Description
This Principles and Practices of Financial Management document is for With Profits business eligible for bonuses. This document, together with customer friendly versions, 'An Introduction to Conventional With Profits' and 'An Introduction to Unitised With Profits' are intended to assist With Profits Policyholders in understanding the way in which the Society manages its With Profits business.
1 PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT
PRINCIPLES AND
PRACTICES OF
FINANCIAL
MANAGEMENT.
PPFM JULY 2013
This is an important document, which you should read and keep.
2 PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT
CONTENTS
4
4
5
5
7
7
7
7
8
8
9
10
10
11
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11
7
5
5
5
5
5
6
6
1 INTRODUCTION
1.1 The purpose of this document
1.2 Difference between Principles and Practices
1.3 Changes to the Principles and Practices of Financial Management
2 STRUCTURE OF THE LONG TERM FUND
2.1 Ownership of the Society
2.2 Basic structure
2.3 Application of pro?ts
2.4 Use of shareholder funds
2.5 Types of policy
2.6 Structure diagram
4 OVERRIDING PRINCIPLES
4.1 Background
4.2 Supremacy of the Overriding Principles
4.3 The Overriding Principles
5 PRINCIPLES
5.1 The amount payable under a With Pro?ts Policy
5.2 Investment policy
5.3 Business risks
5.4 Charges and expenses
5.5 Management of the Inherited Estate
5.6 Volumes of new business
5.7 Equity between the With Pro?ts Sub Fund, shareholders and Policyholders
3 THE INHERITED ESTATE
2
3 PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT
11
11
18
19
20
21
22
22
22
22
23
6 CURRENT PRACTICE
6.1 The amount payable under a With Pro?ts Policy
6.2 Investment policy
6.3 Business risks
6.4 Charges and expenses
6.5 Management of the Inherited Estate
6.6 Management of capital
6.7 Volumes of new business
6.8 Equity between the With Pro?ts Sub Fund, shareholders and Policyholders
6.9 Contractual Minimum Addition (CMA)
6.10 Contractual Annual Interest
7 GLOSSARY 23
3
4 PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT
1 INTRODUCTION.
1.1 THE PURPOSE OF THIS DOCUMENT
In 2004 our Regulator implemented rules for the
governance of With Pro?ts business. These included
the requirement to publish Principles and Practices of
Financial Management (PPFM).
This Principles and Practices of Financial Management
document is for With Pro?ts business eligible for
bonuses. This document, together with customer friendly
versions, ‘An Introduction to Conventional With Pro?ts’
and ‘An Introduction to Unitised With Pro?ts’ are
intended to assist With Pro?ts Policyholders in
understanding the way in which the Society manages
its With Pro?ts business.
It is important to understand that the Principles and
Practices of Financial Management set out in this
document describe the way in which the Society
currently seeks to manage its With Pro?ts business.
Management of the With Pro?ts business is not a
mechanistic process carried out strictly on the basis of
compliance with a detailed set of pre-determined rules,
guidelines or criteria. Rather, it requires the Society to
make many judgements about the actions it should
take in endeavouring to meet the objectives which are
described in the Principles and Practices set out in
this document.
Those judgements are made by the Society in good
faith, with a view to balancing the different interests
of individual Policyholders, groups of Policyholders,
and Policyholders as a whole. They are based, among
other things, upon assumptions about the future, the
ful?lment of which clearly cannot be guaranteed by
the Society. Equally, the Society cannot guarantee that
the judgements it makes will result in the objectives
described in the Principles and Practices set out in this
document being achieved.
With Pro?ts contracts of insurance are long term in
nature. Whilst the Society wishes its Policyholders to
have as clear an understanding as practicable of how the
Society will seek to manage the With Pro?ts business, it
is not in Policyholders’ interests for the Society to do so
by reference to rigid and in?exible criteria. The Society
therefore seeks to respond to events in managing the
With Pro?ts business, and to adapt accordingly the
Principles and Practices by reference to which it seeks
to carry on that business. These Principles and Practices
have evolved signi?cantly over time, in response to
changing experience within the With Pro?ts Sub Fund,
and changing events outside it, such as changes in
investment markets and insurance company legislation
and regulation. This evolutionary process is likely to
continue into the future.
