14 DECEMBER Prudential. Extract Prepared for Prudential

Transcription

1 14 DECEMBER 215 Prudential Extract Prepared for Prudential

2 AKG Financial Analytics Ltd (AKG). Extract from UK Life Office With Profits Reports - Issued 14 December 215 All rights reserved. This report is protected by copyright. Distributed under licence agreement with Prudential plc. AKG has made every effort to ensure the accuracy of this report and to ensure that the information contained is as current as possible at the date of issue, but AKG cannot accept any liability in respect of, or resulting from, errors or omissions. AKG accepts no responsibility for investment decisions taken as a result of information supplied. Accompanying notes and definitions can be found in the full source reports, for use by professional financial advisers.

3 Introduction to extract for Prudential plc Background to extract This document contains an extract from AKG's comprehensive annual series of UK Life Office With Profits Reports. It has been prepared for distribution under licence agreement by Prudential plc. The reports cover a broad spectrum of UK long term insurers, and they are designed to meet the information needs of advisers and other analysts in assessing the relative strengths of UK with profits funds. Summary of extract This extract includes full details of the AKG analysis and assessment of Prudential s range of with profits funds. The details in the extract specifically relating to Prudential begin with an overview of the Group s background followed by confirmation of with profits funds within the Group and with profits products currently marketed by the Group. AKG then looks at things from a Company perspective - Prudential Assurance Company Ltd - providing details of the Company background, the structure of funds within the Company and an asset breakdown (as at 31/12/214) followed by confirmation of with profits funds within the Company and with profits products currently marketed by the Company. At company level this extract provides details of s long term business admissible assets and long term business liabilities and margins. It also looks at the Company s with profits realistic balance sheet (total for all funds published by ), capital resources, free assets and free asset ratios. Details of the Company s new with profits single and regular premium business, distribution of surplus (from all funds containing with profits business), increase/decrease in distributions and distribution as a percentage of with profits liabilities is also covered. AKG s analysis then gives consideration to three overarching fund structures within - With-Profits Sub-Fund (Open), Scottish Amicable Insurance Fund (Closed) and Defined Charge Participating Sub-Fund (Open) - and the individual funds within these structures. For advisers and analysts familiar with Prudential s PruFund fund range these funds are assessed under Prudential s With-Profits Sub-Fund, covered in pages 842 to 877 of this extract. The fund analysis sections cover a wide range of material including asset breakdown, with profits realistic balance sheet, fund type/classification, fund background, fund objectives, PPFMs applicable to the fund, governance arrangements and confirmation of with profits products currently marketed in the fund. Information about rights to share in profits, profit-sharing philosophy, distribution of surplus, increase/decrease in distributions, approach to risk and smoothing are also included in the fund analysis sections. Furthermore details about MVRs, guarantees, inherited estate, headline asset allocation mix, past performance and investment returns can also be found in the fund analysis sections. The fund analysis sections conclude with AKG s with profits ratings. AKG attributes three different types of with profits related ratings within its annual series of UK Life Office With Profits Reports: With Profits Financial Strength With Profits Future Performance With Profits Transparency. Transparency, Future Performance and Financial Strength Ratings for the Prudential funds covered by AKG s assessment work are displayed on pages 874, 875, 876,877, 888, 889, 9 and 91 of this extract. AKG Financial Analytics Ltd 14 December 215

4 Introduction to extract for Prudential plc AKG comment on Company Financial Strength "As one of the UK's largest and strongest life companies, PAC continues to show significant resilience in the wake of very challenging economic, legislative and regulatory conditions. It has retained focus and increased its market share, whilst continuing to demonstrate its appetite for key segments of the UK market, specifically the Pre- and Post- Retirement space. Statutory solvency reduced in 214, but remained healthy. The group's IGD surplus, albeit distorted by dividend payments, remained relatively stable. AKG believes that PAC remains financially very strong. The group's strategy towards the UK, which is still an important generator of cash for the group despite its declining proportion of overall group profits, based on its brand and financial strength, is a sensible one." Source: Page 837 of this extract. About AKG AKG is an independent organisation. Originally established as an actuarial consultancy AKG has, for over 2 years, specialised in the provision of assessment, ratings, information and market assistance to the financial services industry. As the market has evolved over this period, the range of entities considered by AKG has expanded. Consequently AKG has brought additional skill sets into its operations. This has meant the inclusion of accounting, corporate finance, IT and market intelligence experience, alongside actuarial resources, to deliver an expanded professional capability. Today AKG s core purpose is in the provision of financial analysis and review services and in the delivery of key value added financial information to support the wider financial services sector and its customers. Regular Reports AKG publishes the following reports to assist Providers and Intermediaries: AKG Company Profile & Financial Strength Reports Covering UK long term Insurers/Providers. AKG Offshore Profile & Financial Strength Reports Covering offshore life assurance companies. AKG Platform Profile & Financial Strength Reports Covering platform operations. AKG UK Life Office With Profits Reports Providing further depth in the assessment of with profits funds. For futher details on any of the above please contact AKG: AKG Financial Analytics Ltd Anderton House 92 South Street Dorking Surrey RH4 2EW Tel: +44 () or akg@akg.co.uk. AKG Financial Analytics Ltd 14 December 215

5 Introduction Purpose and scope of the reports Reports compilation AKG has been publishing its annual series of UK Life Office With Profits Reports for nearly 2 years. These reports are designed to assist advisers and other analysts to assess the relative merits of specific with profits funds. The aim is to provide comprehensive, structured and consistent information, accompanied by AKG's key analytical assessments of with profits financial strength, future performance and transparency. The reports provide an invaluable resource for intermediaries who are advising clients in the selection of with profits providers for new policies. The amount of with profits business in-force remains considerable (with profits assets totalling over 315 billion at the end of 214: Source PRA Returns - Form 48). Advice for in-force clients should be just as robust as it is for new business. Indeed evaluating existing with profits funds is an important part of an adviser's job and AKG's reports provide a wealth of relevant information and assessments. Each individual report provides information on the structure and operation of a provider's with profits fund(s). It also highlights the various risks borne by with profits policyholders and concludes with AKG's long established Ratings for: With Profits Financial Strength With Profits Future Performance With Profits Transparency The reports are confined to those providers whose products conform to a statutory definition of with profits and includes individual reports and comments on those providers whose with profits funds exceed 1m, supplemented by smaller companies and friendly societies operating in the intermediary market. The reports contain analysis and assessments of 187 sub-funds within 72 funds within 3 firms that will be active in the UK market at the end of December 215 (from 26 different groups). A number of comparative industry-wide tables are also included, covering a range of key metrics. Compilation of the reports keeps AKG s research and analyst teams busy for many months, since it involves collection of a huge volume of data, and painstaking analysis of each fund s position before our updated ratings can be determined. The process started in earnest in April, with the gathering of each firm s annual accounts and PRA Returns and an industry-wide market survey that is used to ensure that other pieces of key information that are used in the reports are as accurate and as up to date as possible. The survey covers topics such as PPFM/CFPPFM changes, With Profits Committee membership and terms of reference, annual reports to with profits policyholders, asset mixes and investment returns. AKG is very grateful to those companies which go to such great lengths to assist us by completing our surveys each year, and by answering any further queries which may arise. After all relevant financial data, past performance statistics and survey information has been loaded into AKG s databases, a technical analyst drafts the narrative text for each group, company, fund and sub-fund that is covered in the reports. Everything is then subject to technical review by a different analyst and to a market review. AKG s updated ratings are then determined. AKG Financial Analytics Ltd Page 5 14 December 215

6 Introduction With Profits glossary Conventional With Profits: Products characterised by a guaranteed sum assured to which regular (annual) bonuses, and possibly a terminal (final) bonus, are added. Few offices now offer conventional with profits, these having been superseded during the 198s by unitised with profits products. Unitised With Profits: The relevant part of the with profits fund is divided into units (similar to a unit linked fund) and the unit value is used to define individual policy values. Surplus is distributed by allocation of additional units or by incrementing the unit value. Many offices also employ the concept of a potential terminal (final) bonus on exit. Asset Share: The premiums paid by the policyholder, less deductions for expenses, tax and other charges, plus allocations of business profits, accumulated at the rate of investment return achieved. [Note: In practice there is some variability as to which of the above elements are included, depending upon profit sharing philosophy.] Common abbreviations A-Z: CFPPFM Consumer Friendly Principles and Practices of Financial Management CMA Contractual Minimum Addition CPPI Constant Proportion Portfolio Insurance CRR Capital Resources Requirement CWP Conventional With Profits DA Deposit Administration EBR Equity Backing Ratio (including Property) FAR Free Asset Ratio FCA Financial Conduct Authority FSA Financial Services Authority GAO Guaranteed Annuity Option GAR Guaranteed Annuity Rate GMP Guaranteed Minimum Pension IB Industrial Branch ICA Individual Capital Assessment ICG Individual Capital Guidance LTA Long Term Assets LTBF Long Term Business Fund MCR Minimum Capital Requirement MVA/MVR Market Value Adjustment/Market Value Reduction NPSF Non Profit Sub Fund OB Ordinary Branch PPFM Principles and Practices of Financial Management PRA Prudential Regulation Authority PRE Policyholder Reasonable Expectations RBS Realistic Balance Sheet RCM Risk Capital Margin RMM Required Minimum Margin TCF Treating Customers Fairly UWP Unitised With Profits WCR Working Capital Ratio WP With Profits WPAA With Profits Advisory Arrangement WPB With Profits Bond WPC With Profits Committee WPFAR With Profits Free Asset Ratio WPICC With Profits Insurance Capital Component WPSF With Profits Sub Fund AKG Financial Analytics Ltd Page December 215

7 Introduction Guide to AKG's rating system With Profits Financial Strength Ratings The objective is to assess the overall strength of the with profits fund. The initial concern is the company's ability to meet its ongoing guaranteed, or promised, commitments, i.e. existing sum assured and bonuses. However, the company's ability to continue to compete successfully in the with profits market is also particularly relevant, given that closed funds are sometimes bad news for policyholders. In such situations, overall expenses tend to increase as a proportion of the fund and investment performance may well deteriorate. These, together with other factors, may make it difficult for companies in such situations to maintain competitive bonus rates at future declarations, although existing declared bonuses are not affected (other than possibly by MVRs). The main criteria taken into account are: Capital base and free asset position; With Profits Realistic Balance Sheet position; The amount of with profits business in-force; Parental strength (and likely attitude towards supporting the company); Ιmage and strategy. With Profits Future Performance Ratings The potential for future performance is made up of a variety of different factors. The major factors are: Past performance as a guide to potential future performance - It should be noted however that not all current leaders in past performance have always been top performers. Current investment philosophy - With profits funds with high equity and property investments are likely to perform better over the longer term than, for instance, funds with a high proportion of fixed interest securities. It should be noted that this may not always be the case, but provided the policyholder accepts the basic premise that equities will, over the long term, out-perform fixed interest securities, this will be an important factor (i.e. funds with high equity ratios will perform better than funds with lower equity ratios). Company free asset position (and valuation strength), together with the relevant With Profits Realistic Balance Sheet position - This will enable overall investment flexibility and give an investment return on those free assets that may be available to with profits policyholders. Overall size of the company, its with profits fund and its capital base - The brand name (and ownership) and reputation of the company will indicate the company's ability to stay in the with profits market and sell new business at a profitable rate for the benefit of policyholders and shareholders. Distribution efficiency - A sales distribution network, which will enable products to be sold profitably and in adequate volumes, is clearly important. AKG Financial Analytics Ltd Page December 215

8 Introduction Guide to AKG's rating system (continued) Bonus philosophy - with respect to reversionary and terminal bonuses, is relevant, allied with the impact of future stock market growth. Terminal bonuses are not only dependent on the company's attitude to withholding (or otherwise) capital gains, but also the market potential (for equities and property) for on-going growth. Companies with a high terminal bonus ratio (as a percentage of payout) may find this 'high' payment difficult to maintain and, consequently, future performance may be affected. Miscellaneous profits or losses - Some companies have with profits funds benefiting only from investment returns. However, in other funds there is a contribution from other lines of business (e.g. non profit and unit linked surplus). Estate distribution - A key element for closed funds that are running-off is the size of the fund's inherited estate, and the company's policy as to how it will be distributed over time. Mutual or Proprietary status - There has been much debate on the 'strength' of mutual companies because of their potential inability to raise capital, should this be required. Most mutuals would contend that this is, in practical terms, not relevant. However, it has to be conceded that the public perception (of this constraint) does cause mutual companies some problems. A number of mutuals have now demutualised, often to the benefit of their policyholders. The big advantage that mutuals have, as far as policyholders are concerned, is that they pay 1% of all surplus back to policyholders so that bonuses are enhanced compared to their proprietary rivals. This is certainly true in some cases, though in general, actual results for mutual and proprietary companies are similar. It must also be remembered that assessment of on-going performance is subjective, as the company's actual performance in 2 years, say, will be dependent on factors which cannot be accurately forecast, such as: Whether or not the company has stayed in business, and in what form Its ability to adapt to new market forces Its investment results Its overall profitability during that period Nevertheless, those companies with good performance potential (as determined by the with profits factors above) have to start as favourites. Indeed, all intermediaries must consider these factors (or their equivalent rating) when recommending a specific with profits contract to a potential policyholder. AKG has therefore, using its judgement and experience, produced a single rating that combines, to a greater or lesser extent, the various factors outlined above. With Profits Transparency Ratings Transparency has become a significant issue, as a result of the breakdown of trust following general concerns about the opaqueness of the with profits market as it had traditionally grown up. Increasingly, policyholders and their advisers seek reassurance that they will be able to rely on a provider acting fairly in all circumstances, and that the provider's scope to apply discretion is clearly delineated and reasonable. Nowadays, companies are required to produce PPFMs (and CFPPFMs) for each of their with profits funds. Much of the information contained within these PPFMs has always been made available by the more transparent companies, in their desire to develop a more consumer focused approach. For other companies, less at the forefront of any drive to greater transparency, the PPFM ensures at least a degree of compulsory disclosure. AKG Financial Analytics Ltd Page 3 14 December 215

9 Introduction Guide to AKG's rating system (continued) The purpose of the AKG Transparency Rating is to give a simple quantitative rating for transparency, consistent with AKG's other industry measures. Considerations of transparency feature prominently in the context of 'new-style' with profits products, where it is explicitly addressed in the product design and marketing material. Even with 'old-style' products, however, the degree of openness about the conduct of a provider's with profits funds is seen as a vital factor in provider selection. In evaluating transparency and openness, and recognising that there is no current industry wide definition, AKG takes the following main criteria into account: How open the mechanics of the fund are, and the extent of any discretion retained by the provider regarding key decisions about investment mix/bonus allocations/unit prices etc from day to day throughout the life of a policy. The degree of discretion retained by the provider to change charges or other important contract terms. The degree of discretion retained by the provider to make final adjustments to policy proceeds at the point of payout. The amount, quality and timeliness of relevant information, about the operation of the fund and the company, made available to policyholders, advisers, and commentators. This particularly includes consideration of the depth, quality and clarity of information presented in PPFMs and on the company's website; as well as the extent of the provider's commitment to maintaining good standards of communication. The extent to which a provider's with profits fund operations will be subject to independent review and challenge; in particular the makeup and Terms of Reference of its WPC or WPAA. For closed funds, the company's approach to run-off; in particular governance issues and whether its communication strategy enables policyholders to make informed decisions. As levels of transparency develop within the industry, these criteria evolve and benchmarks are adjusted. It is clear that there is still quite a wide spectrum of performance within the market at present, although standards have been generally raised as a result of the PRA s current governance rules. These rules stemmed from the FSA's review of the with profits market. On the one hand, this identified a significant number of firms where with profits funds were being operated with due regard to the interests of policyholders and with appropriate practices in most aspects of their operation. On the other hand, though, it reported sectorwide weaknesses in governance and policyholder communications, involving both open and closed funds. Explanation of AKG's Fund Ratings The main purpose of AKG's Fund Ratings is to show AKG's opinion of the relative merits of each Fund against its competitors. For each of the 3 categories of Fund Rating, AKG's aim is to sub-divide the whole market into 5 separate groups, each containing the funds that are deemed to be broadly comparable with each other. In each case, a rating of 5 represents the highest ranking group, whilst a rating of 1 represents the lowest ranking group. It must be stressed that in arriving at each of the Fund Ratings published in this report, AKG has considered the full range of criteria detailed above. Considerable judgment is often required to assess the appropriate rating for a fund, particularly in situations where a fund exhibits a mixture of characteristics, some strong and some weak. AKG Financial Analytics Ltd Page December 215

10 Group Name Prudential Group Background Prudential is an international financial services group with operations in Asia, the United States and UK, Europe & Africa. The group has four main business units: Prudential Corporation Asia (which now has life insurance and fund management operations in 13 markets in Asia); Jackson National Life Insurance Co (a leading US life company, acquired in 1986); Prudential UK (life and pensions in the UK and across Europe) and M&G Investments (the group s UK and European fund manager, acquired in 1999). Offshore business is marketed through the Dublin subsidiary Prudential International Assurance plc. Prudential began its Asian operations in India in 1923, and it has focused significant attention on expansion in Asia in recent years, including a joint venture operation in Beijing. Domestication of the Hong Kong branch, the last Asian based branch operation, occurred in January 214. Having formed Prudential Europe in 1999 as the group expanded into France and Germany, 23 saw the group sell its German operation to Canada Life and stop writing business in France. A Polish branch became operational in 213 and in March 214 the group entered the nascent African life market, acquiring Express Life in Ghana. The group sold its holdings in Mercantile and General Reinsurance to Swiss Re in 1996 and Egg, the internet bank, in 27. The group now has over 23, staff worldwide, plus over 46, agents in Asia. Whilst the group has come under regular speculative pressure in the UK to consider a break-up, particularly given that the bulk of its new business is written overseas, the group has reiterated its commitment to the UK market - it produced 13% of new business profit, 23% of group IFRS operating profit in H1 215 and substantially supports the overall credit rating of the group. In 27 the group acquired Equitable Life's with profits annuity book and in 28, Prudential UK outsourced a large proportion of its in-force and new business policy administration to Capita Group plc (Capita). In June 21 the group abandoned its plans to acquire AIA from AIG after being unable to negotiate a lower price for the deal. November 214 saw the group sell its remaining 25% share in PruHealth, a joint venture with Discovery Holdings of South Africa, launched in 24. As at 3 September 215, the group had an estimated IGD surplus of 5.1bn after the.3m interim dividend [June 214: 4.1bn, before interim dividend], giving a solvency coverage of 25%. With Profits Funds within the Group With-Profits Sub-Fund Scottish Amicable Insurance Fund Defined Charge Participating Sub-Fund OPEN CLOSED OPEN See page 842 See page 878 See page 89 Prudential International Assurance plc Ordinary Long Term Business Fund OPEN Not included AKG Financial Analytics Ltd Page December 215

