13 Nov 2008

Prudential UK With-Profits bonus rates

  • Prudential's With-Profits helps to protect policyholders against the full impact of the market downturn
  • Year-on-year changes in policy values will be between +3 per cent and -2 per cent, despite falls in the FTSE All Share (total return) and the FTSE 100 (total return) indices of 22 per cent and 21.5 per cent respectively in 2008 to 30 September
  • Reduction in Final Bonus Rates – typically reducing policy values by between 5 per cent and 10 per cent
  • No change to Annual Bonus Rates
  • Approach to MVRs remains unchanged
  • Prudential's With-Profits Fund remains one of the strongest in the UK, benefiting from an Inherited Estate of £6.2 billion (as at 30 September 2008)
  • 174 per cent increase in sales of with-profits bonds in the first 9 months of 2008 as investors seek protection from volatile markets
  • The Fund has delivered investment returns of 102 per cent over 10 years (to 30 September 2008)

Prudential announced today that it is reducing final bonus rates on its with-profits policies in response to the sustained downturn across world markets and the continuing poor investment environment.

The financial strength of the Prudential With-Profits Fund means that there is no need to change the annual bonus rates currently being added to policies.

In addition there will be no change to the company's approach to MVRs, although this is reviewed regularly in the light of emerging market conditions.

David Belsham, Chief Actuary at Prudential said: "Today's change reflects the consistent way in which we have managed the Fund to ensure a fair approach to the setting of bonus rates. In an environment where markets have fallen significantly, our policyholders have benefited from the downside protection provided by our Fund. This demonstrates the benefit of being invested in Prudential's strong With-Profits Fund which is supported by an Inherited Estate of £6.2 billion as at 30 September 2008. It has never been more important to have a strong Inherited Estate to help support the security and ongoing financial strength of the Fund for the benefit of our current and future policyholders. Despite volatile markets, Prudential with-profits has delivered what it said it would - smoothed returns to policyholders, who will see only a small change in their year-on-year policy values.

"We believe today's move is prudent and will ensure the continuing long-term strength of the Fund and protect the ongoing interests of our long-term customers. It is the right course of action to take at this time.

"Our With-Profits Fund is the largest and one of the strongest in the industry and our overriding priority has always been to maintain the long-term financial security of the Fund and to continue delivering strong performance for the benefit of our policyholders. The Fund has outperformed the market and is providing our customers with good returns compared with many other investment options, especially during such challenging market conditions".

Rationale
The performance of the Prudential With-Profits Fund has historically been strong and investors continue to benefit from the quality of the underlying fund management. However, the continuing poor performance of world stock markets and the wider, weak economic environment is having an impact on the performance of the investments (assets) within the With-Profits Fund. The strong financial position of the Prudential With-Profits Fund, and smoothing, which is the cornerstone of with-profits, have protected investors from the full extent of this downturn.

Prudential is taking action now to maintain the strong financial position of the Fund and to protect the long-term interests of current and future policyholders. In the year to 30 September 2008, the FTSE All Share (total return) and FTSE 100 (total return) indices fell by 22 per cent and 21.5 per cent respectively. Despite this, Prudential's strong With-Profits Fund continues to protect the value of policyholders' investments from the full impact of volatile market performance. The revised final bonus rates being announced today will typically reduce policy values by between 5 per cent and 10 per cent. However, customers will see the year-on-year value of their policies changing by between +3 per cent and -2 per cent.

The bonus rates added to policies aim to reflect the actual investment returns over the medium to long-term. The changes now being made to bonus rates will ensure that payouts more fairly represent the underlying value of the assets backing each with-profits policy, while continuing to provide the benefits of smoothing associated with Prudential's With-Profits Fund.

Performance

Prudence Bond's performance relative to alternative investment products

Investment Product Total Payout Annualised Return
Prudential With-Profits Bond
(10 year, £10,000 single premium)
£16,093 4.9%
Average building society account £11,689 1.6%
Average balanced managed unit trust £12,336 2.1%
Average balanced managed unit-linked life fund £11,474 1.4%

Prudential's Personal Pension performance relative to alternative investment products

Investment Product Total Payout Annualised Return
Prudential With-Profits Individual Pension
(20 year term, £200 per month regular premiums)
£103,730 7.1%
Average building society account £63,426 2.7%
Average balanced managed unit trust £82,979 5.2%
Average balanced managed unit-linked life fund £81,934 5.1%

Scottish Amicable Personal Pension performance relative to alternative investment products

Investment Product Total Payout Annualised Return
Scottish Amicable Personal Pension
(20 year term, £200 per month regular premiums)
£112,257 7.8%
Average building society account £63,426 2.7%
Average balanced managed unit trust £82,979 5.2%
Average balanced managed unit-linked life fund £81,934 5.1%

(For tables above, please refer to Notes 1-4)

Prudential Bonus Tables: sample claim values as at 1 January 2008 and 1 January 2009

Contract Policy duration in 2009 (2008) Premium Claim Value 2008 Claim Value 2009 % Change
Prudence Bond 10 years (9 years) £10,000 single premium £16,376 £16,093 -1.7%
Prudential Personal Pension 20 years (19 years) £200 per month £102,729 £103,730 +1.0%
Scottish Amicable Personal Pension 20 years (19 years) £200 per month £111,779 £112,257 +0.4%
Scottish Amicable Mortgage Endowment
(original term 25 yrs)
25 years (24 years) £50 per month £42,546 £42,319 -0.5%

Our Customers


What this means for Prudential and Scottish Amicable policyholders is that when a with-profits policy comes to the end of its term or, alternatively, should a policyholder decide to cash in all or part of a with-profits policy before its maturity date is reached, any additional money that Prudential adds as a final bonus will be reduced.

