24 Feb 2009

Prudential UK with-profits bonus update

  • £2.8 billion added to policy values as Prudential’s with-profits protects policyholders from the full impact of the current economic downturn
  • Policyholders benefit from the smoothing being applied to their policies and will typically see a reduction of between 6 per cent and 10 per cent in their accumulating with-profits policy values, despite the FTSE All-Share index (total return) declining by 29.9 per cent during 2008
  • Prudential’s with-profits continues to be an attractive medium to long-term investment when compared with alternative investment options. This is particularly the case in today’s unprecedented market volatility
  • The With-Profits Fund has delivered investment returns of 67.2 per cent over 10 years compared with the FTSE All-Share index (total return) of 12.4 per cent over the same period
  • Even though interest rates have fallen to their lowest level for over 300 years, Prudential sets annual bonus rates at 3 per cent for most with-profits bond and personal pension policies and 2 per cent for Prudential sold annuity customers

Prudential announced today that its strong with-profits fund has once again sheltered policyholders from the full impact of the extreme volatility seen in world markets and that it will make bonus payments totalling £2.8 billion (Note: £2.8 billion added to With-Profits policy values is split £1.3 billion Annual Bonus and £1.5 billion Final Bonus).

Annual bonus rates have been set at 3 per cent for most with-profits bond and personal pension policies and 2 per cent for Prudential sold annuity customers. This was possible due to the financial strength of the Fund and the consistently good underlying investment performance it has achieved over the medium to long-term, particularly when compared with many alternative investment options.

While the investment performance of Prudential’s With-Profits Fund was not immune to the extreme market conditions seen in 2008, customers have benefited from the ‘smoothing’ being applied to their policies which has reduced the full impact on claim values.

David Belsham, Chief Actuary at Prudential, said: “Prudential’s with-profits has once again delivered what it said it would. Although investment markets have performed very poorly in 2008, our policyholders have been protected from the full impact of the market falls and will typically see a reduction of between 6 per cent and 10 per cent in their accumulating with-profits policy values. In such exceptional market conditions, this compares very well with many directly exposed investment options available to customers.

“It is important to remember that with-profits products are a medium to long-term investment and our with-profits customers have received strong annualised returns.

"Today’s announcement reflects the consistent way in which we manage the Fund to ensure a fair approach to the setting of bonus rates. Our policyholders have benefited from the downside protection provided by our Fund which is supported by an Inherited Estate of £5.4 billion. It has never been more important to maintain the security and ongoing financial strength of the Fund for the benefit of our current and future policyholders.”

What this means for customers

The strong long-term investment performance achieved by Prudential’s With-Profits Fund has enabled the Company to provide customers with good annualised returns compared with many other investment options. Examples include:

10 year Prudence Bond performance relative to alternative investment products

Investment Product Total Payout Annualised Return
Prudential With-Profits Bond
(10 year, £10,000 single premium)
£14,697 3.9%
Average building society account £11,662 1.6%
Average balanced managed unit trust £11,243 1.2%
Average balanced managed
unit-linked life fund
£10,549 0.5%

15 year Prudence Bond performance relative to alternative investment products

Investment Product Total Payout Annualised Return
Prudential With-Profits Bond
(15 year, £10,000 single premium)
£25,044 6.3%
Average building society account £13,083 1.8%
Average balanced managed unit trust £19,612 4.6%
Average balanced managed
unit-linked life fund
£17,337 3.7%

20 year Prudential 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)
£96,238 6.5%
Average building society account £62,705 2.6%
Average balanced managed unit trust £81,252 5.0%
Average balanced managed
unit-linked pension fund
£81,079 5.0%

20 year 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)
£102,639 7.1%
Average building society account £62,705 2.6%
Average balanced managed unit trust £81,252 5.0%
Average balanced managed
unit-linked pension fund
£81,079 5.0%
(For tables above, please refer to Notes 1-4 below)


David Belsham continued: “We believe the bonuses announced today are prudent and will protect the ongoing interests of our current and future policyholders. Our overriding priority has always been to maintain the long-term financial security of the Fund and to continue to deliver strong performance for the benefit of our customers. The Fund has consistently outperformed the market and is providing our customers with good returns compared with many other investment options, especially during such challenging market conditions.

“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.”