For these reasons, Policyholders and prospective
Policyholders should not treat the statements made in
this document as binding commitments on, or binding
representations by, the Society as to how it manages
the With Pro?ts business or as to how it will do so in
the future. Instead, they represent the criteria to which
the Society currently has regard, and the objectives it
is currently seeking to pursue, in making judgements
about the management of its With Pro?ts business.
Whilst those judgements are made in good faith, and
for the purposes described above, the statements in this
document are not intended to enable those judgements
to be challenged with the bene?t of hindsight.
This Principles and Practices of Financial Management
document is published in accordance with the
requirements of the Regulator and is not intended to alter
the rights and obligations the Society or Policyholders
have under any policy documents that the Society
has issued. Should there be any con?ict between the
Principles and Practices of Financial Management and
what is said in any such policy document, the latter shall
prevail.
The Society maintains governance arrangements
designed to ensure that it complies with, maintains
and records this Principles and Practices of Financial
Management document, as required by the Regulator.
The Society keeps these arrangements under review
to ensure that they remain appropriate to the scale and
complexity of its With Pro?ts Sub Fund and include the
approval of this Principles and Practices of Financial
Management document by the Board of Directors. The
Society’s compliance with this Principles and Practices of
Financial Management document and how it addresses
con?icting rights and interests of Policyholders and
shareholders are subject to review including a review by
an independent person. Currently, the Board of Directors
commissions a report from an independent person with
appropriate skills and experience in these matters to give
their independent judgement. The Society may from
time to time alter these arrangements for obtaining such
independent judgement as it may deem appropriate in
compliance with the requirements of the Regulator.
Following the review, the Board reports annually on the
Society’s compliance with the Principles and Practices
of Financial Management document. In addition the
With Pro?ts Actuary reports whether the exercise of
discretion over the year has taken into account the
interests of the different groups of Policyholders in a
reasonable and proportionate manner. These reports
can be found on our website at:
www.legalandgeneral.com/with-pro?ts/guides
We hope that this document will be helpful in explaining
the Practices we adopt, as well as the Principles we apply,
in the management and operation of our With Pro?ts
business. It does not, however, override any policy
document we have issued, the terms of which will
continue exclusively to govern contractual relationships.
In addition to the PPFM we publish a ‘Bonus Factsheet,
incorporating the PPFM Data Annex’, which contains
certain data regarding the With Pro?ts Sub Fund. We aim
to publish this at least annually. The latest version can be
found on our website at:
www.legalandgeneral.com/with-pro?ts/guides
5 PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT
1.2 DIFFERENCE BETWEEN PRINCIPLES AND
PRACTICES
This document has two core elements:
(A) The Principles describe the Society’s aims and
objectives in the management of the With Pro?ts
Sub Fund and are designed to be long-term in
nature. (Both the “Principles” and “Overriding
Principles” set out in this document count as
Principles for this purpose).
(B) The Practices provide additional detail of the current
operation of the With Pro?ts Sub Fund in line with
the Principles. Changes to Practices are expected to
occur more frequently.
1.3 CHANGES TO THE PRINCIPLES AND
PRACTICES OF FINANCIAL MANAGEMENT
Principles and Practices may in the future be amended
to re?ect, among other things, changes to the business,
investment markets, or the economic or regulatory
environment in which the Society operates.
Any amendments to this document will be carried out
in accordance with the regulatory requirements in force
at the time. At the time of writing, regulations require
that three months’ notice be given of any change to
Principles. No advance notice is required of a change
to Practices.
2 STRUCTURE OF THE LONG
TERM FUND.
2.1 OWNERSHIP OF THE SOCIETY
The Society is a wholly owned subsidiary of
Legal & General Group Plc.
2.2 BASIC STRUCTURE
The Society maintains a Long Term Insurance Fund (the
Long Term Fund). The Long Term Fund comprises the
With Pro?ts Sub Fund and the Non Pro?t Sub Fund.
With Pro?ts Policies form part of the With Pro?ts Sub Fund.
