With-profits policy performance your questions answered PHOENIX LIFE LIMITED SAL WITH-PROFITS FUND January 2017 FORMER SUN ALLIANCE & LONDON ASSURANCE COMPANY TRADITIONAL WITH-PROFITS PENSION POLICIES (OTHER THAN 2009 PALAL SCHEME POLICIES) This leaflet aims to answer questions that are often asked about the performance of former Sun Alliance & London Assurance Company traditional with-profits pension policies like yours, which are invested in the Phoenix Life Limited SAL With-Profits Fund. This leaflet does not apply to personal pension policies which started before February 1981 or 2009 PALAL Scheme policies. In December 2009, the High Court approved a Scheme (the 2009 PALAL Scheme ) which came into effect on 31 December 2009. Under the 2009 PALAL Scheme, the minimum pension rate guarantees were removed from most traditional with-profits individual pension policies with a retirement date in, or after, 2020 in exchange for an increase in the value of these policies. We refer to these as 2009 PALAL Scheme policies. 1 How does my with-profits policy work? We have produced a guide to explain this. It is called How we manage the Phoenix Life Limited SAL With-Profits Fund: A guide for policyholders with traditional with-profits policies. We refer to this as the Guide. The Guide is available 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. Greater pension flexibility was introduced from April 2015. 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. 2 How do you work out bonus rates? We answer this question in the Guide. However, you may find the following explanation helpful. Every policy has an amount (the guaranteed basic sum ) which is the minimum amount which will be available at the retirement date stated in your policy (the end date ). The guaranteed basic sum on many of our pension policies is generous, meaning that the investments underlying the policy have to earn a high return just to pay the guaranteed basic sum after meeting all the costs of selling the policy to you and running it. Figure 1 shows how the premiums paid into a policy, less our expenses, grow with investment returns (this is the build up of premiums ). The build up of premiums would grow to the guaranteed basic sum if we only earned the minimum return on investments that this required.
If we earn a higher investment return, then the build up of premiums will grow to a value higher than the guaranteed basic sum. If this happens we would normally add annual bonuses to the policy to give the policy s share of this extra return. Figure 2 shows how this would look. Once added, we cannot take these annual bonuses away and they are guaranteed to be paid at the retirement date stated in the policy, together with the guaranteed basic sum. 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 return by investing in higher risk investments such as equities (company shares) and property. However, 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. We aim to add annual bonuses at a lower rate than the actual returns received. This makes it less likely that any fall in the value of our investments would cause the build-up of your premiums to be worth less at the end date of the policy than the value of the guaranteed basic sum and the annual bonuses already added. If your premiums do build up to more than the guaranteed basic sum and the bonuses already added, we will add a final bonus to payouts. Figure 3 illustrates this. 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 final bonus might be added to the different parts of your policy. 3 Why are my annual bonus rates so low and when might you increase them? Annual bonus rates have been low in recent years because the benefits already guaranteed under most policies (guaranteed basic sums and annual bonuses already added) are high compared to the investment returns and other profits we have been able to earn after allowing for our expenses. Figures 4 and 5 are similar to Figure 3 but show the position of actual 20-year personal pension policies reaching their retirement date in 2017. Figure 4 illustrates a policy with regular monthly premiums. You can compare the build-up of premiums (red line) with the guaranteed basic sum and annual bonuses actually added (green line). 2
Figure 5 illustrates a policy where only a single lump sum premium was paid when the policy started. As you can see, the build-up of premiums line is below the guaranteed basic sum and annual bonuses line in both cases. The picture is similar for pension policies reaching retirement age in the next few years and we do not expect to be able to increase annual bonus rates for a number of years yet, if at all. Where we have earned profits in excess of those needed to pay the guaranteed basic sum and annual bonuses, we will continue to pass them on to policyholders by way of a final bonus. On many policies we are unable to pay a final bonus at present because, as can be seen from the charts, the build-up of premiums is less than the guaranteed basic sum plus bonus already added. This means that such policyholders are benefiting from the guarantees already given and are getting back more than the build-up of premiums. The examples in question 2 show that all of the premiums you pay and some of the investment return we earn go to provide the basic sum we guarantee to pay at the retirement date in your policy, and to meet our expenses. Only if we earn a higher investment return can we add an annual bonus. Your premiums are used to provide you with the basic benefits guaranteed under the policy. Bonuses are low because our investment return and other profits are lower than was expected when the guaranteed basic sums under most of our policies were set. 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, a final bonus will be added when your policy pays out. The examples in question 2 and question 3 illustrate this. Currently most regular premium policies are not receiving a final bonus. Very long terms over 32 years, very short terms under 5 years and term 8, 9, 18 and 31 years are receiving a final bonus. Single premium policies which have been in force between 5 and 18 years, or for longer than 32 years are receiving a final bonus at the end date. Whether or not you receive a final bonus depends on when you took your policy, 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. We do not guarantee to pay a final bonus, and we review final bonus rates at least twice a year, normally from 1 January and 1 July but we may change them at any time. 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 sum and all annual bonuses, including any more annual bonuses that may be added in future. We may also add a final bonus at the end date of your policy. If you would like an up-to-date illustration of what you might expect to receive when your policy reaches its stated retirement date, please contact us. 3
