PHOENIX LIFE ASSURANCE LIMITED SERP FUND WITH-PROFITS SELF EMPLOYED RETIREMENT PLANS

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1 With-profits policy performance your questions answered January 2017 PHOENIX LIFE ASSURANCE LIMITED SERP FUND WITH-PROFITS SELF EMPLOYED RETIREMENT PLANS The aim of this leaflet is to provide answers to some of the questions that are often asked about the performance of with-profits Self Employed Retirement Plans (SERPs) that invest in the Phoenix Life Assurance Limited SERP Fund ( the fund ). SERPs were originally issued by the National Provident Institution (NPI). All the existing business of NPI was taken over by National Provident Life Limited on 1 January 2000 following the demutualisation of NPI. As a result of a transfer of business approved by the High Court on 5 February 2010, these contracts were transferred to Pearl Assurance Limited (Pearl). Pearl consequently established the Pearl SERP Fund which is separate from Pearl s main with-profits fund. From September 2012 Pearl was renamed Phoenix Life Assurance Limited. The historic information shown in the figures below is based on the relevant National Provident Life data for all years before How does my with-profits policy work? We have produced a guide to explain this, called How we manage the Phoenix Life Assurance Limited SERP Fund. We refer to this as the guide. You can obtain a copy of the guide here or you can ask us for a copy. We recommend that you read the guide before reading the rest of this leaflet, as it will help you understand some of the terms we use. 2 How do you work out my bonus rates? We answer this question in the Guide. However, you may find the following explanation helpful. Every policy has a guaranteed level and format of annuity (the guaranteed basic annuity ) which is the minimum amount which will be available at age 70 and is stated in your policy. If you retire at any age from 60 onwards we will recalculate the guaranteed basic annuity to be payable from your chosen retirement age. The amount of the guaranteed basic annuity on many of our pension policies is generous, meaning that the investments underlying the policy have to earn a fairly high return just to meet the cost of the guaranteed basic annuity after meeting all the costs of selling the policy to you and running it. Figure 1 shows how the premiums you pay to us (including tax relief) less our expenses grow with investment returns, (this is the build up of premiums ). The build up of premiums would grow to the value of the guaranteed basic annuity if we only earned the minimum investment return that this required. This is relevant to one of our regular premium policies where premiums are paid each month or year. On some of our SERP policies only a single premium is paid at the outset. If we earn a higher return, then the build of premiums will grow to an amount higher than the value of the guaranteed basic annuity. If this happens we would normally add annual bonuses to your guaranteed basic annuity to give you a share of this extra return.

2 Once added, we cannot take these bonuses away. They will be paid at your retirement date, adjusted to be based on the guaranteed annuity amount then payable. Figure 2 shows how this would look. All policies of the same type receive the same rates of annual bonus and we use sample policies of average size to calculate the bonus rates. We expect to earn a higher investment return by investing in higher risk investments such as equities (company shares) and property. As the returns from these are not guaranteed, we cannot be sure that our investments will not fall in value before the end date of the policy. If we paid out all of our profits as an annual bonus as soon as we earned them, there would almost certainly be times when we make losses where we would have added more in annual bonuses than we had earned overall. To prevent this happening we aim to add annual bonuses at a lower rate to make it less likely that the value of your guaranteed basic annuity and bonuses added will be more than the build-up of your premiums at the end date of your policy. If, at the end date of your policy, the build-up of your premiums grows to more than the value of your guaranteed basic annuity and bonuses already added, we will normally add a final bonus to your payout. Figure 3 illustrates this. If, at the end date of your policy, the build-up of your premiums has not grown to more than the value of the guaranteed basic annuity and bonuses already added, we would still pay out these guaranteed benefits, but would not add a final bonus. If you increase the regular premiums under your policy, or if you pay additional single premiums, then we keep these premiums separate when we decide what bonuses, if any, we are able to add. This means that different rates of annual and final bonus might be added to the different parts of your policy. 2