11 With Profits Products Currently Marketed within the Group Fund/SubFund Product With-Profits Fund (Sterling OB Annuity with-profits (PLA) business) Annuity with-profits (CPA) Life UWP single premium Individual pensions UWP Trustee investment plan UWP Optimum Bonus Fund Life UWP single premium Optimum Return Fund Annuity with-profits (PLA) Annuity with-profits (CPA) Life UWP single premium Individual pensions UWP Trustee investment plan UWP PruFund Growth Fund Life UWP single premium Individual pensions UWP Trustee investment plan UWP PruFund Protected Growth Fund Life UWP single premium Individual pensions UWP Trustee investment plan UWP PruFund Cautious Fund Life UWP single premium Individual pensions UWP Trustee investment plan UWP PruFund Protected Cautious Fund Life UWP single premium Individual pensions UWP Trustee investment plan UWP PruFund -3 Fund Life UWP single premium Individual pensions UWP Trustee investment plan UWP PruFund 1-4 Fund Life UWP single premium Individual pensions UWP Trustee investment plan UWP PruFund 2-55 Fund Life UWP single premium Individual pensions UWP Trustee investment plan UWP PruFund 4-8 Fund Life UWP single premium Individual pensions UWP Trustee investment plan UWP Prudential International Assurance plc PIA's PAC Sterling With-Profits Fund Life UWP single premium PIA's PAC Euro With-Profits Fund Life UWP single premium PIA's PAC US Dollar With-Profits Life UWP single premium Fund PIA PruFund Growth Life UWP single premium PIA PruFund Growth Life UWP single premium PIA PruFund Growth $ Life UWP single premium PIA PruFund Cautious Life UWP single premium PIA PruFund Cautious Life UWP single premium PIA PruFund Cautious $ Life UWP single premium PIA PruFund Protected Cautious Life UWP single premium PIA PruFund Protected Cautious Life UWP single premium PIA PruFund Protected Cautious $ Life UWP single premium AKG Financial Analytics Ltd Page December 215

12 Company Name Ownership Prudential plc Company Background Prudential began life in 1848 as the Prudential Mutual Assurance Investment and Loan Association. It became the ('PAC') in 1867, and for many years it was the UK s largest life company. Originally a composite office with a large home service operation, the company stopped writing IB business in 1995, and in 21 closed its direct sales force and exited from general business in the UK by selling its book to Churchill (a small run-off liability still exists). At the same time, it dropped the Scottish Amicable brand (it had acquired Scottish Amicable in 1997) and all remaining Scottish Amicable business was transferred into Prudential at the end of 22. In December 27 the company accepted a transfer of 1.8bn of with profits annuities liabilities (6, policies) from Equitable Life Assurance Society. In 28, the company decided not to proceed with a reattribution of its Inherited Estate. At the end of October 21 the businesses of Prudential (AN) Ltd and Prudential Holborn Life Ltd were transferred into the company, to simplify the group structure. Prudential (AN) Ltd contained a closed block of with profits bonds written in 23 and 24 via the sales force of Abbey National plc. That block of business, with reserves of 43m as at December 29, had been wholly reinsured to Prudential Assurance prior to the transfer. In August 211, the majority of the annuities previously reinsured to the subsidiary Prudential Annuities Ltd (PAL) were recaptured by the With-Profits Sub-Fund. In October 214 the remaining policies in PAL were transferred to PAC in order to improve the flexibility and efficiency of the capital management in PAC's with profits fund. In January 214 Prudential set up two new Hong Kong incorporated Prudential Companies (one life, one general) and transferred its Hong Kong branch business (the last remaining Asian branch) to them. This large transfer, some 13 bn of assets in total, aligned the Hong Kong branch business more closely with Prudential's other Asian operations. The Hong Kong branch long-term business (some 1.3m policies and 9.4bn of liabilities, both with profits and non profit) written by PAC was transferred to Prudential Hong Kong Limited (PHKL). The transfer was dependent on the respective risk levels of the Hong Kong and Other business being aligned at or soon after the transfer date and as part of this alignment of risk levels, a reinsurance arrangement was put in place between PAC and PHKL whereby PAC reinsures to PHKL a proportionate share of annuity business ( 1.4bn reserves at the end of 214), including that within PAL prior to its transfer to PAC, although the reserves are then deposited back with PAC. The company has a legally enforceable capital support arrangement between it and Prudential plc under which Prudential plc has an obligation to provide the company with capital support up to an agreed maximum aggregate level in the event of PAC's solvency falling below specified levels. This support is available until 228. Sales of with profits products in the intermediary market are now limited mainly to pensions (including income drawdown) and with profits bonds. However, the company remains by far the biggest writer of new with profits business in the UK market, being almost alone in achieving significant growth in new business volumes compared to 26 levels, reflecting a renewed focus on the with profits market. AKG Financial Analytics Ltd Page December 215

13 Structure of Funds within the Company The company s long term business is contained in the following four funds, each of which has its own category of assets and of surplus: The With-Profits Sub-Fund (WPSF) (a 9:1 fund) The Scottish Amicable Insurance Fund (SAIF) (a 1: fund) The Non-Profit Sub-Fund (NPSF) (a :1 fund) The Defined Charge Participating Sub-Fund (DCPSF) (a 1: fund) The WPSF, the largest with profits fund in the UK, consists mainly of with-profits business, written by: PAC, both OB (including Hong Kong, until January 214, Malta and Poland) and IB. Scottish Amicable Life (SAL) (the accumulated with profits premiums in respect of the business transferred into the NPSF in 22). Prudential (AN) Ltd. This block of unitised with profits bonds written in 23 and 24 via the sales force of Abbey National plc was wholly reinsured into the WPSF until the end of October 21, when it was transferred into the fund. The WPSF also contains a smaller amount of non-profit business (the majority of which is reinsured to Prudential subsidiaries). This comprises: the non-profit (including unit-linked) business written by PAC that is not in the NPSF. the following types of business written by Scottish Amicable Life Assurance Society (SALAS), contained since 1997 in the memorandum Scottish Amicable Account (SAA): unitised with-profits life business (other than its investment content which was transferred to the SAIF), and the non-profit (including unit-linked) life business. The SAIF contains the pensions, annuities and traditional with profits life business transferred from SALAS in 1997 and the investment content of with profits business in SAA. The business is predominantly with profits in nature. The NPSF contains most of the company s unit-linked business and a minority of its nonprofit business. It also includes all Defined Charge Participating business (apart from the with profits annuity business transferred from Equitable Life). However, the investment content of the Defined Charge Participating business held in the NPSF is allocated to the DCPSF. The DCPSF contains the accumulated investment content of premiums paid on Defined Charge Participating business, which is either reinsured from Prudential International Assurance plc (based in Dublin) or other companies or was written through the company's French branch between January 21 and December 23. The fund also includes the with profits annuity business transferred from Equitable Life in December 27. The fund is classified as open because it continues to receive new business via reinsurance. Asset Breakdown as at 31 Dec 214 ( 's) With Profits Non Profit Linked Total With-Profits Sub-Fund 77,856,619 11,672,439 2,44,127 91,933, % 12.7 % 2.6% 1.% Scottish Amicable Insurance Fund 6,466,176 49,37 6,956, % 7. %.% 1.% Non-Profit Sub-Fund 9,451,544 1,96,943 19,548,487. % 48.3 % 51.7% 1.% Defined Charge Participating Sub- Fund 3,867,927 3,867, %. %.% 1.% Total Long Term Assets 88,19,722 21,614,2 12,51,7 122,35,811 Source: PRA Returns Form 48 (Line 19: NP; Line 29: WP); Form 13 (Lines 58+59: Linked; Line 89: Total). AKG Financial Analytics Ltd Page December 215

14 With Profits Funds within the Company With-Profits Sub-Fund Scottish Amicable Insurance Fund Defined Charge Participating Sub-Fund OPEN CLOSED OPEN See page 842 See page 878 See page 89 With Profits Products Currently Marketed within the Company Fund/SubFund With-Profits Fund (Sterling OB business) Optimum Bonus Fund Optimum Return Fund PruFund Growth Fund PruFund Protected Growth Fund PruFund Cautious Fund PruFund Protected Cautious Fund PruFund -3 Fund PruFund 1-4 Fund PruFund 2-55 Fund PruFund 4-8 Fund Product Annuity with-profits (PLA) Annuity with-profits (CPA) Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Annuity with-profits (PLA) Annuity with-profits (CPA) Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP AKG Financial Analytics Ltd Page December 215

15 Company Financial Strength As one of the UK's largest and strongest life companies, PAC continues to show significant resilience in the wake of very challenging economic, legislative and regulatory conditions. It has retained focus and increased its market share, whilst continuing to demonstrate its appetite for key segments of the UK market, specifically the Pre- and Post- Retirement space. Statutory solvency reduced in 214, but remained healthy. The group's IGD surplus, albeit distorted by dividend payments, remained relatively stable. AKG believes that PAC remains financially very strong. The group's strategy towards the UK, which is still an important generator of cash for the group despite its declining proportion of overall group profits, based on its brand and financial strength, is a sensible one. AKG Financial Analytics Ltd Page December 215

16 Long Term Business Admissible Assets 212 ( 's) 213 ( 's) 214 ( 's) Fixed Interest Equities Real Estate Linked Other 5,6,788 22,177,629 7,931,43 12,749,925 3,151,75 46,778,759 26,616,72 8,74,297 13,268,796 28,268,822 42,156,556 27,67,243 1,796,245 12,51,7 29,181,698 Total 123,71, ,672, ,35,812 Source: Returns to PRA - Form 13 Long Term Business Liabilities & Margins 212 ( 's) 213 ( 's) 214 ( 's) Non Linked Non Profit Non Linked With Profits Accumulating With Profits Linked Surplus carried forward Other liabilities Investment Reserves 2,27,23 21,433,172 44,176,25 13,131,925 25,139 4,473,43 19,444,658 19,31,5 2,553,787 44,391,842 13,593,16 252,254 3,641,53 21,93,222 19,598,684 15,541,837 46,79,946 12,88, ,673 5,738,145 21,643,333 Total 123,71, ,672, ,35,812 Source: Returns to PRA - Forms 14, 5 With Profits Realistic Balance Sheet - Total for all Funds published by this Company Regulatory value of assets Implicit Items Adjustments Realistic value of assets Support arrangement assets Assets available to the fund With profits benefit reserve Other liabilities Realistic value of liabilities Realistic assets less liabilities Risk capital margin Realistic excess capital Working capital Risk capital margin (RCM) Realistic excess available capital 87,95,645 89,214,985 2,86,25 1,977,844 89,991,67 91,192,829 89,991,67 91,192,829 7,47,463 1,59,48 5,538,55 8,8, ,847 7,114,794 88,189,988 1,65,698 89,795,686 89,795,686 7,158, ,285 6,17,562 Working capital ratio 7.8% 8.8% 8.% RCM as % of assets 1.7% 1.% 1.1% Realistic excess available cap ratio 6.2% 7.8% 6.9% RCM as % of liabilities 1.8 % 1.1 % 1.2% RCM coverage 4.7x 9.x 7.2x RCM coverage (exc support) 4.7x 9.x 7.2x Source: Returns to PRA - Form ( 's) ( 's) ( 's) 74,788,21 8,156,186 82,944,27 7,47,463 1,59,48 5,538,55 76,82,695 6,363,493 83,184,188 8,8, ,847 7,114,794 73,45,349 9,591,491 82,636,84 7,158, ,285 6,17,562 AKG Financial Analytics Ltd Page December 215

17 Capital Resources Core tier one capital Tier one waivers Other tier one capital Tier one deductions Total tier one capital Tier two capital Adjustments and deductions ( 's) ( 's) ( 's) 23,328, ,637 23,155,8-291,244 26,181, ,852 26,34, ,719 26,42,655-51,122 26,369,533-86,194 Total Capital Resources 22,863,836 25,796,857 26,283,339 Resources outside the LT fund 3,6,277 3,419,159 4,443,43 Source: PRA Returns Forms 2 and 3. Free Assets Free Assets (exc Fin Eng) Financial Engineering Free Assets (Published) 212 ( 's) 8,687, ( 's) 11,282, ( 's) 8,67,597 11,78,447 1,392,1 8,249 23,67 174,368 1,566,468 Total Long Term Assets Source: PRA Returns Forms 2, 3 and ,71, ,672, ,35,812 Free Asset Ratios FAR (exc Fin Eng) Financial Engineering % FAR (Published) % % % Source: Free Assets etc from table above, as a percentage of Form 13, Line Free Asset Ratio Breakdown 8% FAR exc Fin Eng Fin Eng 4% % AKG Financial Analytics Ltd Page December 215

18 New With Profits Single Premiums New With Profits Single Premiums - 's 4,, UK Life UK Pensions Overseas 3,, 2,, 1,, UK Life UK Pensions Overseas Total Growth Rate ( 's) ( 's) ( 's) 2,132,715 1,486,842 64,327 3,683, % 1,588,972 1,26,779 74,734 2,87, % 2,139,39 1,87, ,227,2 12.4% New With Profits Regular Premiums Source: Returns to PRA - Form 47 4, New With Profits Regular Premiums ( 's) UK Life UK Pensions Overseas 3, 2, 1, UK Life UK Pensions Overseas Total Growth Rate ( 's) ( 's) ( 's) , ,697 31, % ,47 316, , % 257 5,556 1,28 52, % Source: Returns to PRA - Form 47 AKG Financial Analytics Ltd Page December 215

19 Distribution of Surplus (from all funds containing With Profits business) 3,2, Distribution of Surplus - 's 2,4, To Policyholders Other Transfers 1,6, 8, To Policyholders Other Transfers Total ( 's) ( 's) ( 's) 2,581, ,766 2,81,735 2,442, ,879 2,655,548 2,222, ,997 2,422,389 Source: Returns to PRA - Form 58, Line 46 (Policyholders) and Line 47 (Other transfers) Increase/Decrease in Distributions To Policyholders Other Transfers Total ( 's) ( 's) ( 's) -155,228-8,94-164, ,3-6, ,187-22,277-12, ,159 Source: Returns to PRA - Form 58, Line 46 (Policyholders) and Line 47 (Other transfers) Distribution (as % of With Profits Liabilities) To Policyholders Other Transfers Total % % % Source: Returns to PRA - Form 58, Line 46 (Policyholders) and Line 47 (Other transfers) AKG Financial Analytics Ltd Page December 215

20 With-Profits Sub-Fund Fund Name With-Profits Sub-Fund Fund Basics Assets Earmarked? No Open? Year Opened Year Closed Yes Significant Classes of With Profits Business within the Fund Open? Opened Closed Assets (31/12/14) ( 's) With-Profits Fund (Sterling OB business) Yes 56,246,7 Optimum Bonus Fund Yes 21 1,68,9 Optimum Return Fund Yes 21 PruFund Growth Fund Yes 24 PruFund Protected Growth Fund Yes 28 PruFund Growth & Income Fund No PruFund Protected Growth & Income Fund No PruFund Cautious Fund Yes 29 5,43,8 PruFund Protected Cautious Fund Yes 29 PruFund -3 Fund Yes ,6 PruFund 1-4 Fund Yes ,6 PruFund 2-55 Fund Yes ,7 PruFund 4-8 Fund Yes ,3 With-Profits Fund (Non-Sterling OB business) Yes With-Profits Fund (IB business) No 1995 Asset Breakdown as at 31 Dec 214 ( 's) With Profits Non Profit Linked Total With-Profits Sub-Fund 77,856,619 11,672,439 2,44,127 91,933, % 12.7 % 2.6% 1.% Source: PRA Returns Form 48 (Line 19: NP; Line 29: WP); Form 13 (Lines 58+59: Linked). AKG Financial Analytics Ltd Page December 215

21 With Profits Realistic Balance Sheet Regulatory value of assets Implicit items allocated to the fund Adjustments Realistic value of assets Support arrangement assets Assets available to the fund With profits benefit reserve Other liabilities Realistic value of liabilities Realistic assets less liabilities Risk capital margin Realistic excess capital Working capital Risk capital margin (RCM) Realistic excess available capital Working capital ratio RCM as % of assets Realistic excess available capital ratio RCM coverage RCM coverage (exc support) 212 ( 's) 76,979,181 1,95,54 78,929,721 78,929,721 64,951,654 6,93,64 71,882,258 7,47,463 1,59,48 5,538,55 7,47,463 1,59,48 5,538,55 8.9% 1.9% 7.% Prudential 213 ( 's) With-Profits Sub-Fund 214 ( 's) 77,856,62 1,375,731 79,232,351 79,232,351 63,83,115 8,27,39 72,73,55 7,158, ,65 6,219,197 7,158, ,65 6,219,197 9.% 1.2% 7.8% RCM as % of liabilities 2.1% 1.2% 1.3% Source: Returns to PRA - Form x 4.7x 78,723,588 1,839,477 8,563,65 8,563,65 67,421,497 5,132,927 72,554,424 8,8, ,847 7,114,794 8,8, ,847 7,114, % 1.1% 8.8% 9.x 9.x 7.6x 7.6x AKG Financial Analytics Ltd Page December 215

22 With-Profits Sub-Fund Fund Type/Classification With-Profits Fund (Sterling OB business) Conventional and Unitised With Profits business, plus Non Profit business Mixed Investment Fund (4%-85% Shares) Optimum Bonus Fund Unitised With Profits business only Mixed Investment Fund (2%-6% Shares) Optimum Return Fund Unitised With Profits business only Mixed Investment Fund (4%-85% Shares) PruFund Growth Fund Unitised With Profits business only Mixed Investment Fund (4%-85% Shares) PruFund Protected Growth Fund PruFund Growth & Income Fund PruFund Protected Growth & Income Fund Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (2%-6% Shares) Mixed Investment Fund (2%-6% Shares) PruFund Cautious Fund Unitised With Profits business only Mixed Investment Fund (%-35% Shares) PruFund Protected Cautious Fund Unitised With Profits business only Mixed Investment Fund (%-35% Shares) PruFund -3 Fund Unitised With Profits business only Mixed Investment Fund (%-35% Shares) PruFund 1-4 Fund Unitised With Profits business only Mixed Investment Fund (%-35% Shares) PruFund 2-55 Fund Unitised With Profits business only Mixed Investment Fund (2%-6% Shares) PruFund 4-8 Fund Unitised With Profits business only Mixed Investment Fund (4%-85% Shares) With-Profits Fund (Non- Sterling OB business) With-Profits Fund (IB business) Conventional and Unitised With Profits business, plus Non Profit business Conventional With Profits business only Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (4%-85% Shares) AKG Financial Analytics Ltd Page December 215

