HOW OUR WITH PROFITS FUND WORKS FOR POLICIES WHERE PREMIUMS ARE USED TO BUY UNITS

Transcription

1 HOW OUR WITH PROFITS FUND WORKS FOR POLICIES WHERE PREMIUMS ARE USED TO BUY UNITS

2 02 How our With Profits Fund works HOW OUR WITH PROFITS FUND WORKS For policies where premiums are used to buy units Please take time to read this short booklet and keep it safe with your policy literature. Why should I read this booklet? We explain how our With Profits Fund works and how that affects the value of your investment.

3 03 CONTENTS 1. What is this booklet for? 2. How does our With Profits Fund work? 3. How do bonuses affect my investment? 4. What affects regular bonuses? 5. What affects final bonus? 6. What expenses do I pay for? 7. What if I stop my With Profits investment? 8. Where is my money invested? 9. What could happen to put profits at risk, and how are payouts affected? 10. How do I benefit from the Society s financial strength? 11. Where can I find out more?

4 04 How our With Profits Fund works 1. What is this booklet for? We have written three booklets to explain how our With Profits Funds work. This booklet covers policies where premiums are used to buy units in the With Profits Fund. The other booklets cover: Conventional policies with benefits expressed in terms of a sum assured or regular pension. Medical Sickness Society policies purchased before our merger in July How does our With Profits Fund work? A proportion of your premium is used to buy units in the With Profits Fund. This amount depends on how you have chosen to invest your money and on the terms of your policy. These units represent your investment in the fund. We invest the money paid by you, and our other policyholders, into the fund. We aim to increase the value of your units based on the profits we make from our investments. However, to provide you with some protection from the risk of our investments falling in value rather than rising, we guarantee that the unit price in this fund will not fall. Also we guarantee to pay the full value of units in the circumstances set out in your policy document. In this booklet, we refer to these as guaranteed events. You may not always receive the full value of units at other times (section 7). If our investment growth is enough for us to afford to increase the value of units, we add bonuses (section 3). By investing in the fund, any bonuses you receive are also influenced by other profits or losses we make. These usually have a smaller effect on bonuses. They can arise from other policies like yours, or from other types of policy, or different aspects of our business.

5 05 3. How do bonuses affect my investment? We usually add regular bonuses throughout the period of your investment. We might also add a final bonus when you cash in your units. From time to time we decide a regular bonus rate that will apply to your type of policy. We add this bonus gradually, by increasing the unit price each day. We don t promise to add any regular bonuses. Once we add a regular bonus however, it increases the value of units you are guaranteed to receive on a guaranteed event. You can keep track of what regular bonuses have already been added. We send you an annual statement, which shows how many units you have invested in the fund and their value at the statement date. Please bear in mind that further regular bonuses may be added before you cash in your units, and you may also receive a final bonus. We decide how much final bonus we are able to add when you cash in your units. TOTAL WITH PROFITS VALUE PAYABLE ON A GUARANTEED EVENT: number of With Profits units times the unit price at the date you cash them in plus any final bonus amount, worked out at the same date. Please see section 7 for what happens if you cash in your units at other times. All policies guarantee the full value of units on death. Some policies guarantee the full value of units on diagnosis of a critical illness. Some policies have other guaranteed events, such as specific time periods or a policy end date. Your guarantees are specified in your policy document. It is important that you refer to this document to understand what guarantees you have. What you might get back in total from your policy The value described above represents only your With Profits investment. You may have units in another investment fund. You may also get a higher payout if you have protection benefits as part of your policy (such as life cover or critical illness cover).