3 3 Why is my annual bonus rate zero? Annual bonus rates have been zero for the last few years because the benefits already guaranteed under most policies (guaranteed basic annuities and annual bonuses already added) are high relative to the investment returns and other profits which we have been able to earn. Figures 4 and 5 are similar to Figure 3 but show the position of example 20 year SERP policies reaching their retirement date in Figure 4 is for a policy with regular monthly premiums. Figure 5 is for a policy where a single lump sum premium was paid when the policy started. These let you compare the build-up of premiums (lower, red line) with the value of the guaranteed basic annuity and annual bonuses actually added (upper, green line). As you can see, the red line is still below the green line in both cases. As this is also the case for most other policies still in force, we do not expect to be able to pay an annual bonus for the foreseeable future. Where we have earned profits in excess of those needed to pay the guaranteed basic annuity and annual bonuses already added, we will pass them on to policyholders by way of a final bonus. However, on many policies we are unable to pay a final bonus at present because, as can be seen from the graphs, the buildup of premiums is less than the value of the guaranteed basic annuity and annual bonuses already added. This means that policyholders benefiting from the guarantees already given are getting back more than the build-up of their premiums. What these graphs also show is that the value of the annuity benefits has increased significantly over the last 15 years. This is because pensioners have been living longer and because interest rates have fallen, both factors which increase the cost of buying an annuity. 4 Will I get any final bonus when my policy pays out? As we explain in the Guide, we aim to pay you a fair share of the profits the with-profits fund has earned over the time you have had your policy. If this fair share allows us to pay more than the value of guaranteed benefits (guaranteed basic annuity and annual bonuses already added), a final bonus will normally be added when your policy pays out. The examples in questions 2 and 3 may help you to understand this. Currently it is only a few policies which have been in force for a very long time which are receiving a final bonus. Whether or not you receive a final bonus depends on when you took your policy out, when it is due to end, and the type of policy you have. Current rates of final bonus are not a good guide to future rates, as some rates are likely to reduce further, even if we earn the level of investment returns we expect in the future. 3

4 5 What can I realistically expect to receive from my policy? If you continue to pay premiums for the full payment term of your policy, we will pay, as a minimum, the guaranteed basic annuity and all annual bonuses. In a few cases we may also be able to add a final bonus at the end date of your policy. If you would like an illustration of what you might expect to receive when your policy reaches its stated retirement date, please contact us using the details at the end of this leaflet. If you die, the amount paid will depend upon the type of policy you have. Some policies pay out a return of premiums paid, some pay out a return of premiums paid plus interest, whilst others will pay out the transfer value (see question 9) of the policy. The death benefits were set out in your policy at the time it was taken out. 6 This is a lot less than I expected when the policy started. Why is this? When most of our with-profits policies were sold, investment returns had for many years been much higher than they are now. This was partly a consequence of the high rates of inflation in the 1970s and 1980s. The projected payouts on policies that were sold at that time assumed that these high rates of inflation and investment returns would continue. More recently, it has become clear that inflation would remain low, at least for the time being. Interest rates and the expected returns from other investments have fallen and we do not think that they will rise again in the next few years at least. This means that actual payouts will be lower than were projected when policies began, sometimes even lower than the projection using the lowest future investment return shown in previous illustrations provided to you. Also, projected values we give now are generally lower than before, as not only do we take into account the lower earned returns, we also anticipate lower returns in future. 7 Why does the value of my guaranteed annuity and annual bonus change from time to time? The value of your annuity depends on a number of factors including: your age; how your annuity is payable; what interest rates are; and how long we expect pensioners to live. If you retire at any age from 60 onwards we will recalculate the annuity payable from your chosen retirement age. Similarly, if you select an alternative format of annuity we will recalculate the annuity payable. The recalculated annuity will be at least equal to the current value of the guaranteed annuity and annual bonuses already added. The current value changes as interest rates move and as we change our view on how long we expect pensioners to live. We normally review the annuity rates we use to determine the current value quarterly but can, and do, change these rates more frequently if interest rates move significantly in the meantime. In addition, we review the level of payouts each half year (sometimes more frequently), so cases where there is a final bonus payable will see their value change as and when payouts generally change. 8 What options will I have when I retire? Greater pension flexibility was introduced from April When you come to take your retirement benefits there will be a range of options to choose from. For more information on these options please see the Pension & Retirement section on our website 4