23 With-Profits Sub-Fund Fund Background The WPSF, by far the largest with profits fund in the UK, is a 9:1 fund, consisting mainly of with-profits business, written by: PAC, both OB (including Hong Kong, until the transfer in January 214, Malta and Poland) and IB. SAL (the accumulated with profits premiums in respect of the business transferred into the NPSF in 22). Prudential (AN) Ltd. This block of unitised with profits bonds written in 23 and 24 via the sales force of Abbey National plc was wholly reinsured into the WPSF until the end of October 21, when it was transferred into the fund. The WPSF also contains a smaller amount of non-profit business (the majority of which is reinsured to Prudential subsidiaries). This comprises: the non-profit (including unit-linked) business written by PAC that is not in the NPSF. the following types of business written by SALAS, contained since 1997 in the memorandum Scottish Amicable Account (SAA): unitised with profits life business (other than its investment content which was transferred to the SAIF); the non profit (including unit-linked) life business. The fund provides financial support to SAIF through the Scottish Amicable Capital Fund (SACF), another memorandum account, some of which may be drawn upon in adverse conditions to support the smoothing of bonuses within SAIF. No such drawings have yet been necessary. The WPSF receives an annual charge from SAIF for providing this financial support (.15% of asset shares in each year from 28 to 214). Since 21 the company has offered a choice between the Optimum Bonus Fund and the Optimum Return Fund on various bond products. The Optimum Bonus Fund has a significantly different investment strategy to the rest of the WPSF, but the Optimum Return Fund closely follows the investment strategy of the main part of the WPSF. In September 24 the company introduced the PruFund Growth Fund and the PruFund Growth & Income Fund. These are new-style with profits funds which offer smoothed investment returns and an increased level of transparency. The investment mix of the PruFund Growth Fund is the same as the main part of the WPSF, whilst the mix for the Prufund Growth & Income Fund is the same as for the Optimum Bonus Fund. In October 28, the PruFund Protected Growth Fund was opened. It was closed to new life business in August 29 (when the PruFund Cautious Fund and the PruFund Protected Cautious Fund were launched) and in December 29 for pensions business, but re-opened in June 211. The PruFund Growth & Income Fund was also closed to new business in August 29, when the PruFund Investment Plan was closed. In November 211, four Risk Managed PruFunds were introduced (differentiated as -3, 1-4, 2-55, and 4-8, based on the equity proportion). Equivalent offshore, and $ variants of several of the PruFund range of funds have been introduced for the reinsurance accepted from Prudential International Assurance plc, but these funds reside in the Defined Charge Participating Sub-Fund. In March 29, the Income Choice Annuity product was launched, a new form of smoothed with profits pension annuity. Unless indicated otherwise, the remainder of this report is focused on the UK Sterling OB business within the fund, i.e. it excludes comment on: IB business, the assets for which have been pooled with those for OB business since The IB business now only accounts for less than 2% of the total. Non-sterling OB business, including the business written via the company s branches in Malta, Poland and (until January 214) Hong Kong. The company has no current intention to close the fund to new business. AKG Financial Analytics Ltd Page December 215

24 With-Profits Sub-Fund Fund Objectives With-Profits Fund (Sterling OB business) The aim is to seek to secure the highest total return (allowing for the effect of taxation and investment expenses) whilst maintaining an acceptable overall risk level for the fund and protecting the relative interests of all groups of policyholders. The policy for with profits business is to invest in a highly diversified portfolio of UK and overseas assets. Optimum Bonus Fund The fund, by having a greater proportion invested in fixed interest securities (such as corporate and government bonds) as compared with equities, aims to provide a higher annual bonus than the Optimum Return Fund, which aims to provide a higher overall return. Optimum Return Fund The fund aims to provide a higher overall return than the Optimum Bonus Fund, which aims to provide a higher annual bonus. PruFund Growth Fund The fund aims to maximise growth over the medium to long term by investing in shares, property, fixed interest and other investments. PruFund Protected Growth Fund The fund aims to maximise growth over the medium to long term by investing in shares, property, fixed interest and other investments. PruFund Growth & Income Fund The fund aims to produce medium to long term growth and generate income. The fund currently invests in UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments. PruFund Protected Growth & Income Fund The fund aims to produce medium to long term growth and generate income. The fund currently invests in UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments. PruFund Cautious Fund The fund aims for steady and consistent growth through a cautious approach to investing. The fund currently invests around 7% in a well diversified portfolio of fixed interest securities and holdings of cash and money market instruments. The balance is invested in UK and international shares, property and alternative assets. PruFund Protected Cautious Fund The fund aims for steady and consistent growth through a cautious approach to investing. The fund currently invests around 7% in a well diversified portfolio of fixed interest securities and holdings of cash and money market instruments. The balance is invested in UK and international shares, property and alternative assets. PruFund -3 Fund The fund aims to achieve long-term total return (the combination of income and growth of capital). It is an actively managed fund, typically with a high exposure to lower risk assets such as fixed interest securities and holdings of cash and money market instruments with no more than 3% of the fund being invested in equities. AKG Financial Analytics Ltd Page December 215

25 PruFund 1-4 Fund Prudential With-Profits Sub-Fund The fund aims to achieve long-term total return (the combination of income and growth of capital). It is an actively managed fund, typically with a bias towards lower risk assets such as fixed interest securities and holdings of cash and money market instruments but will always have some exposure to equities, with between 1% and 4% of the fund being invested in equities. PruFund 2-55 Fund The fund aims to achieve long-term total return (the combination of income and growth of capital).it is an actively managed fund with a well diversified exposure to UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments. From time to time, however, the fund may have a high exposure to equities and/or fixed income assets. Between 2% and 55% of the fund will be invested in equities. PruFund 4-8 Fund The fund aims to achieve long-term total return (the combination of income and growth of capital). It is an actively managed fund with a well diversified exposure to UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments. Typically the fund will have a bias towards assets providing potential for growth such as equities, with between 4% and 8% of the fund being invested in equities. PPFMs Applicable to the Fund Business Covered With-Profits business issued by the Prudential Group to UK policyholders Latest Edition February 215 Governance Arrangements The over-riding objective of the With Profits Committee is to act in an advisory capacity to inform the decision-making of PAC and each of the relevant subsidiaries, to ensure that the interests of with profits policyholders are appropriately considered within PAC s governance structures and to consider issues affecting with profits policyholders as a whole or as separately identifiable groups of policyholders. The Committee comprises at least three members, all of whom are independent of Prudential. With Profits Committee meetings are usually attended by PAC s Chief Executive and Chief Risk Officer, the Actuarial Function Holder and the With Profits Actuary, though the Chairman may choose to hold meetings, or parts of meetings, restricted to committee members only. With Profits Actuary: Peter Needleman With Profits Committee Name: With Profits Committee Members of With Profits Committee: Towers Watson Ltd Name Michael Arnold Paul Thornton Chris Daykin Ronnie Bowie Julius Pursaill Position Former Head of the Life Practice of Milliman consulting actuaries in London Past President, Institute of Actuaries Former Government Actuary; Past President, Institute of Actuaries Senior Partner, Hymans Robertson; Past President, Institute and Faculty of Actuaries Governor of the Pensions Policy Institute AKG Financial Analytics Ltd Page December 215

26 With-Profits Sub-Fund With Profits Products Currently Marketed in the Fund SubFund With-Profits Fund (Sterling OB business) Optimum Bonus Fund Optimum Return Fund PruFund Growth Fund PruFund Protected Growth Fund PruFund Cautious Fund PruFund Protected Cautious Fund PruFund -3 Fund PruFund 1-4 Fund PruFund 2-55 Fund PruFund 4-8 Fund Product Annuity with-profits (PLA) Annuity with-profits (CPA) Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Annuity with-profits (PLA) Annuity with-profits (CPA) Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP Life UWP single premium Individual pensions UWP Trustee investment plan UWP AKG Financial Analytics Ltd Page December 215

27 With-Profits Sub-Fund Rights to Share in Profits Divisible profits in the WPSF are shared between shareholders and with profits policyholders. Up to 5% of divisible profits may be transferred to a contingency fund with not less than 9% of the remainder being allocated to policyholders. For virtually all business, the policyholders proportion is currently 9%, thus the WPSF is a '9:1' fund. With profits policyholders are not entitled to profits from SAIF or from shareholderfunded business, primarily unit linked, creditor, sickness and accident and DCPSF business. Miscellaneous profits and losses (from non profit business in the fund and annuity business written by Prudential Annuities Ltd between January 2 and June 24, excluding annuities from vesting Prudential Personal Retirement Plans, and from business risks, apart from those losses which the company has decided should be borne by the inherited estate) are reflected in asset shares for all product lines except the PruFund range of funds. For business issued by SAL, credit for miscellaneous profit is given only if the asset shares calculated using explicit charges with no allowance for miscellaneous profit are less than the asset shares calculated using actual expenses with allowance for miscellaneous profit and the distribution of profit to PAC shareholders. Profits or losses from surrenders of with profits policies are credited to surviving policies in the calculation of asset shares for the relevant product group. At the time the OB and IB assets were merged in 1988 a commitment was made that IB bonuses would not be less than 9% (1% for policies after July 1988) of corresponding OB policies. This reflected the substantial IB estate that was available to support bonuses. AKG Financial Analytics Ltd Page December 215

28 With-Profits Sub-Fund Profit-Sharing Philosophy With-Profits Fund (Sterling OB business) The main aims of the bonus policy are to give returns which take account of the earnings of the underlying investments, whilst smoothing peaks and troughs of investment performance and to ensure that all with profits policyholders receive a fair share of distributed profits by way of bonus additions to their policies. Asset shares are calculated for typical policies at the mid point of the bonus declaration period and these provide a target level for claim values. Since 1991, the investment return credited to asset share has been the rate of return actually earned on the assets in the WPSF. For years prior to 1991, different categories of business were credited with slightly different rates (and use of these has continued as part of PRE). Asset shares do not directly share in investment returns in respect of free assets in excess of aggregate asset shares. Short term pension business is deemed invested in a 'deposit fund' and is credited with the 'pool' deposit rate less expenses. To retain investment flexibility, the company aims, for most types of policy, to keep a substantial proportion of payout values in non-guaranteed form i.e. payable as terminal bonus. Annual bonuses are designed to provide steady growth and are targeted on a proportion of the expected future investment return. Terminal bonuses are used to return a fair share of the assets of the WPSF whilst reducing the impact of market changes especially around the maturity date. A final bonus may also be added to deferred annuity contracts at retirement, in lieu of further participation in profits, in effect reflecting the difference in annuity rates available at retirement and those assumed in the original premium basis. Optimum Bonus Fund See comments on Sterling OB business. Optimum Return Fund See comments on Sterling OB business. PruFund Growth Fund These policies participate in profits by means of an increase in the unit price of the fund. The unit price increases at the Expected Growth Rate (published on each quarter date) unless the unit price moves outside specified limits. An annual management charge is applied by explicit unit deduction. Part of this charge is allocated to cover the expected costs of smoothing and guarantees incurred by the fund over the long term. PruFund Protected Growth Fund These policies participate in profits by means of an increase in the unit price of the fund. The unit price increases at the Expected Growth Rate (published on each quarter date) unless the unit price moves outside specified limits. An annual management charge is applied by explicit unit deduction. Part of this charge is allocated to cover the expected costs of smoothing and guarantees incurred by the fund over the long term. AKG Financial Analytics Ltd Page December 215

29 With-Profits Sub-Fund PruFund Growth & Income Fund These policies participate in profits by means of an increase in the unit price of the fund. The unit price increases at the Expected Growth Rate (published on each quarter date) unless the unit price moves outside specified limits. An annual management charge is applied by explicit unit deduction. Part of this charge is allocated to cover the expected costs of smoothing and guarantees incurred by the fund over the long term. PruFund Protected Growth & Income Fund These policies participate in profits by means of an increase in the unit price of the fund. The unit price increases at the Expected Growth Rate (published on each quarter date) unless the unit price moves outside specified limits. An annual management charge is applied by explicit unit deduction. Part of this charge is allocated to cover the expected costs of smoothing and guarantees incurred by the fund over the long term. PruFund Cautious Fund These policies participate in profits by means of an increase in the unit price of the fund. The unit price increases at the Expected Growth Rate (published on each quarter date) unless the unit price moves outside specified limits. An annual management charge is applied by explicit unit deduction. Part of this charge is allocated to cover the expected costs of smoothing and guarantees incurred by the fund over the long term. PruFund Protected Cautious Fund These policies participate in profits by means of an increase in the unit price of the fund. The unit price increases at the Expected Growth Rate (published on each quarter date) unless the unit price moves outside specified limits. An annual management charge is applied by explicit unit deduction. Part of this charge is allocated to cover the expected costs of smoothing and guarantees incurred by the fund over the long term. PruFund -3 Fund These policies participate in profits by means of an increase in the unit price of the fund. The unit price increases at the Expected Growth Rate (published on each quarter date) unless the unit price moves outside specified limits. An annual management charge is applied by explicit unit deduction. Part of this charge is allocated to cover the expected costs of smoothing and guarantees incurred by the fund over the long term. PruFund 1-4 Fund These policies participate in profits by means of an increase in the unit price of the fund. The unit price increases at the Expected Growth Rate (published on each quarter date) unless the unit price moves outside specified limits. An annual management charge is applied by explicit unit deduction. Part of this charge is allocated to cover the expected costs of smoothing and guarantees incurred by the fund over the long term. PruFund 2-55 Fund These policies participate in profits by means of an increase in the unit price of the fund. The unit price increases at the Expected Growth Rate (published on each quarter date) unless the unit price moves outside specified limits. An annual management charge is applied by explicit unit deduction. Part of this charge is allocated to cover the expected costs of smoothing and guarantees incurred by the fund over the long term. PruFund 4-8 Fund These policies participate in profits by means of an increase in the unit price of the fund. The unit price increases at the Expected Growth Rate (published on each quarter date) unless the unit price moves outside specified limits. An annual management charge is applied by explicit unit deduction. Part of this charge is allocated to cover the expected costs of smoothing and guarantees incurred by the fund over the long term. AKG Financial Analytics Ltd Page December 215

30 With-Profits Sub-Fund Distribution of Surplus Distribution of Surplus - 's 2,4, To Policyholders Other Transfers 1,6, 8, To Policyholders Other Transfers Total ( 's) ( 's) ( 's) 1,989, ,766 2,29,578 1,921, ,879 2,134,645 1,812,77 199,997 2,12,74 Source: Returns to PRA - Form 58, Line 46 (Policyholders) and Line 47 (Other transfers) Increase/Decrease in Distributions To Policyholders Other Transfers Total ( 's) ( 's) ( 's) -74,586-8,94-83,527-68,46-6,887-74,933-19,689-12, ,571 Source: Returns to PRA - Form 58, Line 46 (Policyholders) and Line 47 (Other transfers) AKG Financial Analytics Ltd Page December 215

31 With-Profits Sub-Fund Risk The WPSF is in general exposed to all the risks within the business including expenses, investment, mortality (particularly within the annuity portfolio), and the various guarantees attaching to existing policies. However, the risk from writing new business is treated a little differently to avoid the fund bearing any expected new business strain. In 214 a small new business cost overrun was expected and this was met by shareholders. At the end of 214, the fund held reserves of 43m, 17m, 53m, 35m and 54m [213: 37m, 2m, 53m, 32m and 474m] respectively for GAOs, endowment mis-selling, systems/administration errors, staff pension scheme funding and general contingencies. The fund is also exposed to the risk that the charges relating to the DCPSF's ex-equitable Life annuity portfolio are insufficient to cover the risks therein. The fund provides financial support to SAIF in respect of smoothing via a memorandum account (SACF), for which it receives an annual charge. The fund's inherited estate maintains two bonus smoothing accounts for the DCPSF. On average it is intended that any smoothing transfers should generate neither profit nor loss to either fund. The inherited estate can be used to absorb the costs of significant events such as fundamental strategic change without affecting the level of distributions to policyholders and shareholders. The fund owns the subsidiary company Prudential Annuities Ltd (PAL). This exposed the fund to the potential for any losses it may make, in particular annuitant mortality losses, but the group s decision in 24 to write future pensions annuity business via the shareholder owned subsidiary, Prudential Retirement Income Ltd, limited this exposure. The business in PAL was transferred to the WPSF on 1 October 214 following approval by the Court and PAL is expected to be wound up in due course. A portfolio of options and futures was implemented in January 211 to broadly replicate the UK business guarantee costs for the next five years. In addition, during January 212 the limited equity exposure in the estate assets arising from the SACF was hedged using a mixture of futures. At the end of 214 the fund held equity index and fixed income futures and equity index options as a partial hedge against guarantee costs. Forward currency contracts and swaps were held to hedge currency risk arising from overseas investments and fixed income derivatives and inflation swaps to better match liabilities. Index and single name credit default swaps were held to decrease or increase credit exposure. AKG Financial Analytics Ltd Page December 215

32 With-Profits Sub-Fund Smoothing Claims (as % of adjusted With Profits Benefit Reserves) 212 % All business 15. Source: Returns to PRA - Appendix 9.4A, Section 4 (6). 213 % % 97. The company targets that at least 9% of payouts will fall between 8% and 12% of asset share for both maturities and surrenders. The intention is that smoothing profits and losses should balance out over time. The long-term expected cost of smoothing and guarantees for each type of product is deducted in calculating asset shares and credited to the WPSF inherited estate, which bears the costs of smoothing and guarantees as they emerge. The company keeps the level of charges under review and may alter them if necessary to protect the fund. For some policies bonuses in each of the first five years are based on the expected average return over that period in order to reduce volatility in the early years. With-Profits Fund (Sterling OB business) Payout values are smoothed primarily looking at the change in payouts or maturities from one year to the next on sample policies. The normal smoothing aim is that payouts on similar policies should not change by more than 1% from one year to the next, although larger changes may occur to balance payout values between different policies, and following a significant rise or fall in market values (either sudden or over a number of years). For the Income Choice Annuity, the aim is that changes to the annuity payable should be in the range 1-12%, before the reduction due to the effect of the 'Required Smooth Return'. For other with profits annuities, the aim is that changes to the annuity payable should be in the range -11%, before allowing for any bonus 'anticipated' at outset. Optimum Bonus Fund Payout values are smoothed primarily looking at the change in payouts or maturities from one year to the next on sample policies. The normal smoothing aim is that payouts on similar policies should not change by more than 1% from one year to the next, although larger changes may occur to balance payout values between different policies, and following a significant rise or fall in market values (either sudden or over a number of years). Optimum Return Fund Payout values are smoothed primarily looking at the change in payouts or maturities from one year to the next on sample policies. The normal smoothing aim is that payouts on similar policies should not change by more than 1% from one year to the next, although larger changes may occur to balance payout values between different policies, and following a significant rise or fall in market values (either sudden or over a number of years). AKG Financial Analytics Ltd Page December 215