6 06 How our With Profits Fund works 4. What affects regular bonuses? Regular bonuses depend on past and forecast future investment growth, with adjustments for other profits and losses and depend on whether we are able to get enough overall growth to increase the value of units. We cannot be sure how much growth will definitely be achieved over the period of your investment. Instead, we forecast the overall growth in order to set regular bonus rates. Once we ve added regular bonuses they increase the full value of units you would receive on a guaranteed event. So we can t take them away, even if our forecasts turn out to be wrong. Because of this, we set regular bonuses prudently, using only part of our total forecast growth. We aim to keep adding regular bonuses fairly steadily. If our investment forecasts improve enough, we will start adding higher regular bonuses, even if our investments have been falling recently. Similarly, if our forecasts worsen enough, we will start adding lower regular bonuses, even if our investments have been rising recently. We might have to stop adding regular bonuses altogether if poor future investment growth is forecast, particularly if past investment growth has also been poor. 5. What affects final bonus? Final bonus depends mainly on stockmarket levels at the time that you cash in your units relative to when you bought your units. We look at the investment growth, or loss, we ve had over the period of your investment. We also consider our other profits or losses. We then calculate your fair share of the fund (as explained overleaf) and compare it with the current value of your units. Normally the fair share will be higher, allowing us to add a final bonus. If we worked out your fair share using our actual investment growth or loss, you would be directly affected by short-term stockmarket fluctuations. For example, it would be unfortunate if you paid money into the fund when our investment values were temporarily high, only for them to fall again later. Similarly, you could effectively lose out if you cashed in your units when our investment values were temporarily low.

7 07 One of the most important aims of our With Profits Fund is to help to shelter you from such short-term fluctuations. So we calculate your fair share after adjusting our investment growth or loss. This is called smoothing (see overleaf). You are also protected if stockmarket levels are low at the time of your payout on a guaranteed event. The minimum amount you will receive is the value of your units including a regular bonus that has already been added. YOUR FINAL BONUS IS SET BY: Looking at what we can pay in total, based on your fair share of the fund, allowing for smoothing compared with the value of your units at the date you cash them in, including regular bonuses already added. If this is greater, you will not receive a final bonus. Please see section 7 for what happens if you cash in your units at times other than a guaranteed event. Unlike many other insurers, we don t have any shareholders, so over time our policyholders will benefit from 100% of our investment growth and other profits. How we work out your fair share of the fund We do a calculation which brings together the amounts you have invested in the fund with your share of how much profit or loss has been made. For most policies: we take the amounts you ve invested in the fund; then deduct any money you ve previously taken out of the fund; then deduct charges; and finally adjust for investment rises and falls, allowing for smoothing. Charges will be deducted according to your policy terms and conditions. Policies have an annual fund management charge to help us meet the costs of running the fund, including overheads. Policies with protection cover may have charges to help us meet the cost of any death or illness benefits.

8 08 How our With Profits Fund works Your annual management charge includes the cost of the Ongoing Advice Service (provided by Wesleyan Financial Services) if you have chosen to take this service. We will cancel units in your policy to pay: part of the annual management charge; and any charges for protection benefits. Adjustments for investment rises and falls are, for most policies, made throughout the period money is held in the fund. We work this out based on regular reviews of how our investments are changing in value. We take the change in value since the last review, adjust it for smoothing and calculate your fair share of it. Your share is based on how much money you ve had in the fund between the reviews. We allow for other profits and losses made by the fund when doing these calculations. How smoothing works When we review how the value of our investments has changed, we aim to reduce the effect of short-term fluctuations. We calculate a smoothed investment return which is then used to determine your fair share of the fund. This means that we apply smoothing when you pay your money into your policy, as well as when you take your money out. In periods of good investment growth we may keep some of the growth back. What we have kept back would then be spent in periods of poor investment growth, to cushion the fall in your share of the fund. Smoothing can only adjust for short-term fluctuations because we need to be able to balance out the good and bad periods. In the long term, on average we aim to have paid out 100% of our actual investment rises and falls. So if investment values remain low then payouts are likely to be lower. Similarly, if investment values remain high, then payouts are likely to be higher. We don t specify a range for smoothing for these types of policies.