For the purposes of managing the Long Term Fund the
Society identi?es the assets of the Long Term Fund
which are notionally allocated to the With Pro?ts Sub
Fund. Separate accounts are maintained for the
With Pro?ts Sub Fund. However, the capital requirements
of the Society are assessed by reference to the Long
Term Fund as a whole and the two sections of the Long
Term Fund offer mutual support for the purposes of
meeting these requirements.
2.3 APPLICATION OF PROFITS
Each year, following an actuarial valuation, the Board
decides the amount of pro?ts, if any, which may be set
aside as available for With Pro?ts Policyholders’ bonuses
or for transfer to the shareholders’ pro?t and loss account.
For pro?ts set aside for distribution in this way and
which are certi?ed by the Board as derived from the
With Pro?ts Sub Fund, at least 90% are available for
bonus to With Pro?ts Policyholders. The remainder is
available for shareholders.
Pro?ts arising from outside the With Pro?ts Sub Fund are
available for the shareholders. With Pro?ts Policyholders
are not eligible to participate in these pro?ts.
2.4 USE OF SHAREHOLDER FUNDS
The Board has committed to provide a minimum level
of capital support for the With Pro?ts Sub Fund
(With Pro?ts Capital Support), either from within the
Non Pro?t Sub Fund or from within shareholder funds
(or both), which will be available if necessary to meet
the capital requirements of the With Pro?ts Sub Fund
and which at the date of creation allowed the Board
to continue with its then current approach to the
management of the With Pro?ts Sub Fund. The
With Pro?ts Capital Support represents a minimum
level of capital which will be held within the Society
rather than being a separate fund of assets. The amount
of the With Pro?ts Capital Support was set at £500m
on 31 December 2007 and reduces each year until it
is extinguished on 31 December 2017. The amount of
With Pro?ts Capital Support held as a result of this
commitment may be further reduced in the future if
its then current level exceeds the capital requirements
of the With Pro?ts Sub Fund under a suitably prudent
measure at that time. Any such further reduction or
any other change in the formulation of the With Pro?ts
Capital Support would be subject to discussions with the
Society’s Regulator. The amount of With Pro?ts Capital
Support would also be reduced to the extent it is actually
transferred into the With Pro?ts Sub Fund.
Other shareholder funds within the Society but outside
the Long Term Fund may also, at the discretion of
the Board, be made available to support With Pro?ts
business.
The Society has also given an undertaking to the
Regulator that, if it wishes to make changes to the way in
which it operates in future which could signi?cantly alter
its ?nancial strength, then it will ?rst discuss this with the
Regulator.
6 PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT
2.5 TYPES OF POLICY
Both policies eligible for bonuses (With Pro?ts Policies)
and policies ineligible for bonuses (Non Participating
Policies) are present within the With Pro?ts Sub Fund of
the Long Term Fund.
The current range of With Pro?ts Policies has been
written since 1954. The range is extensive, comprising:
(A) life insurance policies, including bonds, mortgage
endowments and other endowments;
(B) individual and group pensions policies; and
(C) immediate annuities and deferred annuities.
Some policies which are ineligible for bonuses are
accounted for in the With Pro?ts Sub Fund (these being
Non Participating Policies); others are accounted for in
the Non Pro?t Sub Fund. The Non Participating Policies
in the With Pro?ts Sub Fund generally have been
eligible for bonuses previously, or include an option
to become eligible for bonuses in the future. Typical
Non Participating Policies are unitised policies with
an option to switch into Unitised With Pro?ts units, or
annuity policies derived from With Pro?ts Policies. As
described in section 6.1(A), the Society’s practice is that
any surpluses arising in respect of the Non Participating
Policies form part of the Inherited Estate.
2.6 STRUCTURE DIAGRAM
Legal & General
Group Plc
Other
Subsidiaries
Shareholder
Assets
Legal & General
Pensions Ltd
Non Pro?t
Sub Fund
Non Pro?t
Policy liabilities
The Society
With Pro?ts
Policy liabilities
Inherited Estate
Non-Participating
Policy liabilities
With Pro?ts
Sub Fund
The Long
Term Fund
Distributed Surplus:
Policyholders >=90%
Shareholders
This Principles and Practices of Financial Management document is for With Profits business eligible for bonuses. This document, together with customer friendly versions, 'An Introduction to Conventional With Profits' and 'An Introduction to Unitised With Profits' are intended to assist With Profits Policyholders in understanding the way in which the Society manages its With Profits business.