5 9 What is my policy invested in? The fund invests in a range of assets with the aim of meeting all the guaranteed benefits over the medium to long term. The current investment mix for SERP policies is fixed interest securities (38%) and cash assets (62%). The fund may also use derivatives (for example, the right to buy or sell securities at a pre-agreed price on a specific date) as this is an efficient way of quickly changing the investments in the fund and/or to reduce risks. We review our investment strategy regularly as market conditions can change quickly. The fund s main investment objective, apart from maximising return where possible, is to protect the security of policyholder s existing contractual benefits. 10 What return has been earned on the investments underlying policies in the past? Figure 6 shows the with-profits fund s investment returns earned in the last few years. These investment returns are not the same as the rate of annual bonus added to policies in each year. Please see question 2 to see how we work out bonus rates. 11 You are now holding no equities whereas a large proportion of the fund was in equities in the past. Why is this? In the 1980s and 1990s, it was thought that holding a large proportion of equities (company shares) would produce the highest return for policyholders. At that time, there was a reasonable excess of money in the with-profits fund over the amount we then thought would be needed to pay fair benefits to policyholders. This allowed the holding of a high proportion of equities, as some of the excess money could be used to make up any shortfall. As we explain in question 7, the investment outlook then changed. In the late 1990s, it became clear that inflation would remain low, at least for the time being. Interest rates and the returns from other investments fell. Our view is that the future will be one of continuing low inflation and low investment returns. It is generally thought unlikely that the high return on equities seen in the 1980s and 1990s will be repeated. A considerable amount of the excess money has now had to be set aside to meet guarantees on policies and cover losses in the with-profits fund. For example, we have had to set money aside to pay the guaranteed basic annuities and past annual bonuses which were, with hindsight, not always justified by the profits earned. We have also had to set money aside to pay pensions for longer than expected as our pensioner policyholders are living longer than originally expected. As a result of the reduction in excess money held by the fund, it was necessary, from 2000 onwards, to reduce the proportion of equities held in the with-profits fund, and in 2003 the fund had to sell all its equity holdings. This has helped ensure that the fund would be able to continue to pay all amounts already guaranteed to policyholders. 5

6 12 I see that payouts on policies are still getting progressively lower each year. Why is this? Payouts on with-profits policies reflect the profits (including investment performance, and other profits and losses) made by the with-profits fund over the lifetime of the policy. By payouts, we mean the amount available at the stated retirement date to provide retirement benefits (pension only or pension and tax-free cash). Policies of the same duration ending in different years have shared in the profits of some different years and this is why payouts differ. For most policies of longer duration, comparable payouts from one year to the next are falling, as in general the profits earned in the earlier years were higher than those in more recent years. Payouts cannot be less than the value of your guaranteed basic annuity and annual bonuses already added. As annual bonus rates have fallen, policies taken out more recently have had lower or no annual bonuses added. 13 Why is my payout lower than was projected just a few years ago? Projections of future benefits by their nature have to use a number of assumptions, including future rates of investment returns. The resulting figures are only examples of what you might get back and are not guaranteed. Where the investment return earned for a policy has been less than the return previously used for projecting benefits, payouts will be correspondingly lower than that shown in projections. A major contributor to this has been the need to set money aside to ensure that we can pay the benefits already guaranteed under our policies. This has restricted the amount we have been able to invest in higher risk investments such as equities (company shares) and property which potentially provide higher returns. Projected values currently given on policies are now generally lower than those provided in the past, as not only do we take into account the lower returns earned in the past, we also anticipate lower returns in the future. 14 What does Phoenix Group get from my policy? Phoenix Life Assurance Limited is one of the life companies within the Phoenix Group of companies (Phoenix Group). SERP policyholders are entitled to the investment return allocated to asset shares (less tax and charges as appropriate) and to any profits or losses due to mortality experience being higher or lower than assumed. The shareholders are entitled to all of the other profits or losses arising in the SERP Fund. However, if the guaranteed benefits exceed the relevant asset share, the amount of the excess will be met from the SERP Fund estate. Our policies are administered by other companies in the Phoenix Group. If these companies can carry out their responsibilities for less than the fees we pay them, this could result in profit for Phoenix Group. Phoenix Group Holdings pays its own directors and shareholders from a number of sources, of which the payments from Phoenix Life Assurance Limited described above form only a small part. 6

7 15 How do I obtain further information? Versions of this leaflet may be available for other types of with-profits policy and for the policies of other life companies within the group. If this leaflet has not answered your questions we will be happy to help you further. Please contact us here. You can also find the latest information such as final bonus rates and how these are calculated, how the fund is invested and investment returns here. The information in this leaflet is correct as at 1 January FS_PLAL_SERP_01_2017 Phoenix Life Limited No and Phoenix Life Assurance Limited No.1419 are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. All companies are registered in England and have their registered office at: 1 Wythall Green Way, Wythall, Birmingham, B47 6WG. 7

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