9 09 Smoothing illustration Value (including final bonus) Part of the investment gain held back Value supported using gains previously held back Unsmoothed Value Smoothed Value Time The smoothed value reflects your total payout including any final bonus. 6. What expenses do I pay for? Some of the charges deducted from your policy pay for the costs we incur in selling and administering policies, plus a share of the overheads of running Wesleyan. When the costs to be covered are more or less than the charges deducted from all such policies, we may adjust the investment growth credited to the fund to allow for this. 7. What if I stop my With Profits investment? You may choose to stop part or all of your With Profits investment. For example, you may want to take money out of your policy. Or you might wish to transfer to another company, or simply switch to a different investment fund with us. Normally, if you cash in your units at any time other than a guaranteed event, we will pay you what the fund can afford. This will be based on your fair share, and we may also adjust the level of smoothing that usually applies. Paying more than your fair share could mean lower payouts for policyholders who keep their money in the fund.

10 10 How our With Profits Fund works To avoid paying more than we can afford, we may reduce your final bonus or apply a Market Value Reduction (MVR) if investment growth has been poor during the time that your money has been invested. If an MVR is applied, you will not receive any final bonus, or the full value of any regular bonus already added. With Profits is designed for long-term investment and MVRs mean you could get back less than you paid in if you stop your investment. This is particularly likely if stockmarket values are very low at that time. However, you are protected if you stop your investment on a guaranteed event, as we will not apply an MVR. This is a valuable benefit when stockmarket values are low. As well as MVRs, which are specific to a With Profits investment, there may be general policy charges which apply when you cash in your units. For example, we may charge for switches between funds. Also early withdrawal penalties may apply where money is taken out of the policy or transferred to another company. Details of these penalties are contained in your policy document. Here is a summary of what happens if you cash in part or all of your investment early: WITH PROFITS VALUE PAYABLE ON A NON-GUARANTEED EVENT: number of With Profits units you wish to cash in times the unit price at the date you cash them in plus any final bonus amount, worked out at the same date less any Market Value Reduction (MVR) that applies at that date less any general policy charges that apply.

11 11 8. Where is my money invested? We invest your money in a range of investments with the emphasis very much on assets which are expected to provide a return ahead of inflation such as quoted company shares and commercial property, because With Profits is designed as a long-term home for your money. They are the sort of investments which normally have the best long-term growth prospects. However, these investments also carry a risk. We cannot be sure they will grow enough to meet our guarantees to policyholders. We may have guaranteed to pay the full value of units, or something more where there are protection benefits as well. Therefore, we also choose some lower growth investments, like interest-paying bonds and cash deposits. These have lower risk and provide more reliable growth, helping us to meet the guarantees. We keep the mix between the higher and lower risk investments under review. The mix mainly depends on the overall strength of the fund and the level of guarantees made to policyholders. We need to avoid having so many higher risk investments that the fund becomes unable to honour its guarantees in poor investment periods. However, because our fund is financially strong (section 10), we are able to have a significant amount of higher risk investments. We expect to keep an above average percentage of your money in such investments, compared with the rest of the industry. This means that the value of your investment can fluctuate more from day to day than similar investments with other companies. The guarantees set out in section 3 reduce the risk you take. You can find current information on how the fund is invested by visiting our website or by contacting us, as explained in section 11. We invest in a very wide range of companies and properties. The aim of this is to ensure that losses from any particular company or property could only have a limited impact overall. Our investments also include some holdings in subsidiary companies of the Wesleyan Group, such as Wesleyan Bank, our unit trust management company and our distribution company.

12 12 How our With Profits Fund works 9. What could happen to put profits at risk, and how are payouts affected? xxxxxxxxxx What could happen to put profits at risk? The main risk to profits arises from how our investments perform, as explained in section 8. Other items that might put profits at risk include: the risks taken by those subsidiary companies of the Wesleyan Group in which the fund invests the risk of paying more protection claims than we d estimated when setting our premiums the risk of paying pensions for longer than we currently estimate. We seek to manage these risks so that, in the normal course of events, profits are made, rather than losses. To manage the risks of investing in subsidiary companies: the Board has to approve the amount that will be invested in each subsidiary company, based on the risks involved compared with the expected benefits; approval will not be given unless the expected benefits are higher than available from ordinary investments; limits are placed on investments in new ventures; the actual performance of each subsidiary company is then regularly monitored to ensure that the expected benefits are being obtained. To manage the risk of protection claims being higher than we d estimated when setting our premiums: we regularly review our charges we may pass on some of the risk under very large policies, or large groups of policies, to what is called a reinsurer. To manage the risk of paying pensions for longer than we currently estimate: the premium rates we set are regularly reviewed we allow for expected future improvements in life expectancy.