1 PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT
PRINCIPLES AND
PRACTICES OF
FINANCIAL
MANAGEMENT.
PPFM JULY 2013
This is an important document, which you should read and keep.
2 PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT
CONTENTS
4
4
5
5
7
7
7
7
8
8
9
10
10
11
11
11
7
5
5
5
5
5
6
6
1 INTRODUCTION
1.1 The purpose of this document
1.2 Difference between Principles and Practices
1.3 Changes to the Principles and Practices of Financial Management
2 STRUCTURE OF THE LONG TERM FUND
2.1 Ownership of the Society
2.2 Basic structure
2.3 Application of pro?ts
2.4 Use of shareholder funds
2.5 Types of policy
2.6 Structure diagram
4 OVERRIDING PRINCIPLES
4.1 Background
4.2 Supremacy of the Overriding Principles
4.3 The Overriding Principles
5 PRINCIPLES
5.1 The amount payable under a With Pro?ts Policy
5.2 Investment policy
5.3 Business risks
5.4 Charges and expenses
5.5 Management of the Inherited Estate
5.6 Volumes of new business
5.7 Equity between the With Pro?ts Sub Fund, shareholders and Policyholders
3 THE INHERITED ESTATE
2
3 PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT
11
11
18
19
20
21
22
22
22
22
23
6 CURRENT PRACTICE
6.1 The amount payable under a With Pro?ts Policy
6.2 Investment policy
6.3 Business risks
6.4 Charges and expenses
6.5 Management of the Inherited Estate
6.6 Management of capital
6.7 Volumes of new business
6.8 Equity between the With Pro?ts Sub Fund, shareholders and Policyholders
6.9 Contractual Minimum Addition (CMA)
6.10 Contractual Annual Interest
7 GLOSSARY 23
3
4 PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT
1 INTRODUCTION.
1.1 THE PURPOSE OF THIS DOCUMENT
In 2004 our Regulator implemented rules for the
governance of With Pro?ts business. These included
the requirement to publish Principles and Practices of
Financial Management (PPFM).
This Principles and Practices of Financial Management
document is for With Pro?ts business eligible for
bonuses. This document, together with customer friendly
versions, ‘An Introduction to Conventional With Pro?ts’
and ‘An Introduction to Unitised With Pro?ts’ are
intended to assist With Pro?ts Policyholders in
understanding the way in which the Society manages
its With Pro?ts business.
It is important to understand that the Principles and
Practices of Financial Management set out in this
document describe the way in which the Society
currently seeks to manage its With Pro?ts business.
Management of the With Pro?ts business is not a
mechanistic process carried out strictly on the basis of
compliance with a detailed set of pre-determined rules,
guidelines or criteria. Rather, it requires the Society to
make many judgements about the actions it should
take in endeavouring to meet the objectives which are
described in the Principles and Practices set out in
this document.
Those judgements are made by the Society in good
faith, with a view to balancing the different interests
of individual Policyholders, groups of Policyholders,
and Policyholders as a whole. They are based, among
other things, upon assumptions about the future, the
ful?lment of which clearly cannot be guaranteed by
the Society. Equally, the Society cannot guarantee that
the judgements it makes will result in the objectives
described in the Principles and Practices set out in this
document being achieved.
With Pro?ts contracts of insurance are long term in
nature. Whilst the Society wishes its Policyholders to
have as clear an understanding as practicable of how the
Society will seek to manage the With Pro?ts business, it
is not in Policyholders’ interests for the Society to do so
by reference to rigid and in?exible criteria. The Society
therefore seeks to respond to events in managing the
With Pro?ts business, and to adapt accordingly the
Principles and Practices by reference to which it seeks
to carry on that business. These Principles and Practices
have evolved signi?cantly over time, in response to
changing experience within the With Pro?ts Sub Fund,
and changing events outside it, such as changes in
investment markets and insurance company legislation
and regulation. This evolutionary process is likely to
continue into the future.