33 With-Profits Sub-Fund PruFund Growth Fund On a quarter date, if the net asset value per unit is more than 5% above/below the unit price, the unit price is repeatedly adjusted by half the difference between the unit price and the net asset value per unit until the net asset value per unit is within 5% above/below unit price. Between quarter dates, the net asset value per unit is averaged over the previous 5 working days to give the average net asset value per unit. If the net asset value per unit and the average net asset value per unit are both 1% (or more) above/below the unit price, the unit price will be increased/decreased immediately so that it is 2.5% below/above the net asset value per unit. A smoothing account maintained within the WPSF is credited or debited with any difference between the unit price and the net asset value per unit when units are created or cancelled as a result of premiums being received or claims being paid. If aggregate net flows of business into or out of an investment fund exceed limits specified within the policy provisions, the company may suspend the smoothing of the unit price, in which case the unit price will be the net asset value per unit. Any such suspension of smoothing can be applied separately to life and pensions business. PruFund Protected Growth Fund On a quarter date, if the net asset value per unit is more than 5% above/below the unit price, the unit price is repeatedly adjusted by half the difference between the unit price and the net asset value per unit until the net asset value per unit is within 5% above/below unit price. Between quarter dates, the net asset value per unit is averaged over the previous 5 working days to give the average net asset value per unit. If the net asset value per unit and the average net asset value per unit are both 1% (or more) above/below the unit price, the unit price will be increased/decreased immediately so that it is 2.5% below/above the net asset value per unit. A smoothing account maintained within the WPSF is credited or debited with any difference between the unit price and the net asset value per unit when units are created or cancelled as a result of premiums being received or claims being paid. If aggregate net flows of business into or out of an investment fund exceed limits specified within the policy provisions, the company may suspend the smoothing of the unit price, in which case the unit price will be the net asset value per unit. PruFund Growth & Income Fund On a quarter date, if the net asset value per unit is more than 5% above/below the unit price, the unit price is repeatedly adjusted by half the difference between the unit price and the net asset value per unit until the net asset value per unit is within 5% above/below unit price. Between quarter dates, the net asset value per unit is averaged over the previous 5 working days to give the average net asset value per unit. If the net asset value per unit and the average net asset value per unit are both 1% (or more) above/below the unit price, the unit price will be increased/decreased immediately so that it is 2.5% below/above the net asset value per unit. A smoothing account maintained within the WPSF is credited or debited with any difference between the unit price and the net asset value per unit when units are created or cancelled as a result of premiums being received or claims being paid. If aggregate net flows of business into or out of an investment fund exceed limits specified within the policy provisions, the company may suspend the smoothing of the unit price, in which case the unit price will be the net asset value per unit. AKG Financial Analytics Ltd Page December 215

34 With-Profits Sub-Fund PruFund Protected Growth & Income Fund On a quarter date, if the net asset value per unit is more than 5% above/below the unit price, the unit price is repeatedly adjusted by half the difference between the unit price and the net asset value per unit until the net asset value per unit is within 5% above/below unit price. Between quarter dates, the net asset value per unit is averaged over the previous 5 working days to give the average net asset value per unit. If the net asset value per unit and the average net asset value per unit are both 1% (or more) above/below the unit price, the unit price will be increased/decreased immediately so that it is 2.5% below/above the net asset value per unit. A smoothing account maintained within the WPSF is credited or debited with any difference between the unit price and the net asset value per unit when units are created or cancelled as a result of premiums being received or claims being paid. If aggregate net flows of business into or out of an investment fund exceed limits specified within the policy provisions, the company may suspend the smoothing of the unit price, in which case the unit price will be the net asset value per unit. PruFund Cautious Fund On a quarter date, if the net asset value per unit is more than 5% above/below the unit price, the unit price is repeatedly adjusted by half the difference between the unit price and the net asset value per unit until the net asset value per unit is within 5% above/below unit price. Between quarter dates, the net asset value per unit is averaged over the previous 5 working days to give the average net asset value per unit. If the net asset value per unit and the average net asset value per unit are both 1% (or more) above/below the unit price, the unit price will be increased/decreased immediately so that it is 2.5% below/above the net asset value per unit. A smoothing account maintained within the WPSF is credited or debited with any difference between the unit price and the net asset value per unit when units are created or cancelled as a result of premiums being received or claims being paid. If aggregate net flows of business into or out of an investment fund exceed limits specified within the policy provisions, the company may suspend the smoothing of the unit price, in which case the unit price will be the net asset value per unit. Any such suspension of smoothing can be applied separately to life and pensions business. PruFund Protected Cautious Fund On a quarter date, if the net asset value per unit is more than 5% above/below the unit price, the unit price is repeatedly adjusted by half the difference between the unit price and the net asset value per unit until the net asset value per unit is within 5% above/below unit price. Between quarter dates, the net asset value per unit is averaged over the previous 5 working days to give the average net asset value per unit. If the net asset value per unit and the average net asset value per unit are both 1% (or more) above/below the unit price, the unit price will be increased/decreased immediately so that it is 2.5% below/above the net asset value per unit. A smoothing account maintained within the WPSF is credited or debited with any difference between the unit price and the net asset value per unit when units are created or cancelled as a result of premiums being received or claims being paid. If aggregate net flows of business into or out of an investment fund exceed limits specified within the policy provisions, the company may suspend the smoothing of the unit price, in which case the unit price will be the net asset value per unit. Any such suspension of smoothing can be applied separately to life and pensions business. AKG Financial Analytics Ltd Page December 215

35 With-Profits Sub-Fund PruFund -3 Fund On a quarter date, if the net asset value per unit is more than 5% above/below the unit price, the unit price is repeatedly adjusted by half the difference between the unit price and the net asset value per unit until the net asset value per unit is within 5% above/below unit price. Between quarter dates, the net asset value per unit is averaged over the previous 5 working days to give the average net asset value per unit. If the net asset value per unit and the average net asset value per unit are both 1% (or more) above/below the unit price, the unit price will be increased/decreased immediately so that it is 2.5% below/above the net asset value per unit. A smoothing account maintained within the WPSF is credited or debited with any difference between the unit price and the net asset value per unit when units are created or cancelled as a result of premiums being received or claims being paid. If aggregate net flows of business into or out of an investment fund exceed limits specified within the policy provisions, the company may suspend the smoothing of the unit price, in which case the unit price will be the net asset value per unit. Any such suspension of smoothing can be applied separately to life and pensions business. PruFund 1-4 Fund On a quarter date, if the net asset value per unit is more than 5% above/below the unit price, the unit price is repeatedly adjusted by half the difference between the unit price and the net asset value per unit until the net asset value per unit is within 5% above/below unit price. Between quarter dates, the net asset value per unit is averaged over the previous 5 working days to give the average net asset value per unit. If the net asset value per unit and the average net asset value per unit are both 1% (or more) above/below the unit price, the unit price will be increased/decreased immediately so that it is 2.5% below/above the net asset value per unit. A smoothing account maintained within the WPSF is credited or debited with any difference between the unit price and the net asset value per unit when units are created or cancelled as a result of premiums being received or claims being paid. If aggregate net flows of business into or out of an investment fund exceed limits specified within the policy provisions, the company may suspend the smoothing of the unit price, in which case the unit price will be the net asset value per unit. Any such suspension of smoothing can be applied separately to life and pensions business. PruFund 2-55 Fund On a quarter date, if the net asset value per unit is more than 5% above/below the unit price, the unit price is repeatedly adjusted by half the difference between the unit price and the net asset value per unit until the net asset value per unit is within 5% above/below unit price. Between quarter dates, the net asset value per unit is averaged over the previous 5 working days to give the average net asset value per unit. If the net asset value per unit and the average net asset value per unit are both 1% (or more) above/below the unit price, the unit price will be increased/decreased immediately so that it is 2.5% below/above the net asset value per unit. A smoothing account maintained within the WPSF is credited or debited with any difference between the unit price and the net asset value per unit when units are created or cancelled as a result of premiums being received or claims being paid. If aggregate net flows of business into or out of an investment fund exceed limits specified within the policy provisions, the company may suspend the smoothing of the unit price, in which case the unit price will be the net asset value per unit. Any such suspension of smoothing can be applied separately to life and pensions business. AKG Financial Analytics Ltd Page December 215

36 With-Profits Sub-Fund PruFund 4-8 Fund On a quarter date, if the net asset value per unit is more than 5% above/below the unit price, the unit price is repeatedly adjusted by half the difference between the unit price and the net asset value per unit until the net asset value per unit is within 5% above/below unit price. Between quarter dates, the net asset value per unit is averaged over the previous 5 working days to give the average net asset value per unit. If the net asset value per unit and the average net asset value per unit are both 1% (or more) above/below the unit price, the unit price will be increased/decreased immediately so that it is 2.5% below/above the net asset value per unit. A smoothing account maintained within the WPSF is credited or debited with any difference between the unit price and the net asset value per unit when units are created or cancelled as a result of premiums being received or claims being paid. If aggregate net flows of business into or out of an investment fund exceed limits specified within the policy provisions, the company may suspend the smoothing of the unit price, in which case the unit price will be the net asset value per unit. Any such suspension of smoothing can be applied separately to life and pensions business. MVRs With-Profits Fund (Sterling OB business) MVRs may be imposed on UWP policies where the value of the underlying assets is less than the value of the policy including bonuses. All the company's UWP policies contain specific MVR-free conditions, for example, on death, terminal illness or at pre-selected retirement date. Some regular automatic withdrawals have been set up with a guarantee that no MVR will apply but from 11 November 213 new policies no longer benefit from MVR free regular withdrawals, including those in respect of adviser charges. MVRs were applied throughout 21, 211, 212, 213 and 214 for certain combinations of product/year of entry. Optimum Bonus Fund MVRs may be imposed on UWP policies where the value of the underlying assets is less than the value of the policy including bonuses. All the company's UWP policies contain specific MVR-free conditions, for example, on death, terminal illness or at pre-selected retirement date. Some regular automatic withdrawals have been set up with a guarantee that no MVR will apply but from 11 November 213 new policies no longer benefit from MVR free regular withdrawals, including those in respect of adviser charges. MVRs were applied throughout 21, 211, 212, 213 and 214 for certain combinations of product/year of entry. AKG Financial Analytics Ltd Page December 215

37 With-Profits Sub-Fund Optimum Return Fund MVRs may be imposed on UWP policies where the value of the underlying assets is less than the value of the policy including bonuses. All the company's UWP policies contain specific MVR-free conditions, for example, on death, terminal illness or at pre-selected retirement date. Some regular automatic withdrawals have been set up with a guarantee that no MVR will apply but from 11 November 213 new policies no longer benefit from MVR free regular withdrawals, including those in respect of adviser charges. MVRs were applied throughout 21, 211, 212, 213 and 214 for certain combinations of product/year of entry. PruFund Growth Fund The mechanism for determining policy payouts when markets are volatile, or depressed, is pre-defined, as explained in the Smoothing section. The only discretion the company has is whether to suspend smoothing or not. The fund's performance is not a deciding factor in whether the smoothing process is applied, or not. Large values of investments coming into or out of the fund could mean that investments would not be smoothed by the pre-defined process. PruFund Protected Growth Fund The mechanism for determining policy payouts when markets are volatile, or depressed, is pre-defined, as explained in the Smoothing section. The only discretion the company has is whether to suspend smoothing or not. The fund's performance is not a deciding factor in whether the smoothing process is applied, or not. Large values of investments coming into or out of the fund could mean that investments would not be smoothed by the pre-defined process. PruFund Growth & Income Fund The mechanism for determining policy payouts when markets are volatile, or depressed, is pre-defined, as explained in the Smoothing section. The only discretion the company has is whether to suspend smoothing or not. The fund's performance is not a deciding factor in whether the smoothing process is applied, or not. Large values of investments coming into or out of the fund could mean that investments would not be smoothed by the pre-defined process. PruFund Protected Growth & Income Fund The mechanism for determining policy payouts when markets are volatile, or depressed, is pre-defined, as explained in the Smoothing section. The only discretion the company has is whether to suspend smoothing or not. The fund's performance is not a deciding factor in whether the smoothing process is applied, or not. Large values of investments coming into or out of the fund could mean that investments would not be smoothed by the pre-defined process. PruFund Cautious Fund The mechanism for determining policy payouts when markets are volatile, or depressed, is pre-defined, as explained in the Smoothing section. The only discretion the company has is whether to suspend smoothing or not. The fund's performance is not a deciding factor in whether the smoothing process is applied, or not. Large values of investments coming into or out of the fund could mean that investments would not be smoothed by the pre-defined process. PruFund Protected Cautious Fund The mechanism for determining policy payouts when markets are volatile, or depressed, is pre-defined, as explained in the Smoothing section. The only discretion the company has is whether to suspend smoothing or not. The fund's performance is not a deciding factor in whether the smoothing process is applied, or not. Large values of investments coming into or out of the fund could mean that investments would not be smoothed by the pre-defined process. AKG Financial Analytics Ltd Page December 215

38 With-Profits Sub-Fund PruFund -3 Fund The mechanism for determining policy payouts when markets are volatile, or depressed, is pre-defined, as explained in the Smoothing section. The only discretion the company has is whether to suspend smoothing or not. The fund's performance is not a deciding factor in whether the smoothing process is applied, or not. Large values of investments coming into or out of the fund could mean that investments would not be smoothed by the pre-defined process. PruFund 1-4 Fund The mechanism for determining policy payouts when markets are volatile, or depressed, is pre-defined, as explained in the Smoothing section. The only discretion the company has is whether to suspend smoothing or not. The fund's performance is not a deciding factor in whether the smoothing process is applied, or not. Large values of investments coming into or out of the fund could mean that investments would not be smoothed by the pre-defined process. PruFund 2-55 Fund The mechanism for determining policy payouts when markets are volatile, or depressed, is pre-defined, as explained in the Smoothing section. The only discretion the company has is whether to suspend smoothing or not. The fund's performance is not a deciding factor in whether the smoothing process is applied, or not. Large values of investments coming into or out of the fund could mean that investments would not be smoothed by the pre-defined process. PruFund 4-8 Fund The mechanism for determining policy payouts when markets are volatile, or depressed, is pre-defined, as explained in the Smoothing section. The only discretion the company has is whether to suspend smoothing or not. The fund's performance is not a deciding factor in whether the smoothing process is applied, or not. Large values of investments coming into or out of the fund could mean that investments would not be smoothed by the pre-defined process. AKG Financial Analytics Ltd Page December 215

39 With-Profits Sub-Fund Guarantees At December 214 there was a relatively small provision of 43m [213: 37m, 212: 47m, 211: 9m] for GAOs in the fund, a provision of 335m [213: 279m, 212: 361m, 211: 371m] for GMPs under Section 32 contracts, and a provision of 29m [213: 36m, 212: 51m, 211: 6m] for the surrender value guarantees on the various PruFund funds. In addition there was a Pensions Review provision of 4m [213: 399m, 212: 425m, 211: 478m] in respect of guarantees given to policyholders. The company has made a commitment that pension mis-selling costs will not be charged to asset shares, nor will they affect the investment or bonus policy. There is an exposure to guaranteed minimum bonus rates on some group cash accumulation business: 4.75% p.a. for premiums paid in scheme years ending before 15 March 1997; 2.5% p.a. on premiums paid in scheme years ending between 15 March 1997 and 3 December 23; and.1% p.a. on premiums paid in scheme years commencing on or after 31 December 23. With-Profits Fund (Sterling OB business) The long-term expected cost of smoothing and guarantees for each type of product is deducted in calculating asset shares and credited to the WPSF inherited estate, which bears the costs of smoothing and guarantees as they emerge. The company keeps the level of these charges under review and may alter them if necessary to protect the fund. On policies other than with profits annuities and the Income Choice Annuity and those invested in the PruFund range of funds, the total deduction over the lifetime of each policy is currently not more than 2% of any payment made from the fund, with the deduction building up to this level over the first few years of the policy. For with profits annuities, a deduction is made from the investment return credited to asset shares each year. This deduction is derived so that in aggregate its value is expected to cover the costs of guarantees and smoothing over the lifetime of the portfolio of this business. The current deduction is.4% pa for business sold since April 29 and.16% p.a. for business sold prior to that date. For the Income Choice Annuity a deduction is made from the investment return credited to asset shares and an adjustment (positive or negative) may also be made to the level of starting income. The deduction/adjustments are set so that their aggregate value is expected to cover the cost of guarantees over the lifetime of the policy. Each policy has a Secure Level of income which can never decrease. For policies issued before 7 November 211, the Secure Level increases each year by 5% of any positive difference between the new non-guaranteed income and the actual income payable previously. For policies issued subsequently the Secure Level does not change. The charge on new business was increased from.25% to.75% p.a. in April 21. Since April 21, the guarantee charge applying for new business has been actively reviewed each quarter in response to changing market conditions. The charge was also reduced for new business from 6 April 213 when the guaranteed level of income was reduced from 1% to % p.a.. At the end of 214 the charge was.72% p.a.. Optimum Bonus Fund The long-term expected cost of smoothing and guarantees for each type of product is deducted in calculating asset shares and credited to the WPSF inherited estate, which bears the costs of smoothing and guarantees as they emerge. The total deduction over the lifetime of each policy is not currently more than 2% of any payment made from the fund, with the deduction building up to this level over the first few years of the policy. The company keeps the level of these charges under review and may alter them if necessary to protect the fund. AKG Financial Analytics Ltd Page December 215

40 With-Profits Sub-Fund Optimum Return Fund The long-term expected cost of smoothing and guarantees for each type of product is deducted in calculating asset shares and credited to the WPSF inherited estate, which bears the costs of smoothing and guarantees as they emerge. The total deduction over the lifetime of each policy is not currently more than 2% of any payment made from the fund, with the deduction building up to this level over the first few years of the policy. The company keeps the level of these charges under review and may alter them if necessary to protect the fund. PruFund Growth Fund The company added an option free of charge in respect of all investments made before August 25, guaranteeing to restore the value of the fund to the amount of the original investment at the fifth anniversary, if necessary. PruFund Protected Growth Fund Policies in this fund contain a Rolling Guarantee Option. Initially only 5 year guarantees were available. The fund was closed to new life business in August 29 and to new pension business in December 29, but it was re-opened to new business in June 211, with a range of guarantee terms from 6 to 1 years available although towards the end of 212 the range was reduced to just 1 years before increasing to 8 to 1 years during 214. At the end of each guarantee period, the company guarantees to restore the value of the fund to the amount of the original investment (reduced for any withdrawals), if necessary. Policyholders have the option to opt-out of this guarantee at the end of each guarantee period. The charge for the 5 year version of this option was initially.6% pa but it is regularly recalculated using stochastic modelling in accordance with prevailing conditions. The charge on new business was increased from.75% to.9% in August 21. In June 211, the charges for the 6-1 year guarantee options were set at.3% p.a. of the fund value (1 year term) in steps up to 1.5% p.a. for the 6 year term, but the charges for new policies were increased to a range of.45% p.a. to 2.5% p.a. in November 211. From October 212 the 1 year charge was increased to.5% p.a. and this remained the charge at the end of 214 [8 year: 1%, 9 year:.85%]. PruFund Growth & Income Fund The company added an option free of charge in respect of all investments made before August 25, guaranteeing to restore the value of the fund to the amount of the original investment at the fifth anniversary, if necessary. PruFund Protected Growth & Income Fund Policies in this fund contain a Rolling Guarantee Option. On the fifth anniversary (and every subsequent fifth anniversary), the company guarantees to restore the value of the fund to the amount of the original investment (reduced for any withdrawals), if necessary. The charge for this option was initially.6% pa but it is regularly recalculated using stochastic modelling in accordance with prevailing conditions. The charge on new business was increased from.75% to.9% in August 21. Policyholders have the option to opt-out of this guarantee at the end of each five year period. PruFund Cautious Fund There are no investment guarantees in this fund. AKG Financial Analytics Ltd Page December 215

