Royal Liver Assurance Limited

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1 Royal Liver Assurance Limited Guide to Unit Linked Funds This guide provides an overview of how our unit-linked funds work and how they are currently managed. It complements the details in your policy documentation by answering some of the questions you might have about unit-linked funds. The guide aims to answer key questions such as how we value the funds and how this is reflected in the payout you receive. This guide also describes the areas where we can use discretion in the management of unit-linked funds and the approach we take to ensure that all policyholders are treated fairly. Contents Section 1 Background 2 Section 2 Understanding the basics 3 Section 3 Fund valuations 4 Section 4 How we calculate unit prices 5 Section 5 Charges and expenses 6 Transaction charges and expenses 6 Charges in relation to tax on income and gains 6 Life insurance funds 7 Pension funds 7 Annual management charge 8 Policy administration charge 8 Avoiding double charging 8 Section 6 Management of unit-linked funds 9 Transaction deferral 9 Error correction 9 Closing or merging funds 10 Introducing new funds 10 Changes to investment objectives 10 Response to exceptional events 10 Section 7 Further information 11 June 2011 Page 1 of 11

2 Section 1 Background How can I tell if my policy is unit-linked? A unit-linked policy will refer to units and unit prices. You can tell if your policy is unit-linked by looking for references to units, unit prices and fund link(s) in your policy document and schedule or from your annual statement. What is a unit-linked fund? A unit-linked policy invests in a fund that is a collection of assets. The value of the fund is divided equally between the units of the fund that have been issued to investors. The value of the assets in the fund determines the value of the units and so the price of units will change directly in line with the performance of the investments held within the fund. The price of each unit determines how many units you receive when you invest your money into the fund and how much money you will receive when you cash in your units. If you make regular contributions to a unit-linked fund the number of units you buy with each contribution will change as the unit price changes. If you cash in all your units at the same time the money you receive will be the number of units multiplied by the unit price at the time of instructing us to sell your units and will be the same for each unit no matter at what price you bought them. Further details are given in Section 3 Fund valuations and Section 4 How we calculate unit prices. In addition to the value of the investments in a fund, where we consider it right and proper to charge certain expenses to the fund, for example expenses incurred in buying and selling assets, we deduct these from the value of the fund. Certain charges will also be deducted from the value of the fund including management charges and, where relevant, charges in relation to tax. Further details are given in Section 5 charges and expenses. In order to pay for the cost of providing any life assurance or health insurance benefits provided by a unit-linked policy, units allocated to your policy may be cancelled to meet these regular charges. Please refer to your policy document to see what charges, if any, are made by cancelling units. What different types of unit-linked fund are available? Royal Liver Assurance has different funds which offer different investment characteristics. Some will invest in only one type of asset whereas others will hold a range of different investments such as shares (equities), fixed interest securities (bonds) etc. We also have some funds which invest only in specific collective investment schemes (unit trusts or OEICs [open ended investment companies]). The funds available to you are shown in the information given to you when you took out your policy although these may have changed following the withdrawal or merger of a fund or the introduction of a new fund. If you require information about the funds available please call our customer services centre on xxxxxx. Please note that our customer services team cannot offer investment advice. How does Royal Liver ensure that unit-linked policyholders are treated fairly? It is very important to us that we treat customers fairly. What this means in the context of running our unit linked funds is discussed in Section 6 Management of unit-linked funds. Page 2 of 11

3 Section 2 Understanding the basics How is my premium invested? A percentage of each premium you pay secures units of the appropriate type for your policy in the fund (or funds) in which you are investing and we say that these units are allocated to your policy. You can see how much of each premium is invested in the fund by looking at your policy schedule. A fund may have a number of different series of units and there will be one or two types of unit within each series. Each series includes a type of unit we call accumulation units and some series will also include a type of unit we call capital units. Capital units are subject to higher charges compared to accumulation units of the same series (see Charges and expenses Annual management charge ). All premiums currently being paid are allocated accumulation units although your policy may have capital units allocated to it from premiums paid in the past. What information is used to value the assets in the fund? We value all assets at least once a month. The value we place on an asset is based on an appropriate quotation from a recognised independent pricing source where available. If it is not available, we take the latest valuation made by an independent valuation specialist appointed by us. Where a market quotation is used we take the asset values at the close of business on the working day immediately prior to the day that we value the fund. If a fund is invested predominantly in a collective investment scheme we value the collective investment scheme investment using the most recent available price at the close of business on the working day immediately prior to the day that we value the fund. Where we have negotiated special terms with external fund managers, (for example, a reduction in the initial charges that may otherwise be levied by the collective investment scheme), these special terms are passed on to the fund. Where we hold overseas assets within the funds we convert the value of the assets to Sterling using market quoted foreign exchange rates (taken at the close of business on the working day immediately prior to the day that we value the fund). All income (for example, dividends on shares or interest on bonds) received from the assets of a fund is invested in the fund. Where applicable we deduct a charge in respect of tax on income (see Charges and expenses ). We are the sole owner of the assets held within the funds. Each fund has stated investment objectives but we retain the right to decide how monies should be invested in order to meet each objective. The selection of assets may include complex investment activities and instruments such as stock lending and derivative contracts as well as more traditional assets such as shares and bonds. Page 3 of 11