If you die, the amount, if anything, that you receive will depend upon the type of policy you have. Some policies do not pay out anything on death, some 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 11) of the policy. The death benefits were set out in your policy at the time it was taken out. On some policies, an additional premium was, or is being paid to provide extra death benefits. These extra benefits are fixed and do not receive bonuses. 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 return 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 lowest projection when the effect of alternative future investment returns was shown. 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 What is my policy invested in? The way that we invest your premiums will depend on how the guaranteed benefits (guaranteed basic sum plus bonus already added) compares to the build-up of your premiums. Your bonus statement includes information on the asset mix for sample policies. Policies with high levels of guaranteed benefits relative to the build-up of premiums are invested fully in fixed interest stocks (bonds or loans issued by governments or by companies). This includes many policies where only a single premium was paid. We do this to ensure that the with-profits fund will be able to provide all policyholders with at least their guaranteed benefits whatever happens to equity and property prices. For other policies we invest the premiums mainly in a mix of equities (company shares), commercial property and fixed interest stocks. The exact mix depends on your policy s type and its start and end date. Equities and property can vary in value more than fixed interest stocks and are generally expected to produce higher returns over the long term. Single and Regular premium policies which are not fully invested in fixed interest stocks and which have nine or more years left before the stated retirement date are currently invested approximately 39% in equities, 6% in commercial property, 4% in emerging market debt and 51% in fixed interest stocks. For policies that are partly invested in equities and property, we reduce the proportion of equities and property as the stated retirement date approaches so that the uncertainty about the eventual payout from the policy lessens as it gets closer to the stated retirement date. We also manage our fixed interest stocks to provide an increasingly high certainty of the return we will earn from them as your policy nears the stated retirement date. We may change the asset mix from time to time if we consider that this is likely to be in the best interest of our policyholders. 8 What return has been earned on the investments underlying policies in the past? The investment return allowed for in the build-up of premiums for a policy depends on its particular asset mix, which is determined mainly by the time remaining to the policy end date. Figure 6 shows the returns earned in the last few years for 25-year personal pension policies with a stated retirement date in 2017. 4
Over 2016 investment returns (after tax) we earned for policies were positive (e.g. 2.0% for a policy with one year remaining) and and were better at longer terms (13.1% for policies with 10 years remaining). The equivalent for 2015 was 0.7% and 1.5% respectively 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. 9 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. This does not mean that the value of your own policy is falling. For each year in which we earn a profit, the underlying value of your policy will still rise, as we illustrate in question 2. What is likely though, is that your eventual payout will be less than if you had taken out a similar policy, say, five years previously which ends (or has ended) five years before your actual policy does. 10 Why is my payout lower than was previously projected? 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 assumed return 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. All with-profits policies provide guaranteed benefits of some sort. For your policy, the guaranteed basic sum plus any annual bonuses already added are the guaranteed benefits (payable at the retirement date stated in the policy). Many of our with-profits pension policies also have a guaranteed rate at which some, or all, of the amount available at retirement can be converted into a pension. This rate is currently likely to be more favourable than insurance companies generally now provide. All policies share equally in the cost of these guarantees. This is because all our policies are in the same with-profits fund and the law requires the cost to be spread across all policies in the same with-profits fund, as set out by a judgement of the House of Lords in 2000. Projected values currently given on policies still to pay out, 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. 11 What does Phoenix Group get from my policy? 5
Phoenix Life Limited is one of the life companies within the Phoenix group of companies (Phoenix Group). We pay Phoenix Group no more than one ninth of the value of the bonuses added to with-profits policies. When our bonus rates are very low or nil, then the amounts we pay to Phoenix Group are low or nil accordingly. In addition our policies are administered by other companies within Phoenix Group. If these companies carry out their responsibilities for less than the fees we pay them, this would result in additional profit for Phoenix Group. Phoenix Group pays its own directors and shareholders out of its profits from all sources, of which the payments described above form only a small part. 12 Why is your annual bonus rate lower than the investment return assumed in my last benefit illustration? The examples in question 2 show that only part of the return we earn on our investments is passed on as annual bonuses. Some investment return is needed just to pay your guaranteed basic sum and some may be added as a final bonus when your policy reaches its end date. Currently, the payment of guaranteed basic sums and bonuses already added means that only a very limited amount, if any, is left over, most of which is set aside for a final bonus. 13 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 January 2017. FS_PLL_SAL_PEN_2017 Phoenix Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Phoenix Life Limited is registered in England No. 1016269 and have their registered office at: 1 Wythall Green Way, Wythall, Birmingham, B47 6WG. 6