13 13 Also, we have a separate fund containing policies sold by Medical Sickness Society before our merger. If we needed to support that fund then our profits would reduce. We have, though, taken steps to ensure that this would only be required in very extreme circumstances. How are payouts affected? In the normal course of events, we aim to make sufficient profits to be able to add bonuses to payouts. However, in the event of a sustained period of losses, we would have to consider reducing future bonuses, possibly stopping them altogether. This is because we would give priority to using the fund to honour guaranteed payouts under the terms of each policy (including any regular bonuses already added). 10. How do I benefit from the Society s financial strength? xxxxxxxxxxxxxxxxx There is more money in the fund than we expect will be needed to pay out on all of our current policies. This money represents our financial strength. This money is not owned by any particular policyholders, but is used to give day to day practical benefits to current and future policyholders. We can: meet guarantees even if our investments fall keep an above average percentage of the fund in higher risk investments, that we hope will allow us to pay higher bonuses smooth out larger rises and falls in our investments when we determine payouts select investments which we believe will grow in the long term, even if they are currently out of favour with other investors. We see these benefits as the key components of what our With Profits Fund is about excellent growth prospects with the added protection of a smoothed value of units.

14 14 How our With Profits Fund works We are financially strong and need to preserve this strength so that the above benefits can continue to be enjoyed by both current and new generations of policyholders. We might use some of our strength to keep payouts high in poor years, but we would aim to top it back up again in good years. From time to time, we may decide to use some of our strength to finance some costs, rather than charge them to policyholders directly. A key consideration would be making sure our financial strength would remain high enough afterwards. Examples of such costs are: some guarantee costs including, for Mortgage Endowment policyholders, our guarantee to cover their mortgage large projects to develop our business strategy compensation paid to policyholders the cost associated with the Mutual Rewards Scheme, which provides incentives to existing policyholders towards the purchase of general insurance products. Our aim is to remain strong in the future. We monitor this strength and if it fell too much, we would look at how to re-build it. We might have to make wider changes to how we operate policies. For example, we might start to keep back some of the profits we make, so as to re-build our strength. We aim to continue to sell new policies. We may occasionally have to limit our pace of growth to ensure that our overall guarantees don t build up too quickly. If we stopped selling significant numbers of new policies, we would have to consider what to do with our financial strength in the long term, and develop a suitable plan.

15 Where can I find out more? If you have any questions on the information in this booklet, or would like further information, please contact your Financial Consultant. To book an appointment with your Financial Consultant, please call Lines are open Monday to Friday, 8.30am to 5.30pm. Each year we publish an annual report which explains how we have acted to manage the fund during the year. We have also written a more detailed guide about how we run the fund. This is called Principles and Practices of Financial Management (Wesleyan Open Fund). You can get a copy of these by calling , or from our website

16 For all your financial needs: Savings and Investments Retirement Planning Life and Income Protection Mortgages and Insurance Please call: Or visit: If you would like this document in Braille, large print or audio format, please contact For regular news, updates and information find us on social media. Visit: Head Office Wesleyan Colmore Circus Birmingham B4 6AR Advice is provided by Wesleyan Financial Services Ltd. WESLEYAN is a trading name of the Wesleyan Group of companies. Wesleyan Financial Services Ltd (Registered in England and Wales No ) is authorised and regulated by the Financial Conduct Authority and is wholly owned by Wesleyan Assurance Society. Wesleyan Assurance Society is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Incorporated in England and Wales by Private Act of Parliament (No. ZC145). Registered Office: Colmore Circus, Birmingham B4 6AR. Telephone: Fax: Telephone calls may be recorded for monitoring and training purposes. WG-EL-1-01/16