41 With-Profits Sub-Fund PruFund Protected Cautious Fund On the selected guarantee date, the company guarantees to restore the value of the fund to the amount of the original investment reduced for any withdrawals), if necessary. Initially only 5 year guarantees were available, but from June 211, a range of terms from 5 to 1 years was introduced. The charge for the 5 year option was initially fixed at.75% p.a. of the fund value (but reduced to.5% p.a. as a special launch offer to policyholders who took out plans before the end of 29), but the charge for new policies was increased to.9% p.a. in August 21, to 1.5% p.a. in January 211, and to 1.75% p.a. in November 211 before this option was withdrawn in February 212. In June 211, the charges for the 6-1 year guarantee options were set at.15% p.a. of the fund value (1 year term) in steps up to.7% p.a. for the 6 year term, but the charges for new policies were increased to a range of.3% p.a. to 1.5% p.a. in November 211 and further to a range of.3% to 1.5% from June 212. In October 212 the 6 and 7 year versions were withdrawn and the range of charges increased to.45% p.a. (1 years) to.95% p.a. (8 years). These charges are regularly reviewed and from 22 November 213 and throughout 214 ranged from.35% p.a. (1 years) to.6% p.a. (8 years). The 6 and 7 year versions were reintroduced from August 214 with charges of 1% and.75% p.a. respectively. PruFund -3 Fund There are no investment guarantees in this fund. PruFund 1-4 Fund There are no investment guarantees in this fund. PruFund 2-55 Fund There are no investment guarantees in this fund. PruFund 4-8 Fund There are no investment guarantees in this fund. AKG Financial Analytics Ltd Page December 215

42 With-Profits Sub-Fund Inherited Estate The company has two inherited estates, one in the WPSF and one in SAIF. The inherited estate in the WPSF is effectively the working capital for PAC. It has built up over many years and neither policyholders nor shareholders can have any expectation that they will receive any distribution of it. In March 27 the company announced that it was considering a possible reattribution of the WPSF inherited estate. However, after extensive assessment, the company decided in June 28 that it would not proceed with a reattribution as it believed that the current operating model was in the best long-term interests of both policyholders and shareholders. There is no specific target for the size of the WPSF inherited estate. It currently supports the WPSF with profits business by providing benefits associated with smoothing and guarantees, permitting investment flexibility and meeting regulatory requirements. It also supports business in SAIF and the DCPSF (including the ex-equitable Life with profits annuity portfolio), for which it receives a charge. The inherited estate may also be used for other purposes as determined by the Directors. Currently, this includes the additional tax payable by the long term fund as a result of shareholders' distribution from the WPSF (and this use is expected to continue), expenses written off between 1997 and the end of 211 and any cost of shareholder transfers in respect of business issued by Scottish Amicable Life plc in excess of the difference between charges deducted and expenses incurred. However, since 212, new business in the WPSF has been priced such that it is expected to be financially self supporting over the lifetime of the business at the point the pricing assumptions are set. Where the business is not expected to be financially self supporting at the point the pricing assumptions are set, shareholders will make an appropriate contribution to the WPSF. The inherited estate also met the cost of the pensions mis-selling review. In 1998, the company gave WPSF policyholders an assurance that this would not impact bonus or investment policy and if it did, appropriate shareholder resources would be made available. Following completion of the review, the assurance does not apply to post-23 new business. Since the investment policy for WPSF policies is the same whether or not the assurance applies, its withdrawal has had no effect on policyholder returns. The WPSF inherited estate now has a different investment strategy to the remainder of the WPSF. Early in 28, the company tactically de-risked part of the inherited estate, by selling a portion of the equity investments into high grade bonds and cash. As a result, the inherited estate was mainly invested in fixed interest securities and cash at the end of 21 and this continued to be the case at the end of each of the years 211 to 214. In 212, the FSA provided guidance to the company to clarify two questions raised by Prudential in relation to FSA policy statement PS12/4. The guidance clarifies that Prudential is not generally required, when writing new business and managing its with profits fund, to take account of any current policyholders interest in the prospect of a distribution (or greater distribution) from Prudential s inherited estate. Also, while Prudential s with profits fund remains open and the inherited estate remains fully utilised in supporting current and expected future new business, policyholders do not have any expectation of a distribution of the inherited estate, other than through the normal process of the smoothing of their returns and in Prudential meeting guarantees in adverse investment conditions. Prudential believes that no group of in-force policyholders has made any contribution to the inherited estate. As noted above the inherited estate is utilised in supporting expected future new business, including that written in Hong Kong. With the transfer of in-force Hong Kong branch business and future such business to PHKL it was also considered appropriate to transfer a portion of the WPSF inherited estate to PHKL and this took place as part of the transfer effective from 1 January 214. The share of the WPSF inherited estate transferred to the PHKL with profits fund took into account PHKL's anticipated requirement for capital to fund the writing of new business in that fund after the transfer. AKG Financial Analytics Ltd Page December 215

43 With-Profits Sub-Fund Investment The group s Portfolio Management Group is the in-house investment strategist and manager of managers, responsible for monitoring and reviewing performance and for dayto-day allocation of monies from the fund to the group s various fund management specialists: M&G Investment Managers for the UK and Europe, Prudential Property Investment Managers for property, Prudential Portfolio Management for the US, and Prudential Corporation of Asia and Prudential Asset Management for the Far East. The company's investment strategy is to seek to secure the highest net return whilst maintaining an acceptable overall risk level, maintaining an appropriate and broad asset mix, and protecting policyholders interests. It seeks to include all with profits policies in a common asset pool wherever appropriate. The fund currently contains one asset that would not normally be traded, the subsidiary company Prudential Annuities Ltd although this is now effectively a shell and expected to be wound up in due course. Within the fund separate asset pools are held as appropriate to the different nature of the liabilities (e.g. With profits, non-profit, unit-linked) and, usually, for liabilities in each different currency. For most WPSF policies, assets are held within the main WPSF asset pool; however separate asset pools are operated for: with profits products which have a more cautious investment policy (e.g. The Optimum Bonus Fund, the PruFund Growth & Income Fund and the PruFund Cautious Funds), shorter term deposit based products (e.g. The Personal Pension Deposit Fund) the Scottish Amicable Capital Fund, which has an asset mix as close as possible to that of the Scottish Amicable Insurance Fund (SAIF) A separate asset pool is also operated for certain with profits retirement annuity contracts expected to reach their vesting date in the near to medium term where the guaranteed benefits significantly exceed asset shares and the likelihood of any final bonus becoming payable is therefore remote. Note however that asset shares continue to be credited with the return earned on the main WPSF asset share pool. The Board reviews benchmark asset mixes (and permitted variations for tactical asset allocation decisions - typically 5% of the asset pool) for each asset pool at least once a year. Limits are set in accordance with the fund s risk appetite, which is determined on the assumption that the with profits funds are managed on a standalone basis and do not rely on shareholder resources (apart from the company s 1998 commitment regarding the impact of the pensions mis-selling review). Reductions in the EBR to % may be necessary in extreme investment conditions, or to protect the fund. In 26 equity allocation was reduced and allocation to bonds and alternative assets was increased. June 27 saw the fund further de-risked with a review of property exposure and a hedge against its corporate bond book. Following the stockmarket recovery in 29 and the uncertainty regarding the future direction of global investment markets, the company reduced the EBR. In May 211, the company stated that it expected the reduced EBR to continue for the foreseeable future and it repeated this view in March 212 and 213. However, as a result of changes in market conditions and de-risking activity that was carried out during 213, the solvency of the WPSF had improved significantly at the end of 213. As a result the board agreed to increase the EBR by 1% during 214 and this was achieved over the six months to September 214. Additional protection was also purchased against extreme falls in equity values. AKG Financial Analytics Ltd Page December 215

44 With-Profits Fund (Sterling OB business) Prudential With-Profits Sub-Fund In 29 the EBR fell from 65.5% to 49.1% as a result of the decision to reduce the fund's equity content. At the end of December 213 the EBR was 49.4% but this had increased to 62.2% at the end of September 215. Asset type UK Equities 16.8% Overseas Equities 17.% Property 12.1% Fixed Interest 44.% Cash 4.2% Other 5.9% Note on Actual at 31/12/212 Note on Actual at 31/12/213 Note on Actual at 31/12/214 Note on Actual at 3/9/215 Optimum Bonus Fund Actual Actual Actual Actual 31 Dec Dec Dec Sep % 19.2% 13.9% 41.8% 2.7% 3.7% 18.7% 26.1% 16.% 33.7% 1.6% 3.9% Other assets are mostly infrastructure. Other assets are infrastructure. 17.8% 27.7% 16.7% 29.8% 2.1% 5.9% Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. The fund is promoted to offer a higher regular bonus rate, so a more cautious investment strategy is adopted than that for the main part of the WPSF, with a lower EBR. The EBR had remained fairly stable for several years, being 45.6% at the end of December 29, but it had reduced to 34.3% by December 211 and remained around this level until the end of 213 before increasing to 45% at the end of 214. Asset type UK Equities 12.3% Overseas Equities 12.5% Property 8.7% Fixed Interest 57.4% Cash 4.8% Other 4.3% Note on Actual at 31/12/212 Note on Actual at 31/12/213 Note on Actual at 31/12/214 Note on Actual at 3/9/215 Actual Actual Actual Actual 31 Dec Dec Dec Sep % 13.1% 9.5% 58.4% 3.8% 2.5% 13.9% 19.2% 11.9% 49.8% 2.4% 2.8% Other assets are mostly infrastructure. Other assets are infrastructure. 12.5% 19.5% 11.7% 48.8% 3.4% 4.1% Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. AKG Financial Analytics Ltd Page December 215

45 Optimum Return Fund Prudential With-Profits Sub-Fund In 29 the EBR fell from 65.5% to 49.1% as a result of the decision to reduce the fund's equity content. At the end of December 213, the EBR was 49.4% but this had increased to 62.2% at the end of September 215. Asset type UK Equities 16.8% Overseas Equities 17.% Property 12.1% Fixed Interest 44.% Cash 4.2% Other 5.9% Note on Actual at 31/12/212 Note on Actual at 31/12/213 Note on Actual at 31/12/214 Note on Actual at 3/9/215 PruFund Growth Fund Actual Actual Actual Actual 31 Dec Dec Dec Sep % 19.2% 13.9% 41.8% 2.7% 3.7% 18.7% 26.1% 16.% 33.7% 1.6% 3.9% Other assets are mostly infrastructure. Other assets are infrastructure. 17.8% 27.7% 16.7% 29.8% 2.1% 5.9% Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. In 29 the EBR fell from 65.5% to 49.1% as a result of the decision to reduce the fund's equity content. At the end of December 213, the EBR was 49.4% but this had increased to 62.2% at September 215. Asset type UK Equities 16.8% Overseas Equities 17.% Property 12.1% Fixed Interest 44.% Cash 4.2% Other 5.9% Note on Actual at 31/12/212 Note on Actual at 31/12/213 Note on Actual at 31/12/214 Note on Actual at 3/9/215 Actual Actual Actual Actual 31 Dec Dec Dec Sep % 19.2% 13.9% 41.8% 2.7% 3.7% 18.7% 26.1% 16.% 33.7% 1.6% 3.9% Other assets are mostly infrastructure. Other assets are infrastructure. 17.8% 27.7% 16.7% 29.8% 2.1% 5.9% Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. AKG Financial Analytics Ltd Page December 215

46 PruFund Protected Growth Fund Prudential With-Profits Sub-Fund The investment mix currently closely follows that of the main part of the WPSF fund and follows that of the Growth Fund. After little change in the EBR during 28, in 29 the EBR fell from 65.5% to 49.1% as a result of the decision to reduce the fund's equity content. At the end of December 213, the EBR was 49.4% but this had increased to 62.2% at the end of September 215. Asset type UK Equities 16.8% Overseas Equities 17.% Property 12.1% Fixed Interest 44.% Cash 4.2% Other 5.9% Note on Actual at 31/12/212 Note on Actual at 31/12/213 Note on Actual at 31/12/214 Note on Actual at 3/9/215 PruFund Growth & Income Fund Actual Actual Actual Actual 31 Dec Dec Dec Sep % 19.2% 13.9% 41.8% 2.7% 3.7% 18.7% 26.1% 16.% 33.7% 1.6% 3.9% Other assets are mostly infrastructure. Other assets are infrastructure. 17.8% 27.7% 16.7% 29.8% 2.1% 5.9% Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. A more cautious investment strategy is adopted than that for the main part of the WPSF and since the end of 212 the fund has followed that of the Optimum Bonus Fund. The EBR was 33.7% at the end of 211 and remained around this level until the end of 213 before increasing and standing at 43.7% at the end of September 215. Asset type UK Equities 12.3% Overseas Equities 12.5% Property 8.7% Fixed Interest 57.4% Cash 4.8% Other 4.3% Note on Actual at 31/12/212 Note on Actual at 31/12/213 Note on Actual at 31/12/214 Note on Actual at 3/9/215 Actual Actual Actual Actual 31 Dec Dec Dec Sep % 13.1% 9.5% 58.4% 3.8% 2.5% 13.9% 19.2% 11.9% 49.8% 2.4% 2.8% Other assets are mostly infrastructure. Other assets are infrastructure. 12.5% 19.5% 11.7% 48.8% 3.4% 4.1% Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. AKG Financial Analytics Ltd Page December 215

47 PruFund Protected Growth & Income Fund Prudential With-Profits Sub-Fund A more cautious investment strategy is adopted than that for the main part of the WPSF and since the end of 212 the fund has followed that of the Optimum Bonus Fund. The EBR was 33.7% at the end of 211 and remained around this level until the end of 213 before increasing and standing at 43.7% at the end of September 215. Asset type UK Equities 12.3% Overseas Equities 12.5% Property 8.7% Fixed Interest 57.4% Cash 4.8% Other 4.3% Note on Actual at 31/12/212 Note on Actual at 31/12/213 Note on Actual at 31/12/214 Note on Actual at 3/9/215 PruFund Cautious Fund Actual Actual Actual Actual 31 Dec Dec Dec Sep % 13.1% 9.5% 58.4% 3.8% 2.5% 13.9% 19.2% 11.9% 49.8% 2.4% 2.8% Other assets are mostly infrastructure. Other assets are infrastructure. 12.5% 19.5% 11.7% 48.8% 3.4% 4.1% Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. The fund has been marketed with a much more cautious approach than for the main part of the WPSF, with a current target of a 3% EBR. At the end of September 215, the EBR was 32.2%. Asset type UK Equities 9.9% Overseas Equities 9.1% Property 5.6% Fixed Interest 65.7% Cash 7.3% Other 2.4% Note on Actual at 31/12/212 Note on Actual at 31/12/213 Note on Actual at 31/12/214 Note on Actual at 3/9/215 Actual Actual Actual Actual 31 Dec Dec Dec Sep % 9.2% 6.5% 62.5% 6.4% 4.2% 9.3% 11.% 6.7% 63.7% 7.6% 1.7% Other assets are mostly infrastructure. 9.2% 15.2% 7.8% 62.9% 3.1% 1.8% Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. AKG Financial Analytics Ltd Page December 215

48 PruFund Protected Cautious Fund Prudential With-Profits Sub-Fund The fund has been marketed with a much more cautious approach than for the main part of the WPSF, with a current target of a 3% EBR. At the end of September 215, the EBR was 32.2%. Asset type UK Equities 9.9% Overseas Equities 9.1% Property 5.6% Fixed Interest 65.7% Cash 7.3% Other 2.4% Note on Actual at 31/12/212 Note on Actual at 31/12/213 Note on Actual at 31/12/214 Note on Actual at 3/9/215 PruFund -3 Fund Actual Actual Actual Actual 31 Dec Dec Dec Sep % 9.2% 6.5% 62.5% 6.4% 4.2% 9.3% 11.% 6.7% 63.7% 7.6% 1.7% Other assets are mostly infrastructure. 9.2% 15.2% 7.8% 62.9% 3.1% 1.8% Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. The fund is actively managed, typically with a high exposure to lower risk assets such as fixed interest securities and holdings of cash and money market instruments with no more than 3% of the fund being invested in equities. Asset type UK Equities 6.% Overseas Equities 16.% Property 9.% Fixed Interest 61.% Cash 8.% Other.% PruFund 1-4 Fund Actual Actual Actual Actual 31 Dec Dec Dec Sep % 13.% 9.% 55.% 15.%.% 8.% 13.% 9.% 55.% 15.%.% 8.% 13.% 9.% 55.% 15.%.% The fund is actively managed, typically with a bias towards lower risk assets such as fixed interest securities and holdings of cash and money market instruments but will always have some exposure to equities, with between 1% and 4% of the fund being invested in equities. Asset type UK Equities 1.% Overseas Equities 25.% Property 9.% Fixed Interest 51.% Cash 5.% Other.% Actual Actual Actual Actual 31 Dec Dec Dec Sep % 24.% 8.% 5.% 1.%.% 9.% 27.% 1.% 46.% 8.%.% 9.% 27.% 1.% 46.% 8.%.% AKG Financial Analytics Ltd Page December 215

49 PruFund 2-55 Fund Prudential With-Profits Sub-Fund The fund is actively managed with a well diversified exposure to UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments. From time to time, however, the fund may have a high exposure to equities and/or fixed income assets. Between 2% and 55% of the fund will be invested in equities. Asset type UK Equities 13.% Overseas Equities 35.% Property 12.% Fixed Interest 38.% Cash 2.% Other.% PruFund 4-8 Fund Actual Actual Actual Actual 31 Dec Dec Dec Sep % 33.% 9.% 4.% 8.%.% 12.% 35.9% 1.% 35.1% 7.%.% 12.% 35.9% 1.% 35.1% 7.%.% The fund is actively managed with a well diversified exposure to UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments. Typically the fund will have a bias towards assets providing potential for growth such as equities, with between 4% and 8% of the fund being invested in equities. Asset type UK Equities 18.% Overseas Equities 46.% Property 12.% Fixed Interest 22.% Cash 2.% Other.% Actual Actual Actual Actual 31 Dec Dec Dec Sep % 44.% 1.% 25.% 6.%.% 15.1% 46.9% 1.% 25.% 3.%.% 15.% 47.% 1.% 25.% 3.%.% AKG Financial Analytics Ltd Page December 215