For these reasons, Policyholders and prospective
Policyholders should not treat the statements made in
this document as binding commitments on, or binding
representations by, the Society as to how it manages
the With Pro?ts business or as to how it will do so in
the future. Instead, they represent the criteria to which
the Society currently has regard, and the objectives it
is currently seeking to pursue, in making judgements
about the management of its With Pro?ts business.
Whilst those judgements are made in good faith, and
for the purposes described above, the statements in this
document are not intended to enable those judgements
to be challenged with the bene?t of hindsight.
This Principles and Practices of Financial Management
document is published in accordance with the
requirements of the Regulator and is not intended to alter
the rights and obligations the Society or Policyholders
have under any policy documents that the Society
has issued. Should there be any con?ict between the
Principles and Practices of Financial Management and
what is said in any such policy document, the latter shall
prevail.
The Society maintains governance arrangements
designed to ensure that it complies with, maintains
and records this Principles and Practices of Financial
Management document, as required by the Regulator.
The Society keeps these arrangements under review
to ensure that they remain appropriate to the scale and
complexity of its With Pro?ts Sub Fund and include the
approval of this Principles and Practices of Financial
Management document by the Board of Directors. The
Society’s compliance with this Principles and Practices of
Financial Management document and how it addresses
con?icting rights and interests of Policyholders and
shareholders are subject to review including a review by
an independent person. Currently, the Board of Directors
commissions a report from an independent person with
appropriate skills and experience in these matters to give
their independent judgement. The Society may from
time to time alter these arrangements for obtaining such
independent judgement as it may deem appropriate in
compliance with the requirements of the Regulator.
Following the review, the Board reports annually on the
Society’s compliance with the Principles and Practices
of Financial Management document. In addition the
With Pro?ts Actuary reports whether the exercise of
discretion over the year has taken into account the
interests of the different groups of Policyholders in a
reasonable and proportionate manner. These reports
can be found on our website at:
www.legalandgeneral.com/with-pro?ts/guides
We hope that this document will be helpful in explaining
the Practices we adopt, as well as the Principles we apply,
in the management and operation of our With Pro?ts
business. It does not, however, override any policy
document we have issued, the terms of which will
continue exclusively to govern contractual relationships.
In addition to the PPFM we publish a ‘Bonus Factsheet,
incorporating the PPFM Data Annex’, which contains
certain data regarding the With Pro?ts Sub Fund. We aim
to publish this at least annually. The latest version can be
found on our website at:
www.legalandgeneral.com/with-pro?ts/guides
5 PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT
1.2 DIFFERENCE BETWEEN PRINCIPLES AND
PRACTICES
This document has two core elements:
(A) The Principles describe the Society’s aims and
objectives in the management of the With Pro?ts
Sub Fund and are designed to be long-term in
nature. (Both the “Principles” and “Overriding
Principles” set out in this document count as
Principles for this purpose).
(B) The Practices provide additional detail of the current
operation of the With Pro?ts Sub Fund in line with
the Principles. Changes to Practices are expected to
occur more frequently.
1.3 CHANGES TO THE PRINCIPLES AND
PRACTICES OF FINANCIAL MANAGEMENT
Principles and Practices may in the future be amended
to re?ect, among other things, changes to the business,
investment markets, or the economic or regulatory
environment in which the Society operates.
Any amendments to this document will be carried out
in accordance with the regulatory requirements in force
at the time. At the time of writing, regulations require
that three months’ notice be given of any change to
Principles. No advance notice is required of a change
to Practices.
2 STRUCTURE OF THE LONG
TERM FUND.
2.1 OWNERSHIP OF THE SOCIETY
The Society is a wholly owned subsidiary of
Legal & General Group Plc.
2.2 BASIC STRUCTURE
The Society maintains a Long Term Insurance Fund (the
Long Term Fund). The Long Term Fund comprises the
With Pro?ts Sub Fund and the Non Pro?t Sub Fund.
With Pro?ts Policies form part of the With Pro?ts Sub Fund.