4 Section 3 Fund valuations The method of valuation of the fund depends on whether the fund is expanding or contracting. When the fund is expanding If the number of units we need to allocate to policies is more than the number being sold to pay claims, we may need to create units in a fund. We create units by putting cash or assets into the fund. Our fund managers will then invest this money or realign assets placed into the fund according to the investment objectives of the fund. When we think a fund will be creating units we price it on an expanding fund basis. This means that we value the assets by assuming we need to buy assets identical to those we already have. The value will be based on market quotations for buying assets and we also include an estimate of the amount of expenses that would be incurred in buying those assets. When the fund is contracting If the number of units needing to be sold to pay claims exceeds the number of units we need to allocate to other policies, we may need to cancel units in the fund. In this case cash or assets will be transferred out of the fund and assets may need to be sold first to raise this money. When we think a fund will be cancelling units we price the fund on a contracting fund basis. This means that we value the assets by considering for how much we could sell the fund assets and how much we would have left after paying any selling expenses. The value will be based on market quotations for selling assets and we deduct an estimate of the amount of expenses that would be incurred in selling those assets. In order to make prices more stable and predictable for you, we make a periodic judgement for each fund whether we think overall we will need to create or cancel units over a period of time. This affects the value we place on the assets in the fund. The allowance we make for buying and selling expenses is our reasonable estimate of the actual costs that would be incurred including commission payments (for example, to stockbrokers) and any tax levied on the transfer of assets. The cost estimates we use depend upon the type of asset and the country in which the asset is held and we round the total estimated amount down to the lower 0.05%, expressed as a percentage of the fund value. Page 4 of 11

5 Section 4 How we calculate unit prices We calculate two prices for each unit series and type of unit in a fund. The buying or offer price is the price at which we allocate units to your policy. The selling or bid price is the price of each unit once it has been allocated to your policy and the price on which claims are based. We calculate the bid price by dividing the apportioned fund value for a given type and series of unit by the number of units in existence for that type and series of unit. The bid price is rounded down to the nearest 0.1p for UK policies and the nearest 0.01c for ROI policies. The offer price is then calculated to take into account a charge we deduct when we allocate units to your policy called the bid offer spread. Where this charge applies it is 5% and the offer price is calculated by dividing the unrounded bid price by The bid price is rounded down to the nearest 0.1p for UK policies and the nearest 0.01p for ROI policies. Bid and offer prices are calculated weekly and the price that is applied is the price applicable on the date we receive a request to withdraw your funds or the date we receive a payment from you. Fund Switch Many of our policies allow you to choose one or more of a number of funds in which to invest and give you the option of switching between funds. We will calculate the value of units to be switched using the bid price of the fund you are switching out of and the number of units allocated to you in the receiving fund is calculated as that value divided by the bid price of the receiving fund. The bid prices we use are those that would have been applicable on the day we accept your written request to switch. A switch charge may be deducted from the value of your units. Please refer to your policy document to see if and when this charge applies. Page 5 of 11

6 Section 5 Charges and expenses The fund deductions we make fall into two broad categories: Transaction charges, expenses and tax incurred when trading or maintaining the underlying investments. Charges we make in line with your policy conditions such as annual management charges and policy administration charges. These deductions are described in more detail below. Transaction charges and expenses Any charges or expenses incurred in trading and administering the assets held within the funds are charged directly to the funds. These charges currently include items such as commissions payable to stockbrokers, stamp duty and custodian fees. If, in future, new types of charges, taxes or expenses are incurred in trading and administering the fund assets, we will charge these directly to the fund. Where charges and expenses are anticipated to be significant and likely to affect the unit price, but are paid periodically in arrears, we calculate the amount we expect will be paid and allow for this within the price calculation on a reasonable estimate basis. When the charges or expenses actually fall due, most are paid out of the fund immediately and if appropriate we adjust the allowance for expected charges and expenses carried forward. Where charges are small in relation to the size of the fund we may maintain a record of the charges outside of the fund and deduct these from the fund periodically, (for example, on a monthly, quarterly or annual basis). The fees we pay to our own investment managers are not normally charged to the fund. Charges in relation to tax on income and gains Life Insurance company tax is very complex. The amount of tax payable can depend on a number of factors and the tax treatment of life insurance business differs from the tax treatment of pensions business. We have always taken a practical approach in deducting charges from the unit funds in respect of tax on income and capital gains so that you can understand how your investments are affected. For taxable funds containing assets which are liable to tax on capital gains (asset values have increased since purchase), the fund should only pay tax on capital gains when they are realised by sale of the assets. Within our unit-linked funds, this method of taxation applies mainly to equities. Because there is a mis-match between when capital gains tax is paid and when it is earned, to treat all unit holders fairly, it is necessary to make an allowance within the unit price for the expected future tax payments on assets that have increased in value but have not yet been sold. The calculation method and the assumptions used in calculating this allowance are reviewed at least annually. Where a fund invests in collective investments such as OEICs, the way in which tax is accounted for is slightly different. For OEIC investments HM Revenue and Customs have deemed disposal rules. These rules require that at the end of each calendar year we have to pay the amount of tax we would do if all shares in the OEICs were sold and immediately repurchased. However, for deemed disposal calculations, the payment of tax is spread evenly over a 7 year period. We reduce the tax rate to take into account an estimate of the average time until the gains will be realised, based on the time until the tax is expected to be paid. Page 6 of 11