50 With-Profits Sub-Fund Past Performance With-Profits Fund (Sterling OB business) Payout levels for both maturities and surrenders have been very respectable. There have been some signs of deterioration relative to some of the smaller players in the market, but the fund continues to compare well against the major UK with profts funds. In March 21, payouts for both maturities and surrenders typically fell well within the top quartile, although a minority of the surrender values fell in the second or third quartiles. In March 211 and March 212, payouts for maturities all fell well within the top two quartiles, apart from one (in March 211) which was placed in the third quartile. Payouts for surrenders ranked slightly lower, though, spanning the top three quartiles. In March 213 the majority of payouts again fell in the top two quartiles although several were close to third quartile but in March 214 all payouts were second or third quartile apart from two five year values falling at the bottom of the comparison tables. In March 215, despite increases in absolute value for two thirds of the specimens, payouts spanned all four quartiles. Payouts on Maturity Values: With-Profits Fund (Sterling OB business) Original Insurer: Product Term (yrs) Freq Premium 1/3/14 1/3/15 Endowment 1 Monthly 5 6,652 6,737 Endowment 15 Monthly 5 11,913 12,439 Endowment 2 Monthly 5 19,156 19,55 Endowment 25 Monthly 5 32,844 33,379 Personal Pension/s226 5 Monthly 2 13,916 13,87 Personal Pension/s226 1 Monthly 2 31,652 31,751 Personal Pension/s Monthly 2 55,292 56,126 Personal Pension/s226 2 Monthly 2 84,28 83,995 Personal Pension/s226 5 Single 1, 13,232 13,248 Personal Pension/s226 1 Single 1, 17,495 16,956 Personal Pension/s Single 1, 21,13 22,99 Personal Pension/s226 2 Single 1, 38,56 36,552 Source: Returns to PRA - Form 59A. Original Insurer: Scottish Amicable Life plc Product Term (yrs) Freq Premium 1/3/14 1/3/15 Endowment 15 Monthly 5 11,578 12,346 Personal Pension/s Monthly 2 53,645 55,285 Personal Pension/s Single 1, 2,269 21,236 Source: Returns to PRA - Form 59A. Payouts on Surrender/Transfer Values: With-Profits Fund (Sterling OB business) Original Insurer: Product Term (yrs) Freq Premium 1/3/14 1/3/15 Endowment 15 Monthly 5 11,882 12,491 Endowment 2 Monthly 5 18,95 18,423 Personal Pension/s226 2 Single 1, 11,25 11,144 Personal Pension/s226 3 Single 1, 11,888 11,859 Personal Pension/s226 5 Single 1, 13,232 13,248 Personal Pension/s226 1 Single 1, 17,495 16,956 Source: Returns to PRA - Form 59B. Original Insurer: Scottish Amicable Life plc Product Term (yrs) Freq Premium 1/3/14 1/3/15 Endowment 15 Monthly 5 1,762 11,36 Source: Returns to PRA - Form 59B. AKG Financial Analytics Ltd Page December 215

51 Optimum Return Fund Prudential With-Profits Sub-Fund The specimen 29 and 21 shorter term payouts on the company's with profits bonds all fell in the second or third quartiles while shorter term payouts in 211 were both third quartile. Longer term specimen payouts at March 212 were both top quartile and indeed were best or second best payouts in the market but specimen payouts at March 213 were in or close to second quartile and specimen payouts at March 214 and March 215 cover the bottom three quartiles. These results should be indicative of the returns on each of the With-Profits Fund, Optimum Return Fund, PruFund Growth Fund and PruFund Protected Growth Fund, which all share the same asset mix. Payouts on Surrender/Transfer Values: Optimum Return Fund Original Insurer: Product Term (yrs) Freq Premium 1/3/14 1/3/15 With Profits Bond 2 Single 1, 1,31 1,972 With Profits Bond 3 Single 1, 11,24 11,247 With Profits Bond 5 Single 1, 13,28 12,753 With Profits Bond 1 Single 1, 17,254 15,984 Source: Returns to PRA - Form 59B. Investment Returns Amongst the major with profits funds in the UK, the WPSF has been one of the top performing funds over the last 15 years. Year With-Profits Fund (Sterling OB business) % 2.1% % % % Optimum Bonus Fund 11.8 % 3.7% 12.6% 8.6% 9.5% Optimum Return Fund 12.7 % 2.1% 1.5% 1.3% 8.3% PruFund Growth Fund 12.7 % 2.1% 1.5% 1.3% 8.3% PruFund Protected Growth Fund PruFund Growth & Income Fund PruFund Protected Growth & Income Fund 12.7 % 2.1% 11.8 % 3.7% 11.8 % 3.7% 1.5% 12.6% 12.6% 1.3% 8.6% 8.6% 8.3% 9.5% 9.5% PruFund Cautious Fund 11. % 5.5% 9.9% 5.1% 8.1% PruFund Protected Cautious Fund 11. % 5.5% 9.9% 5.1% 8.1% PruFund -3 Fund 13.% 7.% 8.3% PruFund 1-4 Fund 13.5% 8.8% 8.9% PruFund 2-55 Fund 13.7% 1.7% 8.5% PruFund 4-8 Fund 13.6% 13.4% 8.2% Source: The company. AKG Financial Analytics Ltd Page December 215

52 With-Profits Sub-Fund Transparency In a number of ways the Prudential has set the standard for others to follow in terms of improving transparency. For example, it was the first company to establish a fully independent with profits committee, and it allows it to have a significant involvement in the management of the company s with profits business. It also tends to define intended maximum charges for smoothing and guarantees at the start of a policy. The general quality of the company s literature is high, although the PPFM is slightly difficult to follow because of the wide range of different types of business in force, which entails a large number of departures in practice from the norm. A wide range of different publications on with profits issues are available, but occasionally some are difficult to track down online. The annual report to policyholders on compliance with the PPFM covers a lot of ground and a summary of PPFM changes is now published on the company's website. The new-style PruFund funds are inherently more transparent than the company s older with profits funds, but their mechanics are fairly complex to understand. Policyholders receive a six-monthly statement along the lines of a bank statement. With-Profits Fund (Sterling OB business) 5 Optimum Bonus Fund 5 Optimum Return Fund 5 PruFund Growth Fund 5 PruFund Protected Growth Fund 5 PruFund Growth & Income Fund 5 PruFund Protected Growth & Income Fund 5 PruFund Cautious Fund 5 PruFund Protected Cautious Fund 5 PruFund -3 Fund 5 PruFund 1-4 Fund 5 PruFund 2-55 Fund 5 PruFund 4-8 Fund 5 Future Performance With-Profits Fund (Sterling OB business) 5 The company remains highly committed to with profits and the philosophy that equities offer the best prospect of longer term returns. It is far and away the biggest writer of new with profits business in the UK market. The equity backing ratio had fallen from its level of a few years ago, but it has now recovered to over 62% at the end of September 215 and the fund's investment returns have consistently outperformed other major funds. Recent maturity payouts have shown absolute increases for the majority of terms but have slipped relative to some others in the market, but payouts compare well against the major funds. On the downside, there are charges for smoothing and guarantees, but the strength and scale of the company also contribute to keeping future performance prospects looking rosy. AKG Financial Analytics Ltd Page December 215

53 With-Profits Sub-Fund Optimum Bonus Fund 3 Growth prospects are lower than those in the more traditional equity based Optimum Return Fund. However, given the aim is for income, AKG regards the fund as well placed to deliver this. Optimum Return Fund 5 The company remains highly committed to with profits and the philosophy that equities offer the best prospect of longer term returns. It is far and away the biggest writer of new with profits business in the UK market. The equity backing ratio had fallen from its level of a few years ago, but it has now recovered to over 62% at the end of September 215 and the fund's investment returns have consistently outperformed other major funds. Recent maturity payouts on the company's other products sharing the same asset mix have shown absolute increases for the majority of terms but have slipped relative to some others in the market, but payouts compare well against the major funds. On the downside, there are charges for smoothing and guarantees, but the strength and scale of the company also contribute to keeping future performance prospects looking rosy. PruFund Growth Fund 5 The company remains highly committed to with profits and the philosophy that equities offer the best prospect of longer term returns. It is far and away the biggest writer of new with profits business in the UK market. The equity backing ratio had fallen from its level of a few years ago, but it has now recovered to over 62% at the end of September 215 and the fund's investment returns have consistently outperformed other major funds. Recent maturity payouts on the company's other products sharing the same asset mix have shown absolute increases for the majority of terms but have slipped relative to some others in the market, but payouts compare well against the major funds. Charges are predefined, and those for smoothing and guarantees are contained within the annual management charge. The strength and scale of the company also contribute to keeping future performance prospects looking rosy. PruFund Protected Growth Fund 4 The company remains highly committed to with profits and the philosophy that equities offer the best prospect of longer term returns. The equity backing ratio had fallen from its level of a few years ago, but there must be a reasonable expectation that it may revert to a higher level in the future and there was a significant increase in 214. Recent maturity payouts on the company's other products sharing the same asset mix have shown absolute increases for the majority of terms but have slipped relative to others in the market. However the strength and scale of the company also contribute to keep future performance prospects good. The additional charge for guarantees on the PruFund Protected funds reduces the Future Performance Rating, relative to the PruFund Growth Fund. Charges are pre-defined, and those for smoothing and guarantees (apart from the protected investment guarantee) are contained within the annual management charge. PruFund Growth & Income Fund 3 Growth prospects are lower than those in the more traditional equity based Growth Fund. However, given the aim is also for income, AKG regards the fund as well placed to deliver this. Charges are pre-defined, and those for smoothing and guarantees are contained within the annual management charge. PruFund Protected Growth & Income Fund 2 Growth prospects are lower than those in the more traditional equity based Growth Fund, because of the aim for income. Also, the additional charge for guarantees on the PruFund Protected funds reduces the Future Performance Rating, relative to the PruFund Growth & Income Fund. Charges are pre-defined, and those for smoothing and guarantees (apart from the protected investment guarantee) are contained within the annual management charge. AKG Financial Analytics Ltd Page December 215

54 With-Profits Sub-Fund PruFund Cautious Fund 3 Long-term growth prospects are lower than those in the company's more traditional equity based with profits funds, because of the intentionally cautious target EBR. Charges are pre-defined, and those for smoothing and guarantees are contained within the annual management charge. PruFund Protected Cautious Fund 2 Long-term growth prospects are lower than those in the company's more traditional equity based with profits funds, because of the intentionally cautious target EBR. Also, the additional charge for guarantees on the PruFund Protected funds reduces the Future Performance Rating, relative to the PruFund Cautious Fund. Charges are pre-defined, and those for smoothing and guarantees (apart from the protected investment guarantee) are contained within the annual management charge. PruFund -3 Fund 2 The fund's objectives are clearly focused, with a maximum 3% of equities to be held within the fund. This is designed to be a cautious approach, which inherently limits the potential for future performance on a long-term basis. Charges are pre-defined, and those for smoothing and guarantees are contained within the annual management charge. PruFund 1-4 Fund 3 The fund's objectives are clearly focused, with a range of 1% to 4% of equities to be held within the fund. This is designed to be a fairly cautious approach, which inherently limits the potential for future performance on a long-term basis. Charges are pre-defined, and those for smoothing and guarantees are contained within the annual management charge. PruFund 2-55 Fund 4 The fund's objectives are clearly focused, with a range of 2% to 55% of equities to be held within the fund. This is designed to be a slightly cautious approach, with the upper limit inherently constraining the potential to achieve market-leading future performance on a long-term basis. Charges are pre-defined, and those for smoothing and guarantees are contained within the annual management charge. PruFund 4-8 Fund 5 The fund's objectives are clearly focused, with a range of 4% to 8% of equities to be held within the fund. This provides scope for the fund to take an adventurous approach when appropriate, offering the potential for achieving good levels of future performance on a long-term basis. Charges are pre-defined, and those for smoothing and guarantees are contained within the annual management charge. AKG Financial Analytics Ltd Page December 215

55 With-Profits Sub-Fund Financial Strength of the Fund 5 The company has the largest with profits portfolio in the UK, and it continues to write new UK with profits business in volumes that dwarf all others in the market. The company has renewed its focus on the with profits market and it remains committed to with profits and the long term returns of an equity based strategy. The inherent strength of its with profits fund remains apparent and the recent increase in EBR for the main asset mixes shows the company is comfortably within its risk appetite. RCM coverage was expected to have increased following the transfer of Hong Kong branch business to PHKL in January 214 but coverage fell slightly over 214. The fund is strengthened by the presence of a legally enforceable capital support arrangement between Prudential plc and PAC under which Prudential plc has an obligation to provide PAC with capital support up to an agreed maximum aggregate level in the event of PAC's solvency falling below specified levels. This support is available until 228. The fund's Realistic Balance Sheet at the end of 214 showed the RCM covered 7.6 times [213: 9. times, 212: 4.7 times; 211: 3. times], with 6.2bn [213: 7.1bn, 212: 5.5bn, 211: 4.bn] of realistic excess available capital in the fund. The fall over 211 mainly resulted from an increase in the risk capital margin and changes to economic assumptions, both reversed in 213, while the rise in 212 mainly resulted from investment experience and a fall in the risk capital margin. The WPSF estate is now mainly invested in fixed interest securities and cash. AKG Financial Analytics Ltd Page December 215

56 Scottish Amicable Insurance Fund Fund Name Scottish Amicable Insurance Fund Fund Basics Assets Earmarked? Yes Open? Year Opened Year Closed No Asset Breakdown as at 31 Dec 214 ( 's) With Profits Non Profit Linked Total Scottish Amicable Insurance Fund 6,466,176 49,37 6,956, % 7. %.% 1.% Source: PRA Returns Form 48 (Line 19: NP; Line 29: WP); Form 13 (Lines 58+59: Linked). With Profits Realistic Balance Sheet Regulatory value of assets Implicit items allocated to the fund Adjustments Realistic value of assets Support arrangement assets Assets available to the fund With profits benefit reserve Other liabilities Realistic value of liabilities Realistic assets less liabilities Risk capital margin Realistic excess capital Working capital Risk capital margin (RCM) Realistic excess available capital Working capital ratio RCM as % of assets Realistic excess available capital ratio RCM coverage RCM coverage (exc support) 212 ( 's) 7,89, ,485 7,945,31 7,945,31 6,7,661 1,244,37 7,945, ( 's) 214 ( 's) 6,465, ,967 6,695,48 6,695,48 5,394,39 1,31,369 6,695,48 48,635-48,635 48,635-48,635.%.7% -.7% RCM as % of liabilities.%.%.7% Source: Returns to PRA - Form 19.%.%.% 7,44, ,367 7,183,228 7,183,228 5,932,254 1,25,974 7,183,228.%.%.%.x.x AKG Financial Analytics Ltd Page December 215

57 Scottish Amicable Insurance Fund Fund Type/Classification Conventional and Unitised With Profits business, plus Non Profit business Mixed Investment Fund (2%-6% Shares) Fund Background The business of Scottish Amicable Life Assurance Society (SALAS) was transferred to the company on 3 September As a consequence, it created the closed SAIF fund (on a 1: basis) and the Scottish Amicable Account (SAA), a memorandum account within the WPSF. The fund will be merged with the WPSF when it falls to 1bn, increased in line with RPI from SAA contains various non profit liabilities from SALAS including unitised with profits business (excluding investment content), non profit life and unit linked. SAIF contains the pensions, annuities and traditional with profits life business transferred from SALAS and the investment content of with profits business in SAA. The business is predominantly with profits in nature. The WPSF provides financial support to SAIF through the Scottish Amicable Capital Fund (SACF), a memorandum account, some of which may be drawn upon in adverse conditions to support the smoothing of bonuses within SAIF. No such drawings have yet been necessary. The WPSF receives an annual charge from SAIF for providing this financial support, equivalent to 1% p.a. of the mean value of SACF (equivalent to.15% of asset shares in each of 28 to 214), deducted from asset shares. The fund is closed to new business, except by increment. Fund Objectives The company s investment strategy is to seek the highest combination of income and growth in capital value commensurate with maintaining an acceptable level of risk, an appropriate mix of assets and protecting the relative interests of all groups of policyholders. In particular, the Principles of Financial Management set out in 1997 state that the investment policy "shall provide for maintaining the maximum equity backing ratio possible subject to such constraints as may be necessary to reduce the risk of statutory insolvency to a similar level as for the other Long Term PAC Funds...on...assumptions which are no more cautious than those applied to the [other funds]." This effectively treats SAIF, for investment purposes, as an open fund all the time that PAC has an open with profits fund. PPFMs Applicable to the Fund Business Covered With-Profits business issued by the Prudential Group to UK policyholders Latest Edition February 215 AKG Financial Analytics Ltd Page December 215

58 Governance Arrangements Prudential Scottish Amicable Insurance Fund The over-riding objective of the With Profits Committee is to act in an advisory capacity to inform the decision-making of PAC and each of the relevant subsidiaries, to ensure that the interests of with profits policyholders are appropriately considered within PAC s governance structures and to consider issues affecting with profits policyholders as a whole or as separately identifiable groups of policyholders. The Committee comprises at least three members, all of whom are independent of Prudential. With Profits Committee meetings are usually attended by PAC s Chief Executive and Chief Risk Officer, the Actuarial Function Holder and the With Profits Actuary, though the Chairman may choose to hold meetings, or parts of meetings, restricted to committee members only. The SAIF fund is, in addition to the company's WPC, overseen by a separate Advisory Board, the Scottish Amicable Board, and a Monitoring Actuary as required under the Principles of Financial Management as laid down in the transfer scheme. The Monitoring Actuary is John McKenzie, a Principal in the Life Practice at Milliman. With Profits Actuary: Peter Needleman With Profits Committee Name: With Profits Committee Members of With Profits Committee: Towers Watson Ltd Name Michael Arnold Paul Thornton Chris Daykin Ronnie Bowie Julius Pursaill Position Former Head of the Life Practice of Milliman consulting actuaries in London Past President, Institute of Actuaries Former Government Actuary; Past President, Institute of Actuaries Senior Partner, Hymans Robertson; Past President, Institute and Faculty of Actuaries Governor of the Pensions Policy Institute Rights to Share in Profits The scheme that transferred SALAS to PAC required that the fund should be managed in a prudent manner, bonuses and investment policy should be set on a basis fair to SAIF, SAA and PAC policyholders and that the SAIF inherited estate should be distributed over time to with profits policyholders in SAIF and SAA. 1% of profits arising in SAIF, including those from linked business, accrue to the with profits policyholders in SAIF and SAA. Profits are determined after making a payment to the WPSF for the capital support provided by SACF (at the rate of 1% p.a. of the mean value of SACF). Asset share accumulations include an allocation of.25% in respect of miscellaneous surplus from non profit and unit linked business, with any difference in actual experience being reflected in the claims enhancement factor that is used to distribute the SAIF inherited estate. An annual deduction of up to.25% (levied at this rate in 212, 213 and 214) is levied to meet guaranteed annuity rate costs with any balance met by the SAIF inherited estate. With profits policyholders in SAIF and SAA have no rights to any profits from the other funds within the company. AKG Financial Analytics Ltd Page December 215

59 Scottish Amicable Insurance Fund Profit-Sharing Philosophy The principles underlying bonus declarations in the SAIF fund are defined by the Principles of Financial Management set out in the Scottish Amicable Scheme of Transfer. The main aims of the bonus policy are to give returns which take account of the earnings of the underlying investments, whilst smoothing peaks and troughs of investment performance and to ensure that all with profits policyholders receive a fair share of distributed profits by way of bonus additions to their policies. Asset shares are calculated for typical policies. The investment return credited to asset share is the rate of return actually earned on the assets in the fund. Claim values are targeted on enhanced asset shares. The enhancement is a uniform percentage increase for business that has been in force for ten years or more and proportionately reduced at shorter durations. It is reassessed at least every 3 years, and the aim is to distribute the SAIF inherited estate (but not the assets of the SACF) over the remaining lifetime of the with profits policies in SAIF and SAA. The policy of targeting claim values is constrained by smoothing and by the level of guaranteed benefits. Annual bonuses are designed to provide steady growth and are targeted on a proportion of the expected future investment return. Final bonus sales for SAIF and SAA may be varied at any time. The company s objective is that bonus declarations should provide an attractive amount of guaranteed annual bonus for customers, but should leave enough of the final claim value as non-guaranteed terminal bonus to permit continuation of an equity oriented investment policy while minimising the risk of insolvency. Under the policy set in 1997, annual bonus rates were required to move in line with those on PAC accumulating with profits policies for 5 years. Thereafter, annual bonus rates follow PAC rates unless combined solvency (excluding the effect of PAC personal pension mis-selling) falls below 2%, in which case SAIF annual bonus rates fall linearly to 1% of PAC rates at 1% solvency. AKG Financial Analytics Ltd Page December 215