The policyholders not affected by today's announcement are those holding

  • Prudential With-Profits Endowments
  • Prudential With-Profits Annuities including those Equitable Life with-profits annuitants who transferred to Prudential in December 2007
  • Prudential individual pension policies originally taken out before May 1987 (Section 226 Pensions)
  • Industrial Branch With-Profits policies
  • Certain Prudential Corporate Pension Schemes
  • PruFund Investment Plan

Strong With-Profits Sales Growth
Prudential reported sales of with-profits bonds in the first 9 months of 2008 of £74 million, an increase of 174 per cent.

David Belsham concluded: "We have seen a significant increase in sales of with-profits products at Prudential, reflecting the strength of our with-profits offering and an increasing demand for this type of product, especially when invested in an actively managed, well-run and financially strong fund."

Strength of Prudential's With-Profits Fund
Prudential's With-Profits Fund is the largest and one of the financially strongest in the UK, continuing to cover comfortably all its regulatory solvency requirements. The Fund is supported by an Inherited Estate of £6.2 billion (as at 30 September 2008) which provides the working capital required to support the Fund for the long-term benefit of current and future policyholders. On a realistic market-consistent basis, the Risk Capital Margin at 30 September 2008 was covered three times, solely from capital in the With-Profits Sub-Fund.

Commenting on the current market environment, Martin Brookes of Prudential's Portfolio Management Group, the fund managers of the Prudential With-Profits Fund, said: "We remain confident that we have a tried and tested approach to investment that has worked well over the last 10 years - a time frame that includes periods of extreme volatility. "This active approach and the strong capital position of our Life Fund puts us in a great position to take up investment opportunities as they arise and to be a beneficiary as sentiment in markets improves over time.

"Generally, we believe the current environment presents a fantastic entry point for genuine medium-term equity investment although short-term volatility will remain high. Investment grade corporate bonds also look great value, while the ongoing de-leveraging process in the banking sector is also providing some selective opportunities which we are well positioned to take advantage of."

-ENDS-

The information contained in Prudential UK's press releases is intended solely for journalists and should not be used by consumers to make financial decisions. Full consumer product information can be found at www.pru.co.uk.

Media Contacts:

Darragh Leeson Tel: 020 7150 2600 Mobile: 07801 856011
Steve Colton: Tel: 020 7150 3136 Mobile: 07771 531525

Notes to Editors:

Consistent Performance - Some of the outstanding successes achieved by Prudential's With-Profits Fund over recent years include:

  • The Fund has been the top performing Life Fund in the UK over the last 10 years (to 31 December 2007) and this was reflected in Prudential retaining its top ranking in the 2007 WM Life Fund Survey
  • During this period, the Fund outperformed all of our major competitors as well as the FTSE 100 and All-Share indices. The cumulative return on the Prudential With-Profits Fund over 5 and 10 years to 30 September 2008 was 50 per cent and 102 per cent respectively
  • Despite difficult conditions in financial markets, Prudential's With-Profits Life Fund investment performance compares favourably with industry indices as the table below indicates. All figures relate to period 01/01/2008 to 30/09/2008

Fund / Index Performance
Prudential With-Profits Fund -13%
FTSE 100 (total return) -21.5%
FTSE All Share (total return) -22%
ABI Cautious Managed (up to 85% Equity) -15%
Finex Money Deposit 90 Days (total return) + 2.5%

  • As a result of greater investment flexibility, Prudential has been able to pay out over £24 billion in bonuses to policyholders over the last 10 years, notably during significant market downturns.

Asset Mix of the Prudential With-Profits Fund:

30/09/08
%
31/12/07
%
31/12/06
%
31/12/05
%
31/12/04
%
31/12/03
%
Equity shares
- UK shares 34 35 36 40 33 33
- Non-UK shares 16 17 17 19 15 15
Fixed interest 29 28 25 21 29 31
Property 16 14 15 15 18 17
Alternative investments 4 3 3 2 2 2
Cash 1 3 4 3 3 2
Total 100 100 100 100 100 100

MVRs:
The company's approach relating to Market Value Reductions (MVR) remains unchanged.

Where applicable, it is calculated on a case-by-case basis. For those policies that have been held for more than five years and have an MVR-free withdrawal limit, the limit of £25,000 in any 12 month period remains unchanged.

Financial Performance and Policy Value Notes:

1. Comparison between Prudential products and other returns are for periods to 1 January 2009

2. The deposit fund values, unit trust values and unit-linked life fund values use actual returns from the relevant 1 January through to 30 September 2008 and are then projected to 1 January 2009 using the most recent returns.

3. The Micropal UK Savings Indices deposit rates assumed are gross of tax for the Individual Pension and net of tax for Prudence Bond. The rates are surveyed from the largest 20 building societies and ex-societies. The UK Savings £2,500+ Investment gross/net index for deposits of £2,500+ on instant access have been used. The unit trust returns are based on an average for the "Balanced Managed" sector, offer to bid, gross income reinvested (net income reinvested, for Prudence Bond). The unit-linked life fund returns are based on the average returns in the ABI UK Life Fund's "Balanced Managed – Life Fund" category.

4. A with-profits investment is not like a bank or building society deposit account. A with-profits policy may return less than has been invested, in particular in the early years, whereas a bank or building society deposit account would return all the customer's capital. Investors should consider keeping any money which might be needed in the short-term in a bank or building society deposit account which is generally secure and readily accessible.

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