7 Section 5 Charges and expenses (continued) In practice, a certain amount of approximation is necessary to make an appropriate allowance on a daily basis for tax on unrealised capital gains. Life insurance funds We will make a charge in relation to tax on all income received by the fund. The charge deduction is made at the policyholder tax rate (currently 20%). We deduct this from income and pay the net amount into the fund. Dividend income received from UK and most overseas equities is treated as having tax already deducted and is not subject to an additional tax charge. If tax is deducted at source at a rate of tax higher than the policyholder tax rate, where reasonable and permitted we will reclaim the excess tax deducted. We pay the anticipated reclaim amount into the fund on the following pricing day and we accept the potential risk of delay in recovering the excess tax from the appropriate authority. A capital gain arises if the current value of an asset is greater than the value at which it was purchased. For most assets the gain is assessed after increasing the purchase price in line with retail prices inflation over the period between purchase and subsequent sale. This is called indexation relief and the resulting gain is called the indexed gain. We make an allowance for a charge in relation to tax on indexed gains when we calculate fund prices. The actual allowance we make is complex and designed to aim for fair treatment between all policyholders, between policyholders and us, and over time. At the most straightforward level, where there is an overall indexed gain we will make allowance for a charge in respect of tax. The tax charge is no more than the policyholder tax rate (currently 20%) on the indexed gain. Some assets (predominantly fixed interest securities) are subject to taxation rules called loan relationships. The tax charge on such assets is based on the combined investment return from both income and any capital gain (or loss) in each year. The capital gain or loss in each year is based on the price of the asset at subsequent yearends and there is no indexation relief. We will deduct a charge in respect of tax at the policyholder tax rate (currently 20%) on the combined investment return from both income and capital gains. If capital losses exceed income, rather than deducting a charge, we will pay an amount into the fund calculated on the same basis. The charge from or payment to the fund in relation to tax on loan relationships is calculated and made each time we price the fund. We review the charges we make in relation to tax periodically and we may decide to change how we calculate the charges in future. The need for changes may also arise as a result of legislation or revisions to insurance company taxation. If we do make changes it will be with intention of maintaining the fair treatment of all policyholders. Pension funds We do not make any charges against pension funds in relation to tax on income or capital gains. However, the income from and proceeds from certain investments may have tax deducted at source. Where reasonable and permitted we will reclaim any tax that may have been deducted on pension fund assets. We pay the anticipated reclaim amount into the fund on the following pricing day and we accept the potential risk of delay in recovering the excess tax from the appropriate authority. Currently, we cannot reclaim tax credits on UK equities. Page 7 of 11

8 Section 5 Charges and expenses (continued) Annual management charge We deduct a management charge from the unit funds which is defined as a percentage of the fund value as specified in your policy document. On some policies, capital units were allocated in respect of premiums paid in the first year or first two years and these are subject to an increased annual management charge. Your policy document will say whether your policy has capital units and, if so, the additional charge made on those units. The annual management charge is calculated and deducted from the fund each time we price the fund. The annual management charge calculations we make are made in such a way that when taken over the calendar year the total charge is equivalent to the annual management charge specified in your policy document. We may change the level of annual management charge on some of our policies. If we do this we will give you notice of the changes and explain why we are changing the charges. Policy administration charge A policy administration charge may be deducted from the unit funds as specified in your policy document. We may change the level of the charge. If we do this we will give you notice of the changes and explain why we are changing the charges. Avoiding double charging We aim to avoid double charging. Where funds invest in collective investment scheme assets such as unit trust units or OEIC shares, these assets have charges deducted by the manager of the scheme. To avoid you unfairly suffering the effects of these charges twice, we estimate the charges deducted from the collective investment scheme assets held within a fund (to the extent that the charges are not related to asset transaction charges and expenses) and reduce the annual management charge by the same amount. Page 8 of 11