60 Scottish Amicable Insurance Fund Distribution of Surplus Distribution of Surplus - 's 6, To Policyholders Other Transfers 4, 2, To Policyholders Other Transfers Total ( 's) ( 's) ( 's) 541, , ,34 475,34 361, ,786 Source: Returns to PRA - Form 58, Line 46 (Policyholders) and Line 47 (Other transfers) Increase/Decrease in Distributions To Policyholders Other Transfers Total ( 's) ( 's) ( 's) -7,56-7,56-65,795-65, , ,554 Source: Returns to PRA - Form 58, Line 46 (Policyholders) and Line 47 (Other transfers) AKG Financial Analytics Ltd Page December 215

61 Scottish Amicable Insurance Fund Risk As a 1: fund, the SAIF is exposed to all the risks arising within the fund, although the Principles of Financial Management are designed to provide some protection for the fund against expense risks. Fees for expenses were fixed in the Scheme until 27. Thereafter, charges have reverted to cost, with the only guarantee being that costs for SAIF policies are no greater than those for corresponding PAC policies. Fees for investment expenses are set periodically and were due to be renegotiated after the end of 214. There are various guarantees attaching to existing policies. Prior to 23, the cost of GAOs were charged to asset shares as they arose. From 23, an annual deduction of up to.25% is levied on asset shares, with any additional cost met from the SAIF inherited estate and reflected in the claims enhancement factor. The fund had a relatively large GAO provision at December 214 of 776m [213: 65m, 212: 668m, 211: 553m]. At the end of 214, the fund held reserves of 6m, 24m, 6m and 32m [213: 13m, 17m, 5m and 31m, 212: 22m, 4m, 4m and 36m] respectively for endowment misselling, systems/administration errors, staff pension scheme funding and general contingencies. Whilst mortgage endowment mis-selling fines will be paid for by shareholders, mis-selling costs in respect of former Scottish Amicable business will be charged to the fund. There is a provision within the fund of 2m [213: 2m] in respect of mortgage endowment guarantees. During 26, the SAIF board decided to remove the risks associated with long-term annuity business as it was regarded as inappropriate for a closed life fund. As a result, all SAIF annuities in payment were reinsured with Prudential Retirement Income Ltd, as will be all future annuities written from SAIF group defined benefit business. In May 214 the company revealed a significant error in this respect, whereby SAIF had been undercharged for some of these annuities. Appropriate provisions ( 5m at end 213) were made in respect of the potential liability arising from this undercharging and an inter-fund transfer from SAIF to NPSF (set at a level which ensured that no policyholders would be adversely affected) took place during 214 to resolve the issue. At the end of 214 the fund held equity index and fixed income futures. Forward currency contracts and swaps were held to hedge currency risk arising from overseas investments and fixed income derivatives and inflation swaps to better match liabilities. Index and single name credit default swaps were held to decrease or increase credit exposure. AKG Financial Analytics Ltd Page December 215

62 Scottish Amicable Insurance Fund Smoothing Claims (as % of adjusted With Profits Benefit Reserves) 212 % All business 98. Source: Returns to PRA - Appendix 9.4A, Section 4 (6). 213 % % 95. The normal smoothing rule is that payouts on similar policies change up to ±7% about the long-term trend for regular premium policies and up to ±15% for single premium policies. There is an overriding provision that claim values must move at least one third of the way to asset shares when moving downwards, or at least one quarter of the way when moving upwards. Larger reductions were made during the February 23 declaration, when the maximum levels were increased by 1.5% to reflect the revision in the claims enhancement factor. At the same time, the limits for pension policies were increased to 2% (regular premiums) and 25% (single premiums) to reduce overpayment relative to asset shares on this business. The Principles of Financial Management require that smoothing profits and losses be regulated by an annual percentage charge levied on, or allocation credited to, a bonus smoothing account. Charges are subject to a maximum of.4% of asset shares. The charge/allocation rate is reassessed at least every three years, with the intention of having a zero balance on the account at the end of the fund s existence. The charge was set to zero on 1 January 26, having been.15% p.a. previously. The company targets that at least 9% of payouts will fall between 8% and 12% of asset share for both maturities and surrenders. MVRs MVRs may be imposed on UWP policies where the value of the underlying assets is less than the value of the policy including bonuses. All the company's UWP policies contain specific MVR-free conditions, for example, on death, terminal illness or at pre-selected retirement date. Some regular automatic withdrawals have been set up with a guarantee that no MVR will apply. MVRs were applied throughout 21, 211, 212, 213 and 214 for certain combinations of product/year of entry. AKG Financial Analytics Ltd Page December 215

63 Scottish Amicable Insurance Fund Guarantees Virtually all of unitised with profits pensions business has a minimum guarantee attached. There are a number of investment performance guarantees for contracts in SAIF and SAA: The rate of interest credited to a group accumulation policy will not fall below 5% p.a. in the first 5 years Certain group pension contracts include minimum rates of guarantee ranging from 2.5% to 4.75% The value of accumulation units in the Net Cash Fund, Exempt Cash Fund and Exempt Building Society Fund will not fall For maturities or deaths of pre 15/1/96 pension policies, the value of Exempt With Profits (Series 1) initial units is guaranteed not to fall, and the increase in value of Exempt With Profits (Series 1-4) accumulation units is guaranteed to average not less than 4% p.a. There are also a large number of GAOs, with a provision of 776m at 31 December 214 [213: 65m, 212: 668m, 211: 553m]. An annual charge for the cost of GAOs of.25% of asset shares is made on policies with these guarantees. This is the maximum amount which the Scottish Amicable Board has currently determined should be charged directly to asset shares for this cost. Any excess of the GAO costs over the charge made reduces the potential surplus available to enhance claim values under the Scheme of Transfer. Inherited Estate The company has two separate inherited estates, one in the WPSF and one in SAIF. The SAIF inherited estate consists of the assets over and above the amounts that would normally be paid out over time if the fund had remained open to new business. Under the terms of the SALAS Scheme, the SAIF inherited estate will be distributed to with profits policyholders as an addition to with profits benefits arising in SAIF including those relating to SAA policies. Financial support to SAIF is provided by the Scottish Amicable Capital Fund (SACF), for which a charge of 1% p.a. is levied (in 28 to 214 equivalent to.15% of asset share), and whilst this is treated as part of the free assets of SAIF for the purposes of setting bonus and investment policy, it remains part of the WPSF and does not form part of the SAIF inherited estate. The SAIF inherited estate now has a different investment strategy to the remainder of the SAIF. As a result, the inherited estate was mainly invested in fixed interest securities and cash at the end of 21 and this continued to be the case at the end of 213 and 214. When SAIF is eventually merged with the WPSF (as provided for in the Scheme), the balance of the inherited estate will be attributed to asset shares of the remaining SAIF and SAA with profits policyholders. AKG Financial Analytics Ltd Page December 215

64 Scottish Amicable Insurance Fund Investment The group s Portfolio Management Group is the in-house investment strategist and manager of managers, responsible for monitoring and reviewing performance and for dayto-day allocation of monies from the fund to the group s various fund management specialists: M&G Investment Managers for the UK and Europe, Prudential Property Investment Managers for property, Prudential Portfolio Management for the US, and Prudential Corporation of Asia and Prudential Asset Management for the Far East. The company's investment strategy is to seek to secure the highest net return whilst maintaining an acceptable overall risk level, maintaining an appropriate and broad asset mix, and protecting policyholders interests. It seeks to include all with profits policies in a common asset pool wherever appropriate. Within the SAIF, most assets are held within the main SAIF asset pool. The benchmark asset mix for this main pool differs from that of the WPSF s main pool to reflect the relative strength of the two sub-funds. A separate asset pool is operated for non profit liabilities, which are backed by approximately matched fixed interest securities. The Board (& the Scottish Amicable Board) reviews benchmark asset mixes (and permitted variations for tactical asset allocation decisions - typically 5% of the asset pool) for each asset pool at least once a year. Limits are set in accordance with the fund s risk appetite, which is determined on the assumption that the fund is managed on a standalone basis, apart from the fact that it can rely on the solvency support provided by the Scottish Amicable Capital Fund (SACF) to pursue an investment policy appropriate to an open fund (i.e. a higher EBR). Reductions in the EBR to % may however be necessary in extreme investment conditions, or to protect the fund. There are no assets in SAIF that would not normally be traded. At the end of 214 forward currency contracts and swaps were held to hedge currency risk arising from overseas investments and fixed income derivatives and inflation swaps to better match liabilities. Index and single name credit default swaps were held to decrease or increase credit exposure. Equity index and fixed income futures were also held to reflect tactical asset allocation views around the long-term benchmark. Following the stockmarket recovery in 29 and the uncertainty regarding the future direction of global investment markets, the company concluded that it was prudent to reduce the EBR (falling from 58.5% to 42% over the year). In May 211, the company stated that it expected the reduced EBR to continue for the foreseeable future and it repeated this view in March 212 and 213 but did not repeat this view in May 214. However as a result of changes in market conditions and de-risking activity that was carried out during 213, the solvency of the SAIF had improved significantly at the end of 213. As a result the board agreed to increase the EBR by 1% during 214 and this was achieved over the six months to September 214. The EBR increased further in the first quarter of 215 and was 56.7% at the end of March. AKG Financial Analytics Ltd Page December 215

65 Scottish Amicable Insurance Fund Asset type UK Equities 15.2% Overseas Equities 15.% Property 1.3% Fixed Interest 46.9% Cash 7.8% Other 4.8% Note on Actual at 31/12/212 Note on Actual at 31/12/213 Note on Actual at 31/12/214 Note on Actual at 31/3/215 Actual Actual Actual Actual 31 Dec Dec Dec Mar % 18.6% 1.1% 47.1% 5.4% 2.2% 18.9% 25.7% 9.2% 37.2% 6.5% 2.5% Other assets are alternative investments Other assets are infrastructure. 2.% 27.6% 9.1% 36.4% 4.3% 2.6% Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. Past Performance Payout levels for both maturities and surrenders have been very impressive, with March 211's signs of a slight deterioration relative to others in the market having been reversed, with all March 212 and all but one March 213 SAIF specimen payouts top quartile, and higher than the equivalent WPSF policy. At March 214 and 215, however, specimen maturity values are predominantly second quartile, with one top quartile in 214, and in 215 endowment specimens are no longer all higher than the equivalent WPSF policy although this remains the case for pension specimen policies. The March 21 SAIF specimen payout results for both maturities and surrenders were entirely top quartile, and most were slightly higher than for the equivalent WPSF policy. The March 211 SAIF specimen payout results for both maturities and surrenders were predominantly top quartile, with the remaining three just falling into the second quartile. Most were noticeably higher than for the equivalent WPSF policy. Payouts on Maturity Values Original Insurer: Scottish Amicable Life Assurance Society Ltd Product Term (yrs) Freq Premium 1/3/14 1/3/15 Endowment 2 Monthly 5 19,684 19,419 Endowment 25 Monthly 5 33,319 31,699 Personal Pension/s226 2 Monthly 2 85,661 84,686 Personal Pension/s226 2 Single 1, 4,794 41,284 Source: Returns to PRA - Form 59A. Payouts on Surrender/Transfer Values Original Insurer: Scottish Amicable Life Assurance Society Ltd Product Term (yrs) Freq Premium 1/3/14 1/3/15 Endowment 2 Monthly 5 17,992 18,71 Source: Returns to PRA - Form 59B. Investment Returns Year Scottish Amicable Insurance Fund % 2.3% % % % Source: The company. AKG Financial Analytics Ltd Page December 215

66 Scottish Amicable Insurance Fund Transparency 5 In a number of ways the Prudential has set the standard for others to follow in terms of improving transparency. For example, it was the first company to establish a fully independent with profits committee, and it allows it to have a significant involvement in the management of the company s with profits business. It also tends to define intended maximum charges for smoothing and guarantees at the start of a policy. The general quality of the company s literature is high, although the PPFM is slightly difficult to follow because of the wide range of different types of business in force, which entails a large number of departures in practice from the norm. A wide range of different publications on with profits issues are available, but occasionally some are difficult to track down online. The annual report to policyholders on compliance with the PPFM covers a lot of ground and a summary of PPFM changes is now published on the company's website. In addition, for the SAIF, the Principles of Financial Management set out in the transfer scheme are fairly detailed, and govern all distributions, which are overseen by a separate Advisory Board, the Scottish Amicable Board, and a Monitoring Actuary, as established under the Scheme. Future Performance 5 Despite being in a closed fund situation, policyholders interests are protected by the Terms of the Principles of Financial Management applying to this fund. Of particular relevance are the 1: structure, the enhancements to asset shares, and the support provided to the fund by the WPSF. Distributions are overseen by a separate Advisory Board, and a Monitoring Actuary. The company clearly remains committed to with profits, as one of the major players, and the philosophy that equities offer the best prospect of longer term returns. The equity backing ratio has reverted to a very high level for a closed fund, although it reduced noticeably in 29 as a result of the company's views on the uncertainty of the markets. It has risen steadily in recent years and recovered most of that reduction. This approach allied to Prudential s strength and scale and the fund's excellent record on past performance achievements means that future performance prospects should be towards the upper end of the spectrum for closed funds although investment volatility means payouts are only second quartile in some years. AKG Financial Analytics Ltd Page December 215

67 Scottish Amicable Insurance Fund Financial Strength of the Fund 5 Whilst the group is focusing more and more on non-uk markets, the Prudential remains committed to the UK intermediary channel. It remains one of the strongest providers. The SAIF is a well structured closed fund within one of the UK s strongest and largest providers, which remains very committed to with profits business. The philosophy that equities offer the best prospect of longer term returns seems to clearly extend to this fund as well as to the other funds in the company. The fund is also strengthened by the presence of a legally enforceable capital support arrangement between Prudential plc and PAC under which Prudential plc has an obligation to provide PAC with capital support up to an agreed maximum aggregate level in the event of PAC's solvency falling below specified levels. This support is available until 228. In accordance with normal practice for a closed fund, the fund's published realistic balance sheet showed zero working capital and zero RCM at the end of each of 29 to 213. The notes to the RBS showed working capital of 76m at the end of 213 [212: 19m, 211: 251m, 21: 45m] within the fund, before zeroisation, equivalent to a working capital ratio of 1.1% [212: 3.4%, 211: 3.9%, 21: 5.5%]. The reduction over 213 was increased by the need for a reserve in respect of prior year guaranteed annuity premiums. Without this working capital would have been 126m and the working capital ratio 1.8%. At the end of 214 however there was a slightly different presentation with a non-zero RCM of 49m even though working capital had been zeroised. Before zeroisation working capital was 28m leading to a working capital ratio.4% and a negative realistic excess available capital ratio of.3%. AKG Financial Analytics Ltd Page December 215

68 Defined Charge Participating Sub-Fund Fund Name Defined Charge Participating Sub-Fund Fund Basics Assets Earmarked? No Open? Year Opened Year Closed Yes Significant Classes of With Profits Business within the Fund Open? Opened Closed Assets (31/12/14) ( 's) French Branch UWP business No ex-equitable With-Profits Annuity Plans No UWP Reinsurance from Canada Life (Europe) PIA's PAC Sterling With-Profits Fund Yes 22 PIA's PAC Euro With-Profits Fund Yes ,4 PIA's PAC US Dollar With-Profits Fund Yes ,4 PIA PruFund Growth (Sterling) Fund Yes 28 PIA PruFund Growth (Euro) Fund Yes 28 PIA PruFund Growth (US Dollar) Fund Yes 28 PIA PruFund Protected Growth (Sterling) Fund No No PIA PruFund Protected Growth (Euro) Fund No PIA PruFund Protected Growth (US Dollar) Fund No PIA PruFund Cautious (Sterling) Fund Yes 29 PIA PruFund Cautious (Euro) Fund Yes 29 PIA PruFund Cautious (US Dollar) Fund Yes 29 PIA PruFund Protected Cautious (Sterling) Fund Yes 29 PIA PruFund Protected Cautious (Euro) Fund Yes 29 PIA PruFund Protected Cautious (US Dollar) Fund Yes 29 Asset Breakdown as at 31 Dec 214 ( 's) Defined Charge Participating Sub- Fund With Profits Non Profit Linked Total 3,867,927 3,867, %. %.% 1.% Source: PRA Returns Form 48 (Line 19: NP; Line 29: WP); Form 13 (Lines 58+59: Linked). AKG Financial Analytics Ltd Page December 215

69 With Profits Realistic Balance Sheet Regulatory value of assets Implicit items allocated to the fund Adjustments Realistic value of assets Support arrangement assets Assets available to the fund With profits benefit reserve Other liabilities Realistic value of liabilities Realistic assets less liabilities Risk capital margin Realistic excess capital Working capital Risk capital margin (RCM) Realistic excess available capital Working capital ratio RCM as % of assets Realistic excess available capital ratio RCM coverage RCM coverage (exc support) 212 ( 's) 3,116,918 3,116,918 3,116,918 3,135,76-18,788 3,116,918 Prudential Defined Charge Participating Sub-Fund 213 ( 's) 214 ( 's) 3,867,927 3,867,927 3,867,927 3,848,195 19,732 3,867,927.%.%.% RCM as % of liabilities.%.%.% Source: Returns to PRA - Form 19.%.%.% 3,446,536 3,446,536 3,446,536 3,466,944-2,48 3,446,536.%.%.% AKG Financial Analytics Ltd Page December 215

70 Defined Charge Participating Sub-Fund Fund Type/Classification French Branch UWP business Unitised With Profits business only Mixed Investment Fund (4%-85% Shares) ex-equitable With-Profits Annuity Plans UWP Reinsurance from Canada Life (Europe) PIA's PAC Sterling With- Profits Fund PIA's PAC Euro With-Profits Fund PIA's PAC US Dollar With- Profits Fund PIA PruFund Growth (Sterling) Fund PIA PruFund Growth (Euro) Fund PIA PruFund Growth (US Dollar) Fund PIA PruFund Protected Growth (Sterling) Fund PIA PruFund Protected Growth (Euro) Fund PIA PruFund Protected Growth (US Dollar) Fund PIA PruFund Cautious (Sterling) Fund PIA PruFund Cautious (Euro) Fund PIA PruFund Cautious (US Dollar) Fund PIA PruFund Protected Cautious (Sterling) Fund PIA PruFund Protected Cautious (Euro) Fund PIA PruFund Protected Cautious (US Dollar) Fund Conventional With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Unitised With Profits business only Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (4%-85% Shares) Mixed Investment Fund (2%-6% Shares) Mixed Investment Fund (2%-6% Shares) Mixed Investment Fund (2%-6% Shares) Mixed Investment Fund (2%-6% Shares) Mixed Investment Fund (2%-6% Shares) Mixed Investment Fund (2%-6% Shares) AKG Financial Analytics Ltd Page December 215

