  2. Types of Bonus
    There are two types of bonus:
    Regular bonuses (or annual bonuses) are added to policies each year in order to gradually increase the guaranteed benefits under the policy.
    Final bonuses (or terminal bonuses) are added when the benefits of a policy are realised (ie on surrender, maturity or death). These bonuses are used to make up the difference between the guaranteed benefits and the overall smoothed claim value. Prudential uses these bonuses to return to each policyholder a fair share of the assets of the with-profits fund, while reducing the impact of market changes, especially around the date of maturity.
  3. Determination of Bonus Rates
    The balance between regular and final bonuses influences the investment strategy that the fund can adopt. Regular bonuses increase the amounts guaranteed to policyholders and so need to be backed by less risky (and so normally less rewarding) investments. This, in turn, affects the overall level of return achieved. Regular bonus rates are therefore targeted on a prudent proportion of the investment return that we expect to earn in the future. Regular bonus rates have been gradually reduced over the last twelve years in line with declining inflation and the associated reduction in expected future investment returns, as the chart below shows.

    Prudential Regular Bonus Declaration

    Year Prudence Bond (%) Personal Pensions (%)
    1991 9.25 10.05
    1992 8.75 10
    1993 8 9
    1994 7 8.25
    1995 6.5 7.5
    1996 6.25 7
    1997 6 6.75
    1998 5.75 6.25
    1999 5.25 5.75
    2000 4.75 5.25
    2001 4.5 5
    2002 4 4.5

    Total claim values are set by reference to "asset shares", which are calculated for typical policies by accumulating the premiums paid, less allowance for expenses and charges, at the actual rates of return earned on the assets of the with-profits fund over the life times of those policies. The asset shares also include allowance for distributions to shareholders and profits from other sources arising in the with-profits fund. These asset shares provide a target level for claim values paid to customers.
  4. What is smoothing?
    Smoothing is applied so that the claim values actually paid change only gradually over time. In normal investment conditions, we aim to ensure that total payouts on equivalent policies do not change by more than 10 per cent from one year to the next. 2001 was a turbulent year for the markets, the FTSE 100 falling by 16.2 per cent, following a fall of 10.2 per cent in 2000. It is also the first time that the FTSE All Share Index has fallen in two successive years since 1974. We have therefore reduced some payouts by more than the normal smoothing limits.
    Prudential’s intention is that any smoothing of profits or losses should balance out over time, so that in the long run with-profits policyholders neither gain nor lose as a result of the smoothing policy.
    Over the last five years, the aggregate claim values paid on maturing policies have amounted to around 102 per cent of the corresponding asset shares.
  5. Where do profits from the with-profits fund go?
    Prudential’s with-profits policyholders currently receive 90 per cent of the profits distributed from the with-profits fund as bonus additions to their policies and shareholders receive the remaining 10 per cent as dividend payments. Since policyholders and shareholders share proportionately in these profits, their interests are exactly aligned.
    For the year 2001, profits distributed from Prudential’s main with-profits fund amounted to £3.1 billion, of which £2.8 billion (90 per cent) will be added to policies as bonuses, and £310 million (10 per cent) will be distributed to shareholders.
  6. Prudential’s with-profits investment strategy
    The company’s investment strategy is to seek to secure on behalf of its policyholders the highest combination of income and growth in capital value while maintaining the security of the fund. The table below shows the investment mix of Prudential’s with-profits fund.


    End 2001
    %
    End 2000
    %
    Equity shares
    -UK shares 38 47
    -Non-UK shares 14 14
    Fixed interest 28 20
    Cash 3 5
    Property 15 14
    Alternative investments 2 -
    Total 100 100

    Prior to the market falls in September 2001, the fund continued to reduce its exposure to equities. There was also a re-weighting within equities out of the UK and into overseas equities. This change in asset mix reflected our view that equity valuations were high and that other assets, particularly corporate bonds, were relatively attractive. The change within equities has also improved diversification and reduced expected fund volatility.
    The change in asset mix in recent years has had a substantial beneficial impact on investment returns.
    The broad asset mix will continue to be reviewed as the economic environment and market valuations change.
  7. Investment Returns – better than the FTSE in 2001
    The underlying investment return on the Prudential with-profits fund was minus 3.5 per cent in 2001 compared with the decline of 16.2 per cent in the FTSE 100 index and a decline of 15.4 per cent in the FTSE all share index. Returns on the with-profits fund in recent years have been as follows:
    Year 1997 1998 1999 2000 2001
    Gross Return % 19.8 12.6 19.3 3.0 -3.5

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