9 Section 6 Management of unit-linked funds This section describes examples of when we may exercise discretion in the management of unit-linked funds other than in the instances already mentioned in this unit-linked guide. Transaction Deferral In very exceptional circumstances we may defer switches and the allocation or cancellation of units where we consider this to be in the interests of all policyholders, (for example, if a forced sale of assets is likely to significantly reduce the value of those assets). We may defer transactions for up to one month. We will tell you if any transactions you have requested are to be deferred and the reason why. Where this happens we will calculate the value of your units at the end of the deferment period. We will never defer maturity, normal retirement, death or critical illness claims for this reason. We are aware that certain actions and decisions we take can have an impact on your policy and its benefits either directly or indirectly, for example through the level of charges deducted or the availability or otherwise of a certain investment fund. We aim to do what we said we should do, as disclosed to you in the policy information you were given when you took out your policy and in other publications such as this leaflet. We may change the way we do things from time to time and make changes to the range of funds that is available for you to invest in. You can be assured that whenever we exercise discretion a prime consideration is for us to treat all policyholders fairly. Many aspects of discretion have already been discussed in this information leaflet, for example how we value assets and the degree to which unit prices are rounded. This section considers aspects of managing the funds which have not been covered elsewhere in this leaflet. Error correction Although we try to avoid any errors in unit pricing, given the complexity of the process, it is inevitable that errors will occur from time to time. When we discover an error, we correct the unit prices as soon as possible and take steps to avoid a similar error recurring. Dependant upon the size of the error we will investigate the impact of the error on individual policyholders and the unit fund. Compensation will usually be paid to policyholders and/or the fund if the error results in a price difference of 0.5% or greater and policyholders and/or the fund have been disadvantaged although no compensation will normally be paid to an individual policyholder if the amount due is less than a minimum amount, currently 10. Compensation may also be paid if the error is less than 0.5% of the unit price but where any policyholder is likely to have suffered a loss in excess of a certain amount, currently 50. In such circumstances, if compensation is to be made, this will be subject to the same minimum, currently 10. Where an error of 0.5% or greater of the unit price results in an over-allocation of units to your policy we will correct the unit allocation and if such an error leads to an overpayment to you we may ask you repay the excess amount. Our error correction policy meets the standards set out in the Association of British Insurers publication A Guide of Good Practice for Unit Linked Funds. Page 9 of 11

10 Section 6 Management of unit-linked funds (continued) Closing or merging funds We may decide to close any unit fund or merge two or more unit funds. We retain absolute discretion as to if and when we take such action, but in normal circumstances we will only do this where the size of the fund (or funds) is small or uneconomical to maintain. We will give you notice of any changes and, where a fund is to be closed, we will offer you one or more alternative funds in which to invest. In these circumstances we will not levy a charge for the switch of funds. Introducing new funds We may decide to introduce new funds. If we do, we may hold units in the new fund as an asset of an existing fund if holding the units in the new fund fits with the investment objectives of the existing fund. Changes to investment objectives We regularly review the investment objectives of the funds we offer and from time to time we may agree changes to those objectives following discussions with our investment managers. We will give you notice of any significant changes to investment objectives and tell you the reasons for those changes. Response to exceptional events We may take exceptional actions in exceptional circumstances such as a general or localised event which restricts the availability of our unit pricing systems (for example a fire in one of our buildings) or raises questions over the appropriateness of short-term market asset values (for example following a major terrorist incident). In such circumstances we may take actions that include, but are not limited to: Temporary suspension of unit pricing; Temporary suspension of trading assets; Temporary divergence from stated investment objectives, and Temporary suspension of unit allocations and cancellations. We will only use these powers of discretion when necessary to protect the interests of all policyholders and we will only use them to the minimum extent possible. Page 10 of 11

11 Section 7 Further information We hope that you have found this information leaflet useful and informative. If you would like further information on any aspect of unit pricing or the management of our unit linked funds please contact Head of Actuarial operations in writing at; Financial Planning and Monitoring Royal Liver Assurance Royal Liver Building Pier Head Liverpool L3 1HT (Due to the high technical content and specialist knowledge required in respect of this topic we cannot accept telephone enquiries relating to unit pricing.) Royal Liver Assurance Limited is an Incorporated Friendly Society, Register No. of Society 35 Coll. It is authorised and regulated in the UK by the Financial Services Authority (Registration No ) and in Ireland adheres to the Codes of Conduct issued by the Central Bank of Ireland. Royal Liver Assurance is a member of the Association of British Insurers, the Irish Insurance Federation and the Association of Financial Mutuals. Royal Liver Assurance Limited is registered in England. Head Office: Royal Liver Building, Pier Head, Liverpool, L3 1HT. Telephone: +44 (0) Page 11 of 11