71 Defined Charge Participating Sub-Fund Fund Background The DCPSF was set up as a 1: fund to contain the accumulated investment content of premiums paid on Defined Charge Participating business, which is either reinsured from Prudential International Assurance plc (PIA), based in Dublin, or from other companies (e.g. Canada Life (Europe) Assurance Ltd), or written through the company's French branch between January 21 and December 23. Defined Charge Participating business is defined as with-profits business on which policyholders only incur the charges stated explicitly in the policy (which include an annual management charge on the assets held in the DCPSF). These charges accrue to the NPSF which bears all of the corresponding expenses. In 26 to 21 a.2% p.a. reduction in the investment return credited to the with profits benefit reserve also applied in respect of capital support provided by the WPSF. The range of UWP sub-funds available for investment to policyholders within Prudential International Assurance plc has grown substantially in recent years. Initially there were separate Sterling, US Dollar and Euro denominated asset pools, which were superceded with the PAC Sterling/US Dollar/Euro With-Profits Funds in July 25. The Optimum Bonus/Return Funds have also been available, and separate Sterling, US Dollar and Euro denominated variants of the WPSF's PruFund range of funds were introduced in 28. The latter range was extended in 29 when Cautious variants were launched by PIA. Since December 27, the fund has also included the closed block of CWP annuity business transferred at that time from Equitable Life Assurance Society (ELAS). This block is subject to a 1% p.a. expense charge (deducted from the gross investment return credited to asset shares and which is transferred to the NPSF, which meets all expenses), and a charge in respect of guarantees expressed as a reduction in investment return credited to asset shares of up to.5% p.a. (which accrues to the inherited estate within the WPSF, which bears the cost of the guarantees). In 28 to 21 a.14% p.a. reduction in the investment return credited to the with profits benefit reserve for this block of business also applied in respect of capital support provided by the WPSF. The fund is classified as open because of the ongoing reinsurance new business received from PIA, but it does not write any new business directly. The company has no current intention to close the fund to new business. There has been a greater focus on writing with profits business via PIA in recent years. Unless otherwise stated, this report only contains details relevant to the ex-equitable Life business in the DCPSF, since business from overseas branches and business reinsured from offshore are outside the scope of the report. Fund Objectives ex-equitable With-Profits Annuity Plans The aim is to seek to secure the highest total return (allowing for the effect of taxation and investment expenses) whilst maintaining an acceptable overall risk level for the fund and protecting the relative interests of all groups of policyholders. The policy for with profits business is to invest in a highly diversified portfolio of UK and overseas assets. This block of business is guaranteed to have the same asset mix as the main OB business within the WPSF. PPFMs Applicable to the Fund Business Covered With-Profits business issued by the Prudential Group to UK policyholders Latest Edition February 215 AKG Financial Analytics Ltd Page December 215

72 Governance Arrangements Prudential Defined Charge Participating Sub-Fund The over-riding objective of the With Profits Committee is to act in an advisory capacity to inform the decision-making of PAC and each of the relevant subsidiaries, to ensure that the interests of with profits policyholders are appropriately considered within PAC s governance structures and to consider issues affecting with profits policyholders as a whole or as separately identifiable groups of policyholders. The Committee comprises at least three members, all of whom are independent of Prudential. With Profits Committee meetings are usually attended by PAC s Chief Executive and Chief Risk Officer, the Actuarial Function Holder and the With Profits Actuary, though the Chairman may choose to hold meetings, or parts of meetings, restricted to committee members only. The With Profits Committee also reviews the operation of the transferred ELAS business to ensure compliance with the Scheme. With Profits Actuary: Peter Needleman With Profits Committee Name: With Profits Committee Members of With Profits Committee: Towers Watson Ltd Name Michael Arnold Paul Thornton Chris Daykin Ronnie Bowie Julius Pursaill Position Former Head of the Life Practice of Milliman consulting actuaries in London Past President, Institute of Actuaries Former Government Actuary; Past President, Institute of Actuaries Senior Partner, Hymans Robertson; Past President, Institute and Faculty of Actuaries Governor of the Pensions Policy Institute With Profits Products Currently Marketed in the Fund Product Rights to Share in Profits The DCPSF is a 1: fund. The profit in the fund arises solely from investment performance (after the deduction of any fixed charges) and is entirely attributable to DCPSF policyholders. Shareholders have no rights to the investment profits in the fund. AKG Financial Analytics Ltd Page December 215

73 Defined Charge Participating Sub-Fund Profit-Sharing Philosophy The main aims of the bonus policy are to give returns which take account of the earnings of the underlying investments, whilst smoothing peaks and troughs of investment performance and to ensure that all with profits policyholders receive a fair share of distributed profits by way of bonus additions to their policies. ex-equitable With-Profits Annuity Plans The business is governed by the terms of the 27 Scheme of Transfer. The ex-elas with-profits annuities have two elements that are tracked separately, the guaranteed income and the non-guaranteed income ( Total Annuity ). The policyholder receives the higher of the two elements. Any regular bonus declared has a permanent effect on the guaranteed income. The guaranteed income will increase from the previous year if the bonus declared is higher than the anticipated bonus rate selected by the policyholder, or decrease if the bonus declared is lower than the anticipated rate. The level of regular bonus declared is expected to be zero for the foreseeable future. Some policies have a Guaranteed Investment Return (GIR) which has been anticipated within the guaranteed income, and the level of regular bonus declared could differ for different levels of GIR. The amount of Total Annuity is adjusted at annuity anniversaries by the Overall Rate of Return (ORR) and Interim Rate of Return (IRR) applicable at that time. The ORR reflects the earnings on the fund over the previous calendar year. It is applied to the Total Annuity at the annuity anniversaries in the 12 month period following 1 April each year. The IRR reflects the expected earnings on the fund since the end of the last calendar year for which an ORR has started to become effective. A proportion of the IRR, depending on the period between the end of the calendar year for the effective ORR and the annuity anniversary, is applied to the Total Annuity. When the IRR is applied, the proportion of the IRR that was applied to the Total Annuity at the previous annuity anniversary is removed. Although the IRR can be changed at any time through the year to keep it in line with the return expected on the fund in that year, it is the IRR that was effective on the annuity anniversary that is used in the calculation of the Total Annuity. Asset shares are based on an accumulation of the initial asset shares transferred from ELAS, allowing for investment returns net of charges, adjusted by deducting unsmoothed annuity payments, any uplifts/reductions as a result of the longevity risk mechanism and the re-spreading of mortality surplus each year. The investment return credited to asset shares is the same as that earned by the WPSF. The unsmoothed annuity is calculated as the annuity that is expected to exhaust the asset share over the annuity s remaining lifetime. A fixed charge of 1% p.a. is deducted from the investment return credited to asset shares. The charge accrues to the NPSF, which bears all expenses. Hence shareholders receive any profits or losses from expenses. Under the mortality risk mechanism, mortality profits or losses are fed back into asset shares. The amount of any loss charged/profit credited is limited to.5% p.a. Any mortality profits or losses not charged to asset shares (and any differences between actual and expected mortality costs each year) fall into the inherited estate of the WPSF. Hence the inherited estate of the WPSF receives any profits or losses from guarantees. A separate bonus smoothing account for this business is maintained in the inherited estate of the WPSF. It is intended that transfers to and from this account should generate no net profit or loss to either the WPSF or the DCPSF in the long term. AKG Financial Analytics Ltd Page December 215

74 Defined Charge Participating Sub-Fund Distribution of Surplus Distribution of Surplus - 's 6, To Policyholders Other Transfers 4, 2, To Policyholders Other Transfers Total ( 's) ( 's) ( 's) 51,22 51,22 45,563 45,563 48,529 48,529 Source: Returns to PRA - Form 58, Line 46 (Policyholders) and Line 47 (Other transfers) Increase/Decrease in Distributions To Policyholders Other Transfers Total ( 's) ( 's) ( 's) -1,586-1,586-5,459-5,459 2,966 2,966 Source: Returns to PRA - Form 58, Line 46 (Policyholders) and Line 47 (Other transfers) Risk Policies in the fund are only exposed to investment risk, all other risks being met through the contractual expense charges deducted and transferred to the NPSF, and the guarantee charges and smoothing transfers transferred to/from the WPSF in respect of the annuities transferred from Equitable Life. The investment expense charge agreement was due to be renegotiated after the end of 214. For the with-profits annuities transferred from Equitable Life, the Scheme of Transfer requires that these policies are not exposed to profits or losses arising from PAC s other policies, experience or business activities. However, these policies would be exposed in extreme circumstances if PAC were unable to meet its guaranteed liabilities. AKG Financial Analytics Ltd Page December 215

75 Defined Charge Participating Sub-Fund Smoothing Claims (as % of adjusted With Profits Benefit Reserves) 212 % All business 13. Source: Returns to PRA - Appendix 9.4A, Section 4 (6). 213 % % 99. The company targets that at least 9% of payouts will fall between 8% and 12% of asset share for both maturities and surrenders. The intention is that smoothing profits and losses should balance out over time. Two separate bonus smoothing accounts are maintained within the inherited estate of the WPSF - one in respect of the DCPSF business, and one in respect of the annuities transferred from Equitable Life. Whenever a claim payment is made from the DCPSF any excess of the claim amount over the policy's underlying asset share is transferred from the relevant inherited estate within WPSF to the DCPSF and any shortfall is transferred from the DCPSF to the WPSF. Similar transfers reflect the difference between unit price and the net asset value per unit when premiums are paid. It is intended that transfers to and from these accounts should generate no net profit or loss to either the WPSF or the DCPSF in the long term. ex-equitable With-Profits Annuity Plans The cost of guarantee is calculated as being the guaranteed annuity less the unsmoothed annuity, subject to a minimum of zero. The smoothing cost is then calculated as the annuity paid to the policyholder less the guarantee cost and the unsmoothed annuity. In normal circumstances, the smoothing approach seeks to ensure that annuity income does not: Fall by more than the combined effect of the selected anticipated bonus rate and any guaranteed investment return, in any year. Rise by more than the smoothing cap, less the combined effect of the selected anticipated bonus rate and any guaranteed investment return, in any year. The smoothing cap is currently 11% but it may be reviewed at any time. Greater flexibility may be required in certain circumstances, for example following a significant fall in market values. In such situations the bonus smoothing limits could be varied to protect the overall interests of policyholders. The bonus smoothing account is managed with the ongoing aim that it should always tend to zero subject to the need for short-term smoothing. Smoothing is applied to ensure the objective of gradual changes in income. If the company opts to terminate the Scheme, any positive amount remaining in the bonus smoothing account will be distributed amongst the then remaining annuity policies by way of an enhancement to non-guaranteed income. AKG Financial Analytics Ltd Page December 215

76 Defined Charge Participating Sub-Fund MVRs MVRs may be imposed on UWP policies where the value of the underlying assets is less than the value of the policy including bonuses. All the company's UWP policies contain specific MVR-free conditions, for example, on death, terminal illness or at pre-selected retirement date. Some regular automatic withdrawals have been set up with a guarantee that no MVR will apply. MVRs were applied throughout 21, 211, 212, 213 and 214 for certain combinations of product/year of entry. ex-equitable With-Profits Annuity Plans Not applicable. Guarantees As at December 214 there was a small provision of 12m [213: 14m, 212: 13m] for guaranteed surrender values on the International Prudence Bond where the PruFund is used as a fund link. On policies other than with profits annuities and those transferred from ELAS and those invested in the PruFund range of funds, the total deduction over the lifetime of each policy is not currently more than 2% of any payment made from the fund, with the deduction building up to this level over the first few years of the policy. For PruFund business an annual management charge is applied by explicit unit deduction, part of which covers guarantee costs. This charge is set at policy inception and actively reviewed each quarter for new policies. ex-equitable With-Profits Annuity Plans This business contains guaranteed annuity levels, but the risks associated with these guarantees are borne by the inherited estate of the WPSF. Under the mortality risk mechanism, mortality profits or losses are fed back into asset shares. The amount of any loss charged/profit credited is limited to.5% p.a. Any mortality profits or losses not charged to asset shares (and any differences between actual and expected mortality costs each year) fall into the inherited estate of the WPSF. Hence the inherited estate of the WPSF receives any profits or losses from guarantees. This business is subject to a charge in respect of guarantees expressed as a reduction in investment return credited to asset shares of up to.5% p.a. (which accrues to the inherited estate within the WPSF, which bears the cost of the guarantees). The charge levied each year from 21 to 214 was.5% p.a. AKG Financial Analytics Ltd Page December 215

77 Defined Charge Participating Sub-Fund Inherited Estate The DCPSF does not have an inherited estate. Two separate bonus smoothing accounts are maintained in the inherited estate of the WPSF - one in respect of the DCP business, and one in respect of the annuities transferred from Equitable Life. It is intended that transfers to and from these accounts should generate no net profit or loss to either the WPSF or the DCPSF in the long term. For DCPSF policies, apart from the business transferred from Equitable Life, a.2% p.a. reduction in the investment return credited to asset shares was made in 29 and 21 for the capital support provided by the WPSF and credited to the WPSF inherited estate. There was no charge in 211, 212, 213 or 214. For the annuity business transferred from Equitable Life, a.14% p.a. reduction in the investment return credited to asset shares was made in 28, 29 and 21 for the capital support provided by the WPSF to the DCPSF. There was no charge in 211, 212, 213 or 214. Investment The group s Portfolio Management Group is the in-house investment strategist and manager of managers, responsible for monitoring and reviewing performance and for dayto-day allocation of monies from the fund to the group s various fund management specialists: M&G Investment Managers for the UK and Europe, Prudential Property Investment Managers for property, Prudential Portfolio Management for the US, and Prudential Corporation of Asia and Prudential Asset Management for the Far East. The company's investment strategy is to seek to secure the highest net return whilst maintaining an acceptable overall risk level, maintaining an appropriate and broad asset mix, and protecting policyholders interests. It seeks to include all with profits policies in a common asset pool wherever appropriate. For the ex-elas business in the fund, the asset pool is identical to that of the main asset pool of the WPSF. For the other business in the fund, three asset pools are maintained, relating to liabilities in Sterling, Euros, and US Dollars. The Board reviews benchmark asset mixes (and permitted variations for tactical asset allocation decisions - typically 5% of the asset pool) for each asset pool at least once a year. Limits are set in accordance with the fund s risk appetite, which is determined on the assumption that the with profits funds are managed on a standalone basis and do not rely on shareholder resources (apart from the fact that the DCPSF can rely on an appropriate proportion of the PAC inherited estate). Reductions in the EBR to % may be necessary in extreme investment conditions, or to protect the fund. There are no assets in the DCPSF that would not normally be traded. Derivatives are used only for the purposes of efficient portfolio management or reduction in investment risk. ex-equitable With-Profits Annuity Plans AKG Financial Analytics Ltd Page December 215

78 Defined Charge Participating Sub-Fund The investment mix follows that of the main part of the WPSF fund. Following the stockmarket recovery in 29 and the uncertainty regarding the future direction of global investment markets, the company concluded that it was prudent to reduce the EBR. As a result, in 29 the EBR fell from 65.5% to 49.1%. In May 211 and March 212 and 213 the company stated that it expected the reduced EBR to continue for the foreseeable future but did not repeat this view in May 214. However as a result of changes in market conditions and de-risking activity that was carried out during 213, the solvency of the WPSF had improved significantly at the end of 213. As a result the board agreed to increase the EBR by 1% during 214 and this was achieved over the six months to September 214. The EBR increased further in the first quarter of 215 and was 61.9% at the end of March. Asset type UK Equities 16.8% Overseas Equities 17.% Property 12.1% Fixed Interest 44.% Cash 4.2% Other 5.9% Note on Actual at 31/12/212 Note on Actual at 31/12/213 Note on Actual at 31/12/214 Note on Actual at 31/3/215 Actual Actual Actual Actual 31 Dec Dec Dec Mar % 19.2% 13.9% 41.8% 2.7% 3.7% 18.7% 26.1% 16.% 33.7% 1.6% 3.9% Other assets are mostly infrastructure. Other assets are infrastructure. 18.6% 27.% 16.3% 32.5% 1.8% 3.8% Other assets are infrastructure, public private finance. Other assets are infrastructure, public private finance. Past Performance Note: No historical data on Past Performance is available for this fund. Investment Returns Year ex-equitable With-Profits Annuity Plans % 2.1% % % % Source: The company. Transparency In a number of ways the Prudential has set the standard for others to follow in terms of improving transparency. For example, it was the first company to establish a fully independent with profits committee, and it allows it to have a significant involvement in the management of the company s with profits business. It also tends to define intended maximum charges for smoothing and guarantees at the start of a policy. The general quality of the company s literature is high, although the PPFM is slightly difficult to follow because of the wide range of different types of business in force, which entails a large number of departures in practice from the norm. A wide range of different publications on with profits issues are available, but occasionally some are difficult to track down online. The annual report to policyholders on compliance with the PPFM covers a lot of ground and a summary of PPFM changes is now published on the company's website. AKG Financial Analytics Ltd Page 9 14 December 215

79 Defined Charge Participating Sub-Fund ex-equitable With-Profits Annuity Plans 5 The mechanics of this product are fairly tightly controlled by the terms of the Scheme of Transfer, and it sits within a 1: fund within a company that sets high standards of transparency. The re-calculation of the Total Annuity each year is, however, quite complex. Future Performance ex-equitable With-Profits Annuity Plans 3 The fund follows the same asset allocation as the WPSF. The company clearly remains highly committed to with profits and the philosophy that equities offer the best prospect of longer term returns. The equity backing ratio has reverted to a very high level for a closed block of business, although it reduced noticeably in 29 as a result of the company's views on the uncertainty of the markets. It has risen steadily in recent years and recovered most of that reduction. This block of business is subject to guaranteed annuity levels, and there are significant potential charges for the provision of capital support and the mortality guarantees. There may also be charges for the cost of smoothing, but equally there could be credits to asset shares in respect of smoothing. The company has stated that the level of regular bonus declared on these annuities is expected to be zero for the foreseeable future, so the scope for significant enhancements to annuity payments seems very limited. Financial Strength of the Fund 5 The DCPSF is the smallest of the company's four funds within the Long Term Business Fund. On a standalone basis, it maintains no free assets on a realistic basis. Support is provided to the DCPSF by the very strong WPSF in return for a yearly charge - at the rate of.2% p.a. of asset shares in 26 to 21 (or.14% p.a. in respect of the ex-equitable With-Profits Annuity Plans), nil in 211, 212, 213 and 214. The fund is also strengthened by the presence of a legally enforceable capital support arrangement between Prudential plc and PAC under which Prudential plc has an obligation to provide PAC with capital support up to an agreed maximum aggregate level in the event of PAC's solvency falling below specified levels. This support is available until 228. AKG Financial Analytics Ltd Page December 215

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