Prudential Bonus Tables: sample claim values as at 1 May 2008 and 1 May 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
£15,830 £14,697 -7.2%
Prudential Personal Pension 10 years
(9 years)
£200
per month
£30,784 £31,048 -6.7%
Prudential Personal Pension 20 years
(19 years)
£200
per month
£103,581 £96,238 -9.3%
Prudential Mortgage Endowment 25 years
(24 years)
£50
per month
£39,569 £37,738 -6.1%
Scottish Amicable Mortgage Endowment 25 years
(24 years)
£50
per month
£42,150 £38,707 -9.5%
* After allowing for premiums paid during the year

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 estimated at £5.4 billion (as at 31 December 2008) which provides the working capital required to support the Fund for the long-term benefit of current and future policyholders.

This financial strength has enabled Prudential to add just under £25 billion to policy values for its with-profits customers between 1999 and 2009.

Strong With-Profits Sales Growth

Sales of with-profits bonds in 2008 were £98 million, an increase of 139 per cent on the prior year. This strong sales growth reflects the strength of Prudential UK’s with-profits offering and an increasing demand for this type of product as consumers increasingly look to protect themselves from market downturns, especially when invested in an actively managed, well-run and financially strong fund.

Underlying Investment Performance

Source:Prudential, Lipper Hindsight. All figures to 31 December 2008, With-Profits performance is gross of tax, charges and the effects of smoothing.

Market Value Reductions

Prudential’s approach to Market Value Reductions (MVR) remains unchanged although this is reviewed regularly in light of market conditions.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.

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:
5 yrs 10 yrs
Prudential With-Profits Fund (gross cumulative return) 31.7% 67.2%
FTSE All-Share index (total return) 18.7% 12.4%
FTSE 100 index (total return) 18.3% 3.2%

ABI UK – Balanced (up to 85% Equity) Managed-Life Fund

14.3%

12.3%

ABI UK – Cautious (up to 60% Equity) Managed-Life Fund

7.0%

11.3%
Moneyfacts Average up to 90 Days Notice £10,000 15.6% 31.6%
Darragh Leeson: Tel: 020 7150 2600 Mobile: 07801 856011
Steve Colton: Tel: 020 7150 3136 Mobile: 07771 531525
Juliette Emblem: Tel: 020 7150 2657 Mobile: 07802 486414
Notes to Editors:

Despite difficult conditions in financial markets throughout 2008, Prudential’s With-Profits Life Fund investment performance compares favourably with industry indices as the table below indicates.

Prudential With-Profits Fund Performance vs. Industry Indices:
Fund/Index 2008 Performance
Prudential With-Profits Fund (before tax) -19.7%
Prudential With-Profits Fund (after tax) -15.8%
FTSE All -Share index (total return) -29.9%
FTSE 100 index (total return) -28.3%
ABI UK – Balanced (up to 85% Equity) Managed-Life Fund -19.2%
ABI UK – Cautious (up to 60% Equity) Managed-Life Fund -16.0%
IPD Property -22.5%
Moneyfacts Average up to 90 Days Notice £10,000 3.2%
Financial Express average life fund sector fund performance and Moneyfacts Average Lipper Hindsight, both between 31/12/2007-31/12/2008. Investment Property Databank 31/12/2007-31/12/2008

Asset Mix of the Prudential With-Profits Fund
31/12/08
%
31/12/07
%
31/12/06
%
31/12/05
%
31/12/04
%
31/12/03
%

Equity shares

- UK

- Non-UK
34 35 36 40 33 33
17 17 17 19 15 15
Fixed interest 29 28 25 21 29 31

Property
14 14 15 15 18 17
Alternative investments 5 3 3 2 2 2
Cash 1 3 4 3 3 2
Total 100 100 100 100 100 100
Financial Performance and Policy Value Notes:
  1. Comparison between Prudential products and other returns are for periods to 1 May 2009
  2. The building society account, unit trust values and unit-linked life fund values use actual returns from 1 May in the relevant year through to 31 December 2008 and are then projected to 1 May 2009 using the most recent returns for the building society accounts and 8 per cent per annum (6.9 per cent net) for unit trust and unit-linked fund values.
  3. The building society account values are based upon Moneyfacts Average Instant Access assuming a balance of £2,500+. Rates assumed are gross of tax for the Individual Pension and net of tax for Prudence Bond. The unit trust returns are based on an average for the “IMA 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. The unit-linked pension fund returns are based on the average in the ABI UK Pension Fund’s “Balanced Managed–Pension 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 the entire 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.
  5. Full details of all annual and final bonus rates are available on request.

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