For the purposes of managing the Long Term Fund the
Society identi?es the assets of the Long Term Fund
which are notionally allocated to the With Pro?ts Sub
Fund. Separate accounts are maintained for the
With Pro?ts Sub Fund. However, the capital requirements
of the Society are assessed by reference to the Long
Term Fund as a whole and the two sections of the Long
Term Fund offer mutual support for the purposes of
meeting these requirements.
2.3 APPLICATION OF PROFITS
Each year, following an actuarial valuation, the Board
decides the amount of pro?ts, if any, which may be set
aside as available for With Pro?ts Policyholders’ bonuses
or for transfer to the shareholders’ pro?t and loss account.
For pro?ts set aside for distribution in this way and
which are certi?ed by the Board as derived from the
With Pro?ts Sub Fund, at least 90% are available for
bonus to With Pro?ts Policyholders. The remainder is
available for shareholders.
Pro?ts arising from outside the With Pro?ts Sub Fund are
available for the shareholders. With Pro?ts Policyholders
are not eligible to participate in these pro?ts.
2.4 USE OF SHAREHOLDER FUNDS
The Board has committed to provide a minimum level
of capital support for the With Pro?ts Sub Fund
(With Pro?ts Capital Support), either from within the
Non Pro?t Sub Fund or from within shareholder funds
(or both), which will be available if necessary to meet
the capital requirements of the With Pro?ts Sub Fund
and which at the date of creation allowed the Board
to continue with its then current approach to the
management of the With Pro?ts Sub Fund. The
With Pro?ts Capital Support represents a minimum
level of capital which will be held within the Society
rather than being a separate fund of assets. The amount
of the With Pro?ts Capital Support was set at £500m
on 31 December 2007 and reduces each year until it
is extinguished on 31 December 2017. The amount of
With Pro?ts Capital Support held as a result of this
commitment may be further reduced in the future if
its then current level exceeds the capital requirements
of the With Pro?ts Sub Fund under a suitably prudent
measure at that time. Any such further reduction or
any other change in the formulation of the With Pro?ts
Capital Support would be subject to discussions with the
Society’s Regulator. The amount of With Pro?ts Capital
Support would also be reduced to the extent it is actually
transferred into the With Pro?ts Sub Fund.
Other shareholder funds within the Society but outside
the Long Term Fund may also, at the discretion of
the Board, be made available to support With Pro?ts
business.
The Society has also given an undertaking to the
Regulator that, if it wishes to make changes to the way in
which it operates in future which could signi?cantly alter
its ?nancial strength, then it will ?rst discuss this with the
Regulator.
6 PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT
2.5 TYPES OF POLICY
Both policies eligible for bonuses (With Pro?ts Policies)
and policies ineligible for bonuses (Non Participating
Policies) are present within the With Pro?ts Sub Fund of
the Long Term Fund.
The current range of With Pro?ts Policies has been
written since 1954. The range is extensive, comprising:
(A) life insurance policies, including bonds, mortgage
endowments and other endowments;
(B) individual and group pensions policies; and
(C) immediate annuities and deferred annuities.
Some policies which are ineligible for bonuses are
accounted for in the With Pro?ts Sub Fund (these being
Non Participating Policies); others are accounted for in
the Non Pro?t Sub Fund. The Non Participating Policies
in the With Pro?ts Sub Fund generally have been
eligible for bonuses previously, or include an option
to become eligible for bonuses in the future. Typical
Non Participating Policies are unitised policies with
an option to switch into Unitised With Pro?ts units, or
annuity policies derived from With Pro?ts Policies. As
described in section 6.1(A), the Society’s practice is that
any surpluses arising in respect of the Non Participating
Policies form part of the Inherited Estate.
2.6 STRUCTURE DIAGRAM
Legal & General
Group Plc
Other
Subsidiaries
Shareholder
Assets
Legal & General
Pensions Ltd
Non Pro?t
Sub Fund
Non Pro?t
Policy liabilities
The Society
With Pro?ts
Policy liabilities
Inherited Estate
Non-Participating
Policy liabilities
With Pro?ts
Sub Fund
The Long
Term Fund
Distributed Surplus:
Policyholders >=